05 July 2013

You always need a business case...

Many readers in the business world will know of instances where corporations they were working for, or dealing with, have indulged in oppressive or abusive behaviour. The larger ones are more likely to have internal procedures or protocols to mitigate such effects, but the SMEs have tended to be more reckless.

If you're dealing with an American corporation, the rules will more than likely operate in their favour. If the corporation has been established in Canada, you can fight back through the oppression remedy available under the various corporation laws. This is an innovation that has developed in many countries of the Commonwealth, but it has attained significant breadth of scope here.

What types of behaviour can be addressed under an oppression claim? Basically, it can be potentially used by any stakeholder to deal with any type of unfair conduct by a corporation, and the definition is "wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jure" (as noted in the English case Re HR Harmer Ltd, [1959] 1 WLR 62 at 75,  by Jenkins LJ). In Canada, stakeholders include:

  • a current or former registered security holder,
  • a current or former director or officer,
  • the Director appointed under the CBCA, or 
  • "any other person who, in the discretion of a court, is a proper person to make an application under this Part" (which can cover creditors, debtors or employees)

The types of behaviour that can be addressed, and the scope of the remedies available, are breathtaking:

  • Claims can extend to an affiliate not incorporated under the same Act 
  • It has been used to enforce unpaid judgments against the corporation's directors, where the corporation had been subject to asset stripping 
  • It has also been used in conjunction with other remedies — including the threatened winding up of a company by the court — in order to resolve shareholder disputes in closely held companies. 
  • The Crown has employed the oppression remedy in its status as a creditor under the Income Tax Act, in order to set aside dividend payments that rendered a corporation unable to pay its tax liability. 
  • Where a company has made excessive salary payments to a controlliing shareholder, a judgment creditor has been permitted to be a complainant in order to recover the excess amounts. 
  • A wrongfully dismissed employee can make a claim in order to thwart a corporation from conducting asset stripping in order to make itself judgment proof. 
What can a company do to protect itself against such claims? The Supreme Court of Canada, in BCE Inc. v. 1976 Debentureholders, stated that, where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation. There are no absolute rules and no principle that one set of interests should prevail over another. Under the business judgment rule, deference should be accorded to the business decisions of directors acting in good faith in performing the functions they were elected to perform.

Therefore, the directors really need to do their job properly in looking after the corporation's interests first, being aware that evasion of liabilities and condoning disputes among shareholders and other key players do not make for good business, and documenting the business case for undertaking any fundamental changes to their corporate and cost structures. Well-written business agreements will also go a long way to address key concerns.

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