SCC sets out when Corporate Directors may have Personal Liability under Oppression Remedy

In Wilson v. Alharayeri, 2017 SCC 39, the Supreme Court of Canada (SCC or "the Court") addressed when an order for compensation under the oppression remedy may lie against a director as opposed to the corporation itself. The SCC held that this case was an appropriate instance for a personal remedy, affirming an order requiring two directors to pay a minority shareholder approximately $650,000.

Background

Mr. Alharayeri was the former president and CEO of Wi2Wi Corporation, a Canada Business Corporation Act (CBCA), corporation. He was also a director and significant minority shareholder. He was the sole holder of certain convertible preferred shares, which were issued to him as performance-linked incentives. Half of the shares were convertible into common shares if the corporation met certain financial targets in 2006 and the balance if 2007 targets were met. Alharayeri resigned in June 2007 as a result of failing to disclose a potential conflict of interest.

Mr. Wilson, replaced Alharayeri as president and CEO. As a director, Wilson sat on the audit committee of the board, which had only one other member, Dr. Black. Wilson held class C shares, a different series of convertible preferred shares than Alharayeri.

In September 2007, the corporation decided to issue a private placement of convertible secured notes to its existing common shareholders. The private placement would be substantially dilutive of those who did not participate.

Prior to the private placement, the board of directors accelerated the conversion of Wilson's class C shares into common shares to allow Wilson to participate in the private placement. It did so despite doubts expressed by auditors as to whether or not the financial targets required for conversion were met. The other two holders of class C shares did not benefit from expedited conversion.

In contrast, Alharayeri's convertible shares were not converted into common shares. The board never approved the 2006 audited financial statements, which contained a note stipulating that the relevant financial targets had been met for full conversion of his shares into common shares. Wilson and Black, comprising the audit committee of the board, expressed doubts as to whether it was appropriate to permit conversion of his convertible shares, given Alharayeri's past conduct. Consequently, Alharayeri was never sent a formal notice of his crystallized conversion rights, despite his requests.

As a result of the private placement, the value of Alharayeri's common shares were significantly reduced. He brought an oppression claim under the CBCA against four of the directors, including Wilson. The Superior Court of Quebec found oppression: Alharayeri had a reasonable expectation that his convertible shares would be converted if the appropriate financial targets were met. Wilson and Black were held personally liable for the board's refusal to convert the shares. The Quebec Court of appeal affirmed and Wilson appealed to the SCC.

Decision of the Supreme Court of Canada

The SCC unanimously dismissed the appeal and affirmed the personal liability of the directors.

The issue before the Court was narrow: when may personal liability for oppression be imposed on corporate directors?

Wilson argued that the jurisdiction was a limited one. There should be liability only where a director has control of the corporation and acts in bad faith by using the corporation to advance her personal interest or where the corporation is the director's alter ego. The Court rejected this proposal.

The Court instead adopted a two-pronged approach. First, the oppressive conduct must be properly attributable to the director because she exercised—or failed to exercise—her powers so as to effect the oppressive conduct.

Second, personal liability must be "fit" or just in the circumstances. The question of whether the remedy is a fit one is drawn from the following four principles:

1. Personal liability must be fair. In some cases, it will be appropriate to provide limitations on the personal liability (e.g., limited to the extent of the director's personal gain) or to make both the corporation and the director liable. Some examples of situations where personal liability may be fair include:
• where the director has derived a personal benefit;
• where the director has breached a personal duty she owes as director or misused a corporate power; or
• where a remedy against the corporation would unduly prejudice other security holders.
2. Any oppression remedy should go no further than necessary to rectify the oppression.
3. Any oppression remedy may serve only to vindicate the reasonable expectations derived from an individual's status as a security holder, creditor, director or officer. The remedy cannot vindicate familial or personal relationships and cannot serve a purely tactical purpose. In particular, a personal remedy against a director cannot be permitted in order to allow a complainant to jump the queue of creditors of the corporation.
4. A court must consider general corporate law. Personal liability of the director cannot be a surrogate for statutory or other forms of relief.

In this case, Wilson and Black had played the lead role in the board's discussions resulting in the non-conversion of Alharayeri's shares. The personal liability of Wilson was fit in these circumstances: Wilson had accrued a personal benefit because he was able to exercise his conversion rights in advance of the private placement while Alharayeri was not. This increased Wilson's holdings and diluted Alharayeri's. The SCC considered the personal liability of Wilson to represent a fair way of rectifying the oppression while going no further than necessary to vindicate Alharayeri's reasonable expectations.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

All rights reserved.