Shareholder Oppression Requires More than Poor Record-Keeping

March 9, 2017 | Rohit Kumar | Kitchener-Waterloo

Spectrum

The Ontario Business Corporations Act contains provisions creating what is referred to as an “oppression remedy.” Generally speaking, this remedy allows shareholders, officers, and directors to seek redress for corporate conduct that is oppressive, unfairly prejudicial or unfairly disregards their interests. Substantially similar statutory remedies exist throughout the provinces and federally in the Canada Business Corporations Act (the “CBCA”). The remedy is broad and allows courts flexibility to address oppression in a variety of ways.

Mennillo v. Intramodal Inc., 2016 SCC 51, is a recent case decided by the Supreme Court of Canada. It is the first time in about eight years that the Supreme Court has considered and provided guidance on the oppression remedy.

The facts of this case may sound familiar to entrepreneurs in small and medium-sized enterprises. Johnny Mennillo and Mario Rosati were friends who formed a transportation company in 2004. Mennillo and Rosati were the only shareholders and both were named officers and directors. The business was run informally; without adherence to the technical requirements of the CBCA. Very little was put in writing. In 2005, Mennillo resigned as a director and officer. Intramodal filed a declaration that Mennillo was no longer a shareholder but it did not comply with the necessary CBCA formalities in so doing. Five years later, Mennillo brought a claim that Intramodal had unlawfully removed him as a shareholder and that he had been oppressed as a result.

In oppression cases, courts will look to what were the “reasonable expectations” of the shareholder in the circumstances. Factually, it was determined that Mennillo had intended to transfer his shares to Rosati when he resigned as a director and officer. Accordingly, Mennillo could not reasonably expect to be treated as a shareholder following his resignation. In these circumstances, Intramodal’s failure to observe corporate law formalities in transferring Mennillo‘s shares did not amount to oppression. The Court noted that Intramodal was a two-person private company in which dealings between the parties were marked by extreme informality.

The principal takeaway from the Mennillo case is that corporate actions that are consistent with a shareholder’s reasonable expectations as found by the court will not amount to oppression merely because those actions were taken in technical noncompliance with the governing corporate law.

Lower court decisions on oppression can be inconsistent. It is therefore important to take note when the Supreme Court of Canada provides guidance and to ensure, that if faced with a shareholders’ dispute, you obtain advice from those who are up to date on recent developments in this specialized area of law.