This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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The Oppression Remedy Under the Ontario Business Corporations Act: A Key Tool for Shareholders and Directors
The Oppression Remedy under the Ontario Business Corporations Act (OBCA) provides a powerful legal tool for shareholders, directors, and other stakeholders in closely held corporations to protect their interests when they are unfairly treated or oppressed by the actions of those in control of the company. This legal remedy can help resolve disputes, prevent abusive practices, and ensure that corporate governance operates fairly and transparently.
In this article, we’ll explore the key elements of the oppression remedy, how it works, and how it can be used to protect minority shareholders and other stakeholders from unfair treatment in Ontario.
- What is the Oppression Remedy?
The oppression remedy is a provision in the OBCA that allows shareholders, directors, officers, and other stakeholders to seek relief when they feel that their rights or interests are being unfairly harmed or disregarded by the actions of the corporation or its controlling parties. The remedy is designed to ensure that corporate decision-making is done fairly, and that all parties involved in the corporation are treated equitably.
Section 248 of the OBCA grants the court the authority to intervene in situations where there has been oppressive or unfairly prejudicial conduct. The remedy is intended to provide protection to those who have been disadvantaged by the actions of others in the corporation, particularly in closely-held or privately-owned corporations where there may be a disproportionate balance of power.
- Key Features of the Oppression Remedy
A. Who Can Use the Oppression Remedy?
Under section 248 of the OBCA, the following parties may apply for an oppression remedy:
Shareholders: Both minority and majority shareholders may use the oppression remedy to protect their interests, particularly if they believe their rights or interests are being unfairly treated by the actions of the corporation or its controlling shareholders.
Directors and Officers: Directors and officers may apply if they feel that the corporation’s actions, or the actions of other directors or shareholders, are unfairly prejudicing their ability to perform their duties or jeopardizing their rights.
Other Stakeholders: This includes employees, creditors, and any other party that may have an interest in the corporation, if they are impacted by oppressive or prejudicial conduct.
B. Oppressive or Unfairly Prejudicial Conduct
For an oppression remedy to be successful, the applicant must demonstrate that they have been subjected to conduct that is:
Oppressive: This refers to conduct that is burdensome, harsh, or abusive. It can include decisions that are designed to benefit one party at the expense of others, such as unfairly diluting a shareholder’s interest or providing excessive compensation to controlling shareholders.
Unfairly prejudicial: This refers to conduct that unfairly affects the interests of an individual or group, often by depriving them of rights, benefits, or opportunities that they are entitled to within the corporate structure.
Unfairly disregards the interests of the complainant. This can include ignoring the rights or interests of a shareholder in a way that no reasonable corporate party would consider justifiable.
Examples of conduct that might be considered oppressive or unfairly prejudicial include:
• Issuing new shares to dilute the voting power of minority shareholders.
• Taking actions that harm the value of shares without regard for the interests of shareholders.
• Withholding financial information or misrepresenting the state of the corporation’s affairs to minority shareholders.
• Expelling or removing a shareholder without cause, particularly in small closely held corporations.
C. Relief and Remedies Available
When a court finds that oppressive or unfairly prejudicial conduct has occurred, it has broad discretion to grant a range of remedies to rectify the situation. These remedies can include:
• Ordering the corporation to compensate the complainant for any loss suffered due to oppressive conduct.
• Reversing corporate decisions or actions that were taken unfairly, such as rescinding a vote or transaction that harmed minority shareholders.
• Buyout of shares: A common remedy is for the corporation or controlling shareholders to buy the affected shareholder’s shares at fair value. This can provide an exit strategy for a minority shareholder who feels their interests are no longer being fairly represented.
• Restructuring or changes to the governance of the corporation to ensure fairness moving forward.
• Additional remedies: The court may grant any other remedy it deems fit, depending on the facts of the case.
D. Standard of Review
The court will assess whether the conduct in question is reasonable from the perspective of the complainant and whether it is oppressive or unfairly prejudicial. The judge will consider the expectations and understanding of the parties involved, particularly with respect to:
• The parties’ relationships and their roles in the corporation.
• The specific rights that the complainant believes were violated.
• The context in which the alleged oppressive actions occurred.
- Practical Applications of the Oppression Remedy
The oppression remedy is especially important in closely held corporations, where the shareholder structure is small, and decisions are often made by a small group or even a single individual. In these types of corporations, disputes can arise over control, financial distribution, or operational decisions. The oppression remedy provides a way for minority shareholders or stakeholders to protect themselves from unfair treatment, whether in the form of decisions that harm their financial interests or actions that violate their expectations of fair treatment.
Here are a few practical scenarios where the oppression remedy may be applied:
A. Minority Shareholders Disadvantaged by Majority Shareholder Decisions
In many closely held corporations, a majority shareholder may use their control to make decisions that benefit them at the expense of minority shareholders. For instance, a majority shareholder might authorize a buyout of their own shares at an inflated price or approve a decision that reduces the value of the minority shareholder’s shares. A minority shareholder can seek the oppression remedy if they believe the majority shareholder’s conduct has been oppressive or unfairly prejudicial.
B. Executive Actions Impacting Directors and Officers
Directors and officers of a corporation may also use the oppression remedy if they are being unfairly treated. This could involve situations where a director is wrongfully removed from their position or their decisions are overridden by the controlling party, preventing them from fulfilling their fiduciary duties.
C. Unfair Financial Practices or Distribution of Assets
A common issue in small corporations is the uneven distribution of profits or assets, especially in situations where one shareholder or director receives disproportionate financial benefits. For example, if a controlling shareholder awards themselves excessive bonuses or dividend distributions while leaving little for other stakeholders, it could be seen as oppressive or unfairly prejudicial.
- Limitations of the Oppression Remedy
While the oppression remedy is a valuable tool, it does come with limitations. For instance:
Timeliness: The remedy must be sought within a reasonable time after the conduct occurs. Delaying action could weaken the case.
Not a General Dispute Resolution Mechanism: The oppression remedy is designed to address specific types of conduct (oppressive or prejudicial conduct). It is not a tool for resolving general corporate disagreements or disputes about business strategy or policy.
Complexity of Legal Proceedings: Legal proceedings related to the oppression remedy can be complex and costly, often requiring expert legal representation.
- Conclusion
The oppression remedy under the Ontario Business Corporations Act is an essential legal tool for protecting the rights and interests of stakeholders in closely held corporations. It provides a means for individuals to challenge oppressive conduct and seek relief in the form of compensation, restructuring, or other remedies. Directors, officers, and shareholders should be aware of their rights under this provision to ensure fair treatment within their corporations.
Given the complexities of the oppression remedy, it is highly recommended to consult with legal professionals when seeking to use this remedy or when involved in corporate disputes.
Sources:
Ontario Business Corporations Act (OBCA), RSO 1990, c B.16.
Business Corporations Act (Canada), RSC 1985, c. B-9.