Supreme Court clarifies law on claims

If a judge finds that directors were personally implicated in creating the oppression, a company’s directors can be held personally liable

Aggrieved investors can seek redress under the oppression remedy from company directors personally, and not just the company itself, the Supreme Court of Canada has confirmed.

The case, Wilson v. Alharayeri, came out last week. At first blush, permitting investors to target directors personally, instead of a corporation, may not seem like a novel legal concept. Back in 1998, the Ontario Court of Appeal answered the personal liability question in a case called Budd v. Gentra Inc., and the Supreme Court confirmed that decision in the Wilson ruling.

What is new is that the Supreme Court has added more guidance on what courts should consider before issuing an order in an oppression remedy claim. “The general principles articulated by the Supreme Court may help guide directors and counsel in considering whether corporate conduct could lead to personal liability in future cases,” states a note on the case by lawyers from Osler, Hoskin & Harcourt LLP.

In the 9-0 ruling, the Supreme Court upheld court decisions from Quebec that awarded $648,310 to Ramzi Alharayeri from two directors of a private company called Wi2Wi Corp. The courts held that the directors excluded Alharayeri from participating in a private placement of convertible secured notes, even though he had a reasonable expectation to believe he should have been included.

“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,” write lawyers from Torys LLP in a note on the case.

Alharayeri had been the CEO of Wi2Wi, but was forced to step down in June 2007 because of a potential conflict of interest. The Wi2Wi directors offered the convertible notes to the company’s common shareholders in September 2007, but excluded Alharayeri from the deal. Wi2Wi is organized under the Canada Business Corporations Act, and Alharayeri brought the case under the statute’s oppression remedy provision. The remedy is also available in most provincial corporate statutes.

Company boards and directors who were hoping the Supreme Court might limit the availability of the remedy will be disappointed. The court found that restricting access to the remedy would create a “legal formalism” that would be “inimical to its remedial purpose.”

At the same time, the ruling will disappoint those who think the oppression remedy provides a handy, convenient way for investors to chase after directors for any number of reasons. The remedy provides a statutory grounds for compensation, and nothing more, wrote Justice Suzanne Côté for the court. “Director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances,” Justice Côté wrote.

The Supreme Court says that if a judge finds that directors were personally implicated in creating the oppression, a company’s directors can be held personally liable, though only if that would be the remedy that fits the circumstances.

At the heart of the Supreme Court’s ruling is a discussion of four general principles that should guide a judge who is called on to consider the oppression remedy against a director personally.

The requested remedy must be a fair way of dealing with the situation.

The remedy mustn’t go further than needed to rectify the oppressive conduct.

The order should only vindicate reasonable expectations of security holders, creditors and directors in their capacity as corporate stakeholders.

The court should consider general corporate law when exercising its statutory discretion.

These factors might seem rather vague to those less used to corporate governance lingo.

In some ways, that’s the point. The Supreme Court doesn’t want to get too specific about what should be required in appropriate oppression remedy claims against directors. The court wants the judges who hear such cases to have the flexibility they need to call those claims as they see them.