Suvarna Garge (Editor)

Oppression remedy

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In corporate law in Commonwealth countries, an oppression remedy is a statutory right available to oppressed shareholders. It empowers the shareholders to bring an action against the corporation in which they own shares when the conduct of the company has an effect that is oppressive, unfairly prejudicial, or unfairly disregards the interests of a shareholder. It was introduced in response to Foss v Harbottle, which had held that where a company's actions were ratified by a majority of the shareholders, the courts will not generally interfere.

Contents

It has been widely copied in companies legislation throughout the Commonwealth, including:

  • the Canada Business Corporations Act, and
  • the Corporations Act 2001 of Australia
  • Introduction in the United Kingdom

    An oppression remedy, intended to operate as an alternative to winding up a company, was adopted as s. 210 of the Companies Act 1948, which declared:

    210. (1) Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself) or, in a case falling within [s. 169(3)], the Board of Trade, may make an application to the court by petition for an order under this section.

    (2) If on any such petition the court is of opinion— the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise.

    In the Companies Act 2006, the relevant provision is expressed in s. 994 (and the Secretary of State has similar authority under s. 995):

    994. (1) A member of a company may apply to the court by petition for an order under this Part on the ground—

    (a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

    Conduct that is considered to constitute "unfair prejudice" has been given a broad interpretation, which can include:

  • exclusion from management in circumstances where there is a legitimate expectation of participation;
  • the diversion of business to another company in which the majority shareholder holds an interest;
  • the awarding by the majority shareholder to himself of excessive financial benefits; and
  • abuses of power and breaches of the Articles of Association.
  • The conduct is not confined to a specific group. In Re HR Harmer Ltd, Jenkins LJ noted that 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." Therefore, it can cover the actions of:

  • directors,
  • a controlling shareholder,
  • persons with de facto control of the company,
  • a class of shareholders, or
  • conduct of a related company.
  • Scope

    Canadian legislation (both federally and in all provinces other than Prince Edward Island) provides for a broad approach to the oppression remedy. In Peoples Department Stores Inc. (Trustee of) v. Wise, the Supreme Court of Canada noted:

    48. ...The oppression remedy of s. 241(2)(c) of the CBCA and the similar provisions of provincial legislation regarding corporations grant the broadest rights to creditors of any common law jurisdiction. One commentator describes the oppression remedy as “the broadest, most comprehensive and most open-ended shareholder remedy in the common law world.”

    In the CBCA, s. 241 states:

    241. (1) A complainant may apply to a court for an order under this section.

    (2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of. (3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

    A "complainant" is deemed to be 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." In that regard, it can include a creditor of the corporation, but not every creditor will qualify.

    Jurisprudence

    In BCE Inc v 1976 Debentureholders, the Supreme Court of Canada stated that, in assessing a claim of oppression, a court must answer two questions:

  • Does the evidence support the reasonable expectation asserted by the claimant? and
  • Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?
  • Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty. This is defined as a "tripartite fiduciary duty", composed of (1) an overarching duty to the corporation, which contains two component duties — (2) a duty to protect shareholder interests from harm, and (3) a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen". Following BCE, the Court of Appeal of British Columbia noted that "breach of fiduciary duty ... 'may assist in characterizing particular conduct as tending as well to be 'oppressive', 'unfair', or 'prejudicial'". More recently, scholarly literature has clarified the connection between the oppression remedy and the fiduciary duty in Canadian law:

    Upholding the reasonable expectations of corporate constituents is the cornerstone of the oppression remedy. Establishing a breach of the tripartite fiduciary duty has the effect of raising a presumption of conduct contrary to the reasonable expectations of a complainant.

    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.

    Extent of application

    Applications to the Court have been successful where:

    1. there was lack of a valid corporate purpose for the transaction;
    2. the corporate and its controlling shareholders failed to take reasonable steps to simulate an arm's length transaction;
    3. there was lack of good faith on the part of the corporation's directors;
    4. there was discrimination among shareholders which benefited the majority to the exclusion of the minority;
    5. there was a lack of adequate and appropriate disclosure of material information to minority shareholders; and
    6. there was a plan to eliminate a minority shareholder.

    The types of behaviour that such actions encompass have included the diversion of corporate profits, the personal use of such profits by a controlling shareholder, the exclusion of the applicant from the corporation's operations, and changing the proportionate holdings by different shareholders.

    The remedy can extend to a wide variety of scenarios:

  • It can be potentially used by any stakeholder to deal with any type of unfair conduct by a corporation
  • It can cover 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 controlling shareholder, a judgment creditor has been permitted to be a complainant.
  • 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.
  • Where representations have been made by officers of a parent corporation to an officer of a subsidiary about the terms of a stock option plan, such representations may create a reasonable expectation and give rise to an oppression remedy complaint if they are subsequently breached.
  • The court's discretion is not unlimited, as the Court of Appeal of Newfoundland and Labrador observed in 2003:

  • The result of the exercise of the discretion contained in subsection 371(3) must be the rectification of the oppressive conduct. If it has some other result the remedy would be one which is not authorized by law.
  • Any rectification of a matter complained of can only be made with respect to the person’s interest as a shareholder, creditor, director or officer.
  • Persons who are shareholders, officers and directors of companies may have other personal interests which are intimately connected to a transaction. However, it is only their interests as shareholder, officer or director as such which are protected by section 371 of the Act. The provisions of that section cannot be used to protect or to advance directly or indirectly their other personal interests.
  • The law is clear that when determining whether there has been oppression of a minority shareholder, the court must determine what the reasonable expectations of that person were according to the arrangements which existed between the principals.
  • They must be expectations which could be said to have been, or ought to have been, considered as part of the compact of the shareholders.
  • The determination of reasonable expectations will also[...] have an important bearing upon the decision as to what is a just remedy in a particular case.
  • The remedy must not be unjust to the others involved.
  • Comparison with derivative actions

    Oppression claims are separate from derivative actions, but the two are not mutually exclusive. However, a derivative action claim can only be instituted by leave of the court, as it is brought by a complainant to sue on behalf of the corporation for a wrong done to the corporation, and any successful claim is binding on all shareholders. This is in contrast to the oppression remedy claim, where a complainant sues on behalf of himself for a wrong he suffers personally as a result of corporate conduct.

    In 2015, the Ontario Court of Appeal dismissed an oppression remedy claim, because the claimant was only seeking recovery of funds for the benefit of the corporation. As a result of the discussion within the judgment, the following general principles can be drawn for determining which remedy is more appropriate:

    1. To claim oppression, a plaintiff must plead that they suffered personal harm distinct from that suffered by the corporation itself.
    2. The focus of the oppression remedy is on the effects of the impugned conduct on the complainant, not on the corporation.
    3. If the relief sought is for the benefit of the corporation, then the action will most likely have to be brought as a derivative action, and leave will be required.
    4. The causes of action overlap where the corporation is small and closely held, and where the impugned conduct directly affects the complainant in a way that differs from the effects on other shareholders. In such cases, a claim may be brought either as a derivative action or a claim for oppression.

    Application in Australia

    S. 234 of the Corporations Act 2001 provides that the following can apply for an order seeking relief for oppressive conduct:

  • a member of the company, on behalf of himself or another member,
  • a person who has been removed from the register of members, or has ceased to be a member under circumstances which are the substance of the application,
  • a person to whom a share in the company has been transmitted by will or by operation of law, or
  • any other person, with the consent of the Australian Securities and Investments Commission, in connection to a current or prior investigation into the company conducted by ASIC.
  • S. 232 states that the conduct of the company's affairs, an actual or proposed act or omission by or on behalf of a company, or a resolution or proposed resolution by all, or by a class, of the shareholders, must be:

  • contrary to the interests of the shareholders as a whole; or
  • oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders whether in that capacity or in any other capacity,
  • in order for an application to be considered.

    The oppression remedy, together with the option available for winding up a company and ASIC's use of the public interest ground in that regard, has received greater exposure and legal development since the onset of the global financial crisis.

    References

    Oppression remedy Wikipedia