Oppression-reducing Canadian corporate law to a muddy default.

• Author: Khimji, Mohamed F.
• Position: Abstract through V. Examining the Use of the Oppression Action by Category of Claimant B. Category A: Minority Shareholders in Closely Held Corporations, p. 123-152

THIS PAPER EVALUATES THE efficiency of the oppression action as a default contractual term between all corporate stakeholders. The judicial understanding of the action has resulted in the action effectively becoming a muddy default term in all corporate law relationships. The content of this default term is that the corporation has imposed upon it a very general obligation of reasonableness and fairness in its dealings with all stakeholders. In effect, the oppression action is a universal default rule that leaves unclear the rights and obligations of contracting corporate stakeholders until an ex post and potentially lengthy judicial analysis of the oppression action particular to the parties is undertaken. The key issue considered is whether, assuming transactions costs were zero, all stakeholders would hypothetically bargain for such a clause when dealing with a corporation. The paper argues that, aside from the particular context of minority shareholders in close corporations, they would not and, therefore, such an overarching default rule in corporate law is inefficient. Such a muddy default term for every corporate contract raises both ex ante business and contracting costs and ex post expenses of litigation and judicial inquiry. These costs are justified only in the context of minority shareholders in private corporations where the nature of the relationship precludes being able to account for every contingency at reasonable cost. Therefore, in this and only this particular context, a muddy default in the form of the oppression action is necessary in order to allow courts to fill in any apparent contractual gaps after the fact in light of circumstances not anticipated before the fact.

DANS cet article, les auteurs evaluent l'efficacite d'une demande de redressement pour abus en tant que clause contractuelle par defaut entre toutes les parties prenantes de l'entreprise. L'interpretation judiciaire de ce type d'action en justice a fait en sorte qu'elle soit effectivement devenue une clause par defaut qui seme une certaine confusion dans toutes les relations juridiques d'une entreprise. Le contenu de cette clause par defaut implique qu'une societe se voit imposer une obligation tres generale d'agir de facon raisonnable et equitable dans le cadre de ses transactions avec toutes ses parties prenantes. En effet, la demande de redressement pour abus est une regle par defaut universelle qui laisse dans la confusion la portee des droits et obligations afferents aux contrats conclus avec des parties prenantes de l'entreprise jusqu'a ce qu'une analyse judiciaire a posteriori et qui risque d'etre excessivement longue soit menee au sujet de la demande de redressement pour abus en ce qui a trait aux parties prenantes. La question-cle en jeu consistait a determiner dans quelle mesure, en tenant pour acquis que les couts des transactions soient nuis, les parties prenantes seraient enclines a negocier en faveur de l'adoption d'une telle clause pendant leurs transactions avec une societe. Dans l'article, on soutient que, hormis le contexte particulier des actionnaires minoritaires de societes privees, les parties prenantes ne negocieraient pas dans ce sens et par consequent, une regle par defaut avec une telle force obligatoire en droit des societes est inefficace. Une clause par defaut aussi indeterminee applicable a tous les contrats de societe augmente non seulement les couts ex ante des contrats et les prix de revient de l'entreprise, mais egalement les depenses afferentes aux litiges et aux enquetes judiciaires ex post. Ces couts ne seraient justifies que dans le cas des actionnaires minoritaires de societes privees oU la nature des relations ne permet pas de repondre de chaque depense imprevue a un cout raisonnable. Par consequent, dans ce contexte particulier, et uniquement dans ce cas, une telle clause par defaut, sous la forme d'une demande en cas d'abus, est necessaire pour permettre aux tribunaux de combler les lacunes contractuelles apparentes apres les faits a la lumiere des circonstances qui n'avaient pas ete envisagees avant les faits.

CONTENTS Oppression-Reducing Canadian Corporate Law to a Muddy Default Mohamed F. Khimji and Jon Miner Introduction I. The Analytical Framework A. The Corporation as a Nexus of Contracts B. The Setting of Efficient Default Terms II. Historical Development of the Canadian Oppression Action A. UK Origins B. Development of the Canadian Oppression Action III. Judicial Application of the Oppression Remedy A. The Beginning: Ebrahimi as the Basis for the Application of the Oppression Action B. The Ebrahimi Framework and the Concept of Reasonable Expectations C. The Oppression Action Today: The Supreme Court Ruling in BCE IV. Locating the Oppression Action within a Contractarian Framework A. Rethinking Reasonable Expectations as an Exercise in Contractual Gap-Filling V. Examining the Use of the Oppression Action by Category of Claimant A. Defining Which Stakeholders May Bring an Oppression Action B. Category A: Minority Shareholders in Closely Held Corporations 1. The Relational Contract 2. A Tailored Default Approach to Contractual Gaps C. Category B: Minority Shareholders in Publicly Held Corporations 1. The Shareholder's Relationship with the Public Corporation: The Passive Investor 2. A Case Analysis of Oppression in the Minority Shareholder-Public Corporation Context: Ford Motor Co v OMERS 3. Complaining of Corporate Wrongs Exclusively Through the Derivative Action 4. Conclusion: Minority Shareholders of a Public Corporation and the Oppression Action D. Category C: Contract Creditors' Use of the Oppression Action 1. The Use of the Oppression Action by Debtholders a. BCE and Computershare: A Brief Comparative Analysis b. Conclusion: Setting an Efficient Default in the Debtholder-Corporation Context 2. Lenders' Use of the Oppression Action 3. Trade Creditors' Use of the Oppression Action 4. Contract Counterparties' Use of the Oppression Action E. Category D: Involuntary Creditors' Use of the Oppression Action F. Category E: Employees' Use of the Oppression Action G. Category F: Use of the Oppression Action by a Majority Shareholder or the Corporation Itself Conclusion INTRODUCTION

No discussion of the Canadian corporate law landscape is complete without an analysis of the oppression action. (1) The Canadian oppression action has been lauded as "the broadest, most comprehensive and most open-ended shareholder remedy in the common law world." (2) The oppression action (3) has been brought, not only by shareholders, but also by a variety of other corporate stakeholders including lenders, debenture holders, trade creditors, and employees. The Supreme Court's discussions of the oppression action in the precedent-setting corporate law decisions of Peoples v Wise (4) and BCE Inc v 1976 Debentureholders (5) confirmed that the oppression action would have a place in shaping the contours of corporate obligations and to whom they are owed. (6)

This paper takes a step back and, through a contractarian lens, evaluates the efficiency of the oppression action as a default contractual term between all corporate stakeholders. Part I sets out the contractarian analytical framework through which the oppression action will be evaluated. Part II describes the historical development of the Canadian oppression action. Part III examines the judicial treatment of the oppression action through to the Supreme Court's decision in BCE. Part IV interprets judicial treatment of the oppression action within a contractarian framework. Finally, Part V analyzes the use of the oppression action categorized by type of claimant and assesses the efficiency of the action as a default term between corporate stakeholders. The paper will examine the use of the oppression action by minority shareholders in close corporations, minority shareholders in public corporations, contract creditors, (7) involuntary creditors, employees, and the corporation itself.

We observe that the judicial understanding of the oppression action has resulted in the action effectively becoming a muddy default term in all corporate law relationships. (8) The content of this default term is that the corporation has imposed upon it a very general obligation of reasonableness and fairness in its dealings with all stakeholders. In effect, the oppression action is a universal default rule that leaves unclear the rights and obligations of contracting corporate stakeholders until an ex post and potentially lengthy judicial analysis of the oppression action particular to the parties is undertaken. (9) While commonly lauded as the "most comprehensive and most open-ended shareholder remedy in the common law world," (10) it is argued that a muddy default in the form of the oppression action is in fact inefficient in most corporate law relationships.

The key issue we consider is whether, assuming transactions costs were zero, all stakeholders would hypothetically bargain for such a clause when dealing with a corporation. Aside from the particular context of minority shareholders in close corporations, we argue that they would not and, therefore, such an overarching default rule in corporate law is inefficient. Such a muddy default term unduly raises both ex ante business and contracting costs and ex post expenses of litigation and judicial inquiry. Costs are raised both with respect to transaction planning before the fact when uncertainty exists regarding the content of the rule, and litigation costs after the fact when unpredictability exists regarding how the rule will be applied. We conclude that such costs are outweighed by the benefits only in the context of minority shareholders of private corporations. Of course, if parties other than minority shareholders in private corporations wished to contract expressly for such an "oppression" clause, they would be able to do so reasonably cheaply, as transaction costs would not be prohibitively...