Oppression-reducing Canadian corporate law to a muddy default.

• Author: Khimji, Mohamed F.
• Position: V. Examining the Use of the Oppression Action by Category of Claimant C. Category B: Minority Shareholders in Publicly Held Corporations through Conclusion, with footnotes, p. 152-177

3. Category B: Minority Shareholders in Publicly Held Corporations

   Despite the fact that the Dickerson Report anticipated that the oppression action would most often be used by shareholders in closely held corporations (128)--and there has been some academic and judicial suggestion that the oppression action is more suitable in that context (129)--a number of oppression actions have been brought in the context of publicly held corporations. (130) An empirical study on oppression actions brought in Canada between 1995-2001 found that eight percent of oppression claims were brought against widely held corporations. (131) These actions had a lower success rate than oppression claims against close corporations. (132) Numerous commentators have noted fundamental differences in the relationship between a shareholder and a public corporation as compared to a shareholder and a close corporation. (133) Given that the oppression action is simply an exercise in contractual gap filling, the characteristics of the contractual relationship between a shareholder and a public corporation must be analyzed to determine whether the oppression action is an efficient mechanism through which to fill contractual gaps that arise.

   1. The Shareholder's Relationship with the Public Corporation: The Passive Investor

      In contrast to the personal, dynamic relationships that characterize the close corporation context, the arrangement between a shareholder and a public corporation is more discrete, impersonal, and static. (134) Shareholders in public corporations are seen as passive investors who are far removed from the management of the corporation. (135) Shareholders do not expect any employment or management interest as flowing from their status as shareholders. (136)

      Another essential element of the shareholder-public corporation relationship is that shareholders invest knowing that their shares can be sold easily for market value on the stock exchange when they do not approve of particular corporate conduct. (137) In contrast, in the close corporation context, shareholders cannot easily exit from their shareholding position given the lack of liquidity in their shares. (138) Indeed, it has been suggested that oppressive conduct is less likely to occur when all corporate stakeholders recognize that shareholders can easily end their relationship with the corporation through a share sale. (139)

      That shares of public corporations can be sold on the market has relevance for minority shareholders beyond liquidity and ease of exit concerns. Under a law and economics framework, it is assumed that the price of publicly traded shares reflects understanding about the quality of management and potential for oppressive conduct. (140) In other words, a shareholder is compensated before the fact for any abusive conduct that may occur through a lower purchase price. (141)

      Given the aforementioned features of the minority shareholder-public corporation relationship, there are no compelling fairness or efficiency justifications to explain why the law as a contractual gap-filler between these corporate parties should utilize a muddy default in the form of the oppression action. In regard to fairness concerns, recall that, under an efficient markets framework, shareholders are compensated for potentially oppressive conduct ex ante through a lower share price. (142) Allowing recovery under the oppression action would not be compensation but a windfall to minority shareholders. (143) If shareholders are dissatisfied with particular corporate activities, they can sell their shares for market value on the stock exchange.

      Even if one does not fully ascribe to the efficient markets theory, other characteristics of the minority shareholder-public corporation relationship indicate that a muddy default in the form of the oppression action is not justified in this context. The courts have recognized that, for there to be oppression, the impugned conduct must "fall foul of the reasonable expectations of the complainant according to the arrangements existing between the principals." (144) Minority shareholders, in their above-described arrangement as passive investors, should not expect particularly special regard for their interests from the corporation. The courts have already held that majority shareholders in public corporations do not owe fiduciary duties to minority shareholders, (145) and that minority shareholders should not have the expectation that the majority will "exercise its voting power with regard to the interests of the minority as opposed to the interests of the corporation as a whole." (146)

      The courts have found that shareholders may reasonably expect to rely on "public pronouncements" (147) made by public corporations. This approach, however, unduly interferes with the ability of management to respond to changing market conditions. Management may stray from a prior public announcement for the best interests of the corporation. The better approach is to recognize that minority shareholders of public corporations, in their role as passive investors, are only entitled to reasonably expect that management will comply with their legal obligations, including the statutory fiduciary duty to "act honestly and in good faith with a view to the best interests of the corporation." (148) If management's breach of the fiduciary duty to the corporation is the only conduct that allegedly amounts to oppression by a minority shareholder of a public corporation, then the oppression action is redundant. (149) Minority shareholders who believe that management has breached their fiduciary duty to the corporation may seek a remedy for the corporation through a derivative action. (150) Indeed, an examination of oppression actions brought against public corporations seems to suggest that many minority shareholder applicants have complained of corporate behaviour that may be characterized as derivative in nature. (151) That is, many cases have involved minority shareholders who have sought a remedy under the oppression action in response to managerial conduct that was allegedly to the detriment of the entire corporation. In these cases, courts have often relied on a discussion of compliance with the corporate fiduciary duty to determine whether there was oppressive conduct towards the applicant. (152) In other cases, courts have avoided analyzing the statutory fiduciary duty despite the fact that the applicant's oppression action could have been construed as essentially a claim that the board has breached this duty. (153) A case example will illustrate how the Ontario Court of Appeal ruled when minority shareholders used the oppression action to complain of corporate harms that are derivative in nature.

   2. A Case Analysis of Oppression in the Minority Shareholder-Public Corporation Context: Ford Motor Co v OMERS

      In Ford Motor Co, (154) the Ontario Municipal Employees Retirement Board (OMERS) and other minority shareholders brought an oppression action against Ford US and Ford Canada. Ford US owned 94 percent of the shares in Ford Canada and planned to take it private. When the minority shareholders refused an offer by Ford US for their shares, Ford Canada started an action to determine the fair value of the shares held by OMERS and other dissenting shareholders. OMERS and some of the dissenting shareholders counterclaimed against Ford Canada and Ford US by bringing an oppression action.

      The minority shareholders argued that the transfer pricing structure as between Ford US and Ford Canada had the effect of unfairly depressing Ford Canada's profitability and share price. The Court recognized that the oppression applicants were, in essence, complaining of corporate activity that harmed the entire corporation. (155) The effects of the transfer pricing system unfairly benefitted Ford US to the detriment of Ford Canada. Nevertheless, given that the minority shareholders did not seek leave to commence a derivative action and requested only a personal remedy, their complaint was properly located within the oppression action. (156)

      The Court assessed the merits of the oppression action by examining the reasonable expectations of the minority shareholders. The Court admitted that, in the context of minority shareholders in public corporations, it is difficult to find direct evidence as to the reasonable expectations of shareholders. (157) Reasonable expectations may be inferred through the "company's public statements and the shared expectations about the way in which a public company should be run." (158) The Court, relying heavily on the findings of the trial judge, evaluated the wording in the financial statements of Ford Canada to find that the corporation had publicly represented that it would negotiate prices with Ford US at arm's length. Failure to do so constituted a breach of the minority shareholders' reasonable expectations.

      Furthermore, the Court held that reasonable expectations arise not only from the corporation's public statements, but also by "implicit assumptions about the manner in which a public company operates." (159)

      Minority shareholders had the reasonable expectation that management would "act in the best interests of the corporation and take all reasonable steps to enhance profitability by changes to the intercorporate pricing system." (160) Here, the Court essentially acknowledged that, even beyond any public statements made by the corporation, minority shareholders are entitled to expect that management will comply with its fiduciary duty. (161) The judgment showed the Court's concern with the fact that, in its failure to negotiate a more advantageous transfer pricing arrangement, Ford Canada had not acted as a "truly independent entity." (162)

      In Ford Motor Co, the applicants' oppression complaint was derivative in nature and the Court analyzed the action in part by acknowledging that shareholders are entitled to reasonably expect that...