Shareholder Remedies
| Author | J. Anthony Vanduzer |
| Pages | 319-367 |
CHAPTER
9
SHAREHOLDER
REMEDIES
A.
INTRODUCTION
Shareholder
remedies
are the
means
of
ensuring
that
the
interests
of
shareholders
are
protected
and
that
the
rights
to
which they
are
enti-
tled under statute,
at
common law,
or
under
the
corporation's arti-
cles,
by-laws, directors'
and
shareholders' resolutions,
and any
unanimous shareholders' agreements
may be
exercised.
The
initial
focus
of
this
chapter
is
procedural.
We are
concerned
with
the
pro-
cedures available
to
shareholders
to
assert claims, rather than
the
substantive
bases
for
those
claims, which,
in
large part,
are the
sub-
ject
of the
previous chapters
of
this book. When
we
turn
to
deal
with
the
oppression remedy, however,
we are
discussing both
a
substan-
tive
basis
of
protection
and a
procedure
for
making
a
claim.
The
oppression remedy, which
we
have
referred
to
extensively through-
out the
book,
represents
an
emerging standard
of
behaviour that
not
only
complements
the
duties imposed
on
management described
in
Chapter
8 but is
coming
to
rival
the
fiduciary
duty
as the
operative
measure
against which
all
management activities must
be
judged.
In
large
part, this
is due to the
procedural advantages
of
bringing
an
oppression
claim.
The two
main bases
on
which
a
shareholder
may
assert
a
claim
for
relief
are the
derivative action,
and the
oppression action.
Before
the
enactment
of the
CBCA
there
was no
oppression remedy
available
in
319
320 THE LAW OF
PARTNERSHIPS
AND
CORPORATIONS
most Canadian
jurisdictions,1
and the
derivative action
was
subject
to
certain
limitations.
One of the
major
objectives
of the
CBCA
was to
pro-
vide greater access
to
more
effective
remedies
for
minority
shareholders.2
Owning
a
share carries with
it
certain rights that
are
clearly person-
al
to the
holder
of the
shares, such
as the
right
to
vote,
the
right
to
timely
and
informative
notice
of
meetings,
and the
right
to
inspect
the
books
and
records
of the
corporation. These personal
rights
may
derive
from
the
governing corporate statute,
the
articles
and
by-laws
of the
corporation,
the
common
law,3
or a
shareholders'
agreement.
The
major
limitation
on a
personal action
to
enforce
such rights
is
that
the
most
important
legal
constraints
on
directors
and
officers,
the
fiduciary duty
and the
duty
of
care,
are
obligations owed
to the
corporation, rather
than directly
to the
shareholder.
As a
result, breaches
of
these
duties
cannot
be the
basis
of a
personal action
by a
shareholder.
In
some circumstances,
a
shareholder
may
commence
a
derivative
action
on
behalf
of the
corporation
for
breach
of
these duties
or for any
other obligation
to the
corporation where
the
corporation
is not
taking
action
to
pursue
its own
rights. This
is not an
uncommon situation
since,
in
many cases,
the
same people
who
have allegedly breached
their duties,
the
directors
and
senior
officers,
are the
people
who
must
decide whether
to
cause
the
corporation
to
sue.
In
such
a
case,
the
directors
may
well have
a
different
view
of
whether their conduct con-
stitutes
a
breach
of
duty.
As
will
be
discussed below,
before
the
enact-
ment
of the
CBCA,
the
circumstances
in
which shareholders could
initiate such
a
derivative action were narrow.
In
order
to
properly plead
its
claim,
a
shareholder
had to
character-
ize
the
claim correctly
as
either personal
or
derivative.
The
general test
developed
by the
courts
to
ascertain whether misconduct
was a
breach
of
a
personal obligation
to
shareholders
or to the
corporation
was to
ask if the
injury
to the
shareholders
was
merely
incidental
to an
injury
to
the
corporation.4
So
long
as the
injury
did not
occur only because
The
oppression remedy
was
first
introduced
in
Canada
in the
British Columbia
Companies
Act,
R.S.B.C.
1960,
c. 67, in
1960.
It was
interpreted narrowly until
it
was
amended
to
add, among other things,
"unfair
prejudice"
as a
ground
for
relief
in
1973
(S.B.C.
1973,
c.
18).
R.V.W.
Dickerson, J.L. Howard,
& L.
Getz,
Proposals
for a New
Business
Corpora-
tions
Law for
Canada,
vol.
1
(Ottawa: Information Canada, 1971)
at
158-63
[Dickerson].
In
Liu v.
Sung
(1991),
13
C.B.R.
(3d)
285
(B.C.C.A.),
for
example,
a
shareholder
was
permitted
to sue a
director
in
tort
and for
breach
of
contract.
Goldex
Mines
Ltd.
v.
Revill
(1974),
7
O.R. (2d)
216
(C.A.)
(sending
out
mislead-
ing
information circular
and
misleading annual report described
as
breach
of
1
2
3
4
Shareholder
Remedies
321
the
corporation
was
injured, then
the
claim will
be
permitted
to
pro-
ceed.
An
example
of an
injury that
is
only incidental
to an
injury
to the
corporation would
be the
diminution
in the
value
of a
shareholder's
shares caused
by the
appropriation
of a
corporate asset
by the
directors.
It
is
impossible, however,
to
draw
a
clear
and
satisfactory
distinc-
tion between
an
injury
to the
shareholder
and an
injury
to the
corpora-
tion.
As the
holder
of the
residual claim
to the
assets
of the
corporation,
the
shareholders' interests will
be
substantially
affected
by any
injury
to
the
corporation,
as
will
the
interests
of
many other stakeholders.
The
coincidence
of
shareholder
and
corporate interests
is
most obvious
where
the
shareholder holds
all the
shares
of the
corporation,5
but it
will
occur
in
virtually every case. Nevertheless,
in
terms
of the
proce-
dure followed prior
to the
enactment
of the
CBCA,
it was
essential
to
characterize
a
claim clearly
as
personal rather than merely incidental
to
an
injury
to the
corporation
if a
shareholder
was to be
able
to
proceed
without being
forced
to
seek relief
by a
derivative action. This
was
often
difficult
to do,
since most actions
by
directors
and
officers
which
are
injurious
to
shareholders
could
be
characterized
as a
breach
of
fiduci-
ary
duty.
Even
the
example
of a
breach
of a
personal right given above
may be
characterized
as a
breach
of the
directors'
fiduciary
duty.
Is it not
always
contrary
to the
corporation's best interests
to
send
out an
inad-
equate notice
of a
meeting? Historically,
the
courts gave broad scope
to
what
was
considered
a
breach
of
directors' duties
to the
corporation.
This limited
the
ability
of
shareholders
to use the
personal action.
As
discussed
in
more detail
in the
next section,
the
derivative
action
was not an
effective
remedial option
for
shareholders either.
The
primary problem
was
that
the
courts would
not
permit shareholders
to
sue on
behalf
of the
corporation where
the
conduct alleged
to
consti-
tute
the
breach
had
been
or
could
be
ratified
by a
majority
of
share-
holder votes.
If the
majority
shareholder
did not
want
to
pursue
the
matter,
minority shareholders were precluded
from
taking action.
This
rule
was not
applied
in
cases
of
very serious injury
to the
corporation.
In
short, neither
the
derivative action
nor the
personal action pro-
vided ready access
to
relief
for
shareholders.
As
noted,
one of the
pri-
mary
purposes
of the
drafters
of the
CBCA
was to
enhance
the
ability
of
shareholders
to
obtain
relief.
This purpose
was
accomplished
by
personal right; pleading struck down because inextricably linked with claims
for
injuries
to the
corporation).
The
effect
of a
loss
of
corporate assets
on a
sole shareholder
was
recognized
by
the
Supreme Court
of
Canada
in
Kosmopoulos
v.
Constitution
Insurance
Co. of
Canada,
2,
discussed
in
Chapter
3.
5
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