Oppression remedy lawsuit against corporate directors reaches Supreme Court of Canada

The Supreme Court of Canada announced Thursday it will hear an appeal of a lawsuit in which two corporate directors were ordered to pay more than $600,000 to a former chief executive officer who brought an oppression remedy action under the Canada Business Corporations Act.

In a ruling released Jan. 28, 2014, Mr. Justice Stephen Hamilton of the Quebec Superior Court, District of Montreal ordered Hans Black and Andrus Wilson to pay Ramzi Al-Harayeri $648,310 plus interest and additional indemnity.

That ruling was upheld by the Quebec’s appeal court, in a decision released Aug. 19, 2015. Wilson applied Oct. 19 for leave to appeal to the Supreme Court of Canada, which announced April 7, 2016 that it will hear Wilson’s appeal.

Wilson and Black were directors of Wi2Wi Corp., a San Jose, Calif.-based manufacturer whose products include components for wireless equipment. Al-Harayeri was Wi2Wi’s CEO until he resigned in 2007.

Al-Harayeri had filed his lawsuit on the basis of CBCA Section 241, which gives the courts the power to order a remedy if it is satisfied that directors have exercised their power “in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer.”

Al-Harayeri initially asked for $4.693 million from four Wi2Wi directors: Wilson, Black, David Tahmassebi and Rob Roy. In 2014, Mr. Justice Stephen Hamilton ruled against Wilson and Black.

On cross-appeal, Al-Harayeri had asked Quebec’s appeal court to order Black and Wilson to pay him $1.9 million. Al-Harayeri’s cross-appeal was dismissed.

In 2005, Al-Harayeri was vice president of original equipment manufacturing at Actiontec Electronics Inc., which made Wi-Fi modules. In order to develop a system for cellphones, Al-Harayeri acquired that division through Wi2Wi and received financing. In the process, Al-Harayeri ended up being issued 2 million common shares, a million “Class A” preferred shares and 1.5 million “Class B” preferred Shares. Wi2W’s articles of incorporation stipulated the conditions under which Al-Harayeri could convert his preferred shares into common shares.

In September of 2007, Mitel offered to buy Al-Harayeri’s preferred shares. He accepted a Sept. 13 offer, which Mitel later terminated.

Meanwhile, Wi2Wi’s board of directors proceeded with a private placement of secured notes in order to raise cash for Wi2Wi. Mitel was negotiating a deal to acquire Wi2Wi but no deal was reached.

After he resigned as CEO, Al-Harayeri had written to the board asking for conversion of his preferred shares. He filed his lawsuit in 2010.

Justice Hamilton rejected most of Al-Harayeri’s arguments but did rule that the board “acted in complete disregard for the rights of the holders of the A Shares” and “was required to consider the B Shares in the context of the negotiations with Mitec and the Private Placement and to ensure that the rights of the holder of the B Shares were not prejudiced by either the sale to Mitec or the Private Placement.”

Justice Hamilton ruled that Al-Harayeri had a “reasonable expectation” that the board “would consider his rights as holder of the A Shares in any transaction involving the shares of Wi2Wi and ensure that any such transaction did not unfairly prejudice him as the holder of the A Shares.”

That conduct constitutes oppression under section 241 of CBCA, the court ruled.

“Moreover, although all of the Defendants benefitted from the changes to the stock option plan, it is the Defendants Black and Wilson who participated in the Private Placement and benefitted from the dilution of [Al-Harayeri’s] A and B Shares, ” Justice Hamilton added.

Justice Hamilton set the value of Al-Harayeri’s preferred shares at US$0.53 each, whereas Al-Harayeri argued the value should be have been US$1.50 each.

In describing the “general principles” of oppression remedy lawsuits, Justice Hamilton cited a Supreme Court of Canada ruling, released in June, 2008, cited as BCE Inc. v. 1976 Debentureholders.

That case arose when a leveraged buyout (by the Ontario Teachers’ Pension Plan and other investors) of Bell Canada Enterprises – valued at more than $50 billion and proposed in 2007 – was contested by holders of BCE debentures.

Teachers and the other investors terminated the agreement in December, 2008, around the time the Supreme Court of Canada issued its reasons for its decision. Canada’s highest court would have restored a decision by a Quebec lower court to not block the deal.

“As a result of the announcement of the arrangement, the credit ratings of the debentures by the time of trial had been downgraded from investment grade to below investment grade,” the Supreme Court of Canada noted in 2008 in BCE.

Despite that downgrade, the trial judge in BCE ruled that the proposed buyout “did not breach the reasonable expectations of the debentureholders; that the transaction was not oppressive by reason of rendering the debentureholders vulnerable; and that BCE and its directors had not unfairly disregarded the interests of the debentureholders.”

Corporate directors have both a fiduciary duty to the corporation and “duty to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances,” the Supreme Court of Canada noted in BCE.

“The fiduciary duty of the directors to the corporation originated in the common law,” the Supreme Court of Canada added. “It is a duty to act in the best interests of the corporation. Often the interests of shareholders and stakeholders are co-extensive with the interests of the corporation.”

The Canada Business Corporations Act provides for derivative actions. Under Section 239 of CBCA, stakeholders can “enforce the directors’ duty to the corporation when the directors are themselves unwilling to do so,” the Supreme Court of Canada noted in BCE.

Section 241 of CBCA provides for an oppression remedy, which “focuses on harm to the legal and equitable interests of stakeholders affected by oppressive acts of a corporation or its directors,” the Supreme Court of Canada wrote in BCE. “This remedy is available to a wide range of stakeholders – security holders, creditors, directors and officers”.

In the 2008 BCE ruling, Canada’s highest court established two “prongs” for inquiring as to whether there was an oppression.

“The first prong of the inquiry is to establish whether the petitioner’s reasonable expectations were breached,” Justice Hamilton wrote in 2014 in Alharayeri. “Once a breach of reasonable expectations is established, the second prong is to consider whether the reasonable expectation was violated by conduct falling within the terms ‘oppression’, ‘unfair prejudice’ or ‘unfair disregard’ of a relevant interest.  The Court held that ‘oppression’ means conduct that is coercive and abusive and suggests bad faith, that ‘unfair prejudice’ may admit of a less culpable state of mind that nevertheless has unfair consequences, and that ‘unfair disregard’ means ignoring an interest as being of no importance, contrary to the petitioner’s reasonable expectations.”