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‘Sloppy paperwork’ alone does not trigger oppression remedy: Supreme Court of Canada

November 21, 2016   by Canadian Underwriter

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The failure of a company to follow the Canada Business Corporations Act does not necessarily trigger an oppression remedy, the Supreme Court of Canada ruled in a divided decision released Friday.

Wooden gavelSection 241 of the Canada Business Corporations Act essentially lets a security holder, creditor, director or officer sue a corporation for conduct that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests” of the complainant. The corporation could be sued under that section for an “any act or omission of the corporation or any of its affiliates,” for the conduct of its business affairs or for the exercise of the power of the directors of the corporation or any of its affiliates.

“The oppression remedy 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 2008 in BCE Inc. v. 1976 Debentureholders.  “This remedy is available to a wide range of stakeholders.”

That case was cited in the Mennillo v. Intramodal inc. ruling, released Friday.

“There are two elements of an oppression claim,” wrote Justice Thomas Cromwell on behalf of six of the nine Supreme Court of Canada judges who heard an appeal from Johnny Mennillo in December, 2015. “The claimant must first ‘identify the expectations that he or she claims have been violated . . . and establish that the expectations were reasonably held’,” added Justice Cromwell, quoting from BCE v. 1976 Debentureholders.  “Then the claimant must show that those reasonable expectations were violated by conduct falling within the statutory terms, that is, conduct that was oppressive, unfairly prejudicial to or unfairly disregarding of the interests of any security holder.”

Court records indicate that Mennillo and Mario Rosati were friends who met in 2004 to discuss starting a transportation company. The firm, Intramodal inc., began operating in late 2005.

“Before Intramodal was incorporated, the roles that Messrs. Mennillo and Rosati respectively intended to fulfill in the company were agreed upon by a simple handshake,” Justice Cromwell noted. “Once Intramodal was incorporated (on July 13, 2004), they became its directors and shareholders, but neither of them paid for their shares,” contrary to the requirements of CBCA, Justice Cromwell added.

Mennillo advanced a total of $440,000 to Rosati. Intermodal made payments to Mennillo. In 2005, Mennillo had written a letter to Intramodal resigning as a director.  In July 2007, Mennillo met Rosati and “asked that the amounts of his loans be repaid and that he receive his share of the profits generated by Intramodal.”

However a cheque given to Mennillo in 2009 was marked “full and final payment.”

In September, 2010, a lawyer for  Mennillo sent a demand letter claiming that Mennillo had been “unduly and wrongfully stripped” of his status as a shareholder in Intramodal.

In 2012, a Quebec Superior Court concluded that as of May 25, 2005, Mennillo “refused to participate in this venture [that is, to be an equity shareholder in Intramodal] and asked to be removed from the company as a shareholder and a director effective May 25, 2005.” The Quebec Superior Court judge ruled that “Mennillo agreed only to be a lender of $444,000 to his friend,” Rosati, and that “the failure to complete the transfer of Mennillo’s shares to Rosati resulted from an error or oversight on the part of Rosati’s lawyer.”

That ruling was upheld on appeal in 2014. Mennillo appealed to the Supreme Court of Canada, which issued its decision Nov. 18, 2016.

“All the corporation can be accused of is sloppy paperwork,” Justice Cromwell wrote. “But sloppy paperwork on its own does not constitute oppression.”

In 2014, Intramodal’s board “passed a resolution to accept notices of subscription to securities by Mr. Rosati and Mr. Mennillo and to issue 51 class ‘A’ shares to Mr. Rosati and 49 shares of the same class to Mr. Mennillo,” Justice Cromwell noted. “Both the notices of subscription and the resolution were signed by Mr. Rosati alone.”

In dismissing Mennillo’s appeal, the majority of the Supreme Court of Canada found that the Quebec Superior Court judge made “no palpable and overriding error when he rejected Mr. Mennillo’s version of events and substantially accepted Intramodal’s,” and that Mennillo ceased to be a shareholder.

Justice Cromwell noted that Intermodal failed to follow the provisions of CBCA Section 76 (1), which stipulates how shares are to be transferred.

“There is no doubt about the fact that Mr. Mennillo knew that this formality was not complied with when the company proceeded to register the transfer in the corporate books, some time in 2007,” Justice Cromwell added. “There is also no doubt that he was aware that he had not endorsed his share certificate when the shares were transferred to Mr. Rosati as the trial judge found.”

Separate concurring reasons were written by Chief Justice Beverly McLachlin (on behalf of herself and Mr. Justice Michael Moldaver) while Madam Justice Suzanne Côté dissented.

“Many of the legal difficulties in this case have arisen as a result of the virtually complete lack of formality that accompanied the parties’ business dealings,” Justice Cromwell wrote for the majority. “They rarely complied with the requirements of the CBCA and in fact almost never put anything in writing. They had neither a partnership nor a shareholders’ agreement. They rarely or never exchanged emails or letters.”

In her dissenting reasons, Justice Côté noted that Rosati is neither a party nor an intervener in the case. In 2007, Justice Côté noted, “Intramodal passed a retroactive resolution acknowledging Mr. Mennillo’s resignation as a director and officer and approving the transfer of his shares to Mr. Rosati.” That resolution, she added, “shows that Mr. Mennillo was a shareholder of the company, at least before the transfer,” and that Mennillo did not sign the transfer of his shares.

“If Mr. Mennillo and Mr. Rosati had wanted consensualism to take precedence over formalism in the conduct of their affairs, they could easily have opted for a partnership, but they did not do so,” Justice Côté added. “The fact that one shareholder claims he and his fellow shareholder entered into an agreement for the transfer of shares does not relieve the corporation of its legal duty to make the necessary inquiries before passing a resolution approving that transfer of shares and registering the transfer in its registers.”

But writing for the majority, Justice Cromwell noted that Intermodal “failed to observe the formalities of carrying out [Mennillo’s] wish not to be a shareholder.”

But the failure on the part of the corporation to “observe the formalities of carrying out” Mennillo’s wish to not be a shareholder is not “unfairly prejudicial to the extent that this omission deprived him of his status as a shareholder,” Justice Crowmell added. “Nor can the failure to properly remove him as a shareholder in accordance with his express wishes make it just and equitable for him to regain his status as a shareholder.”

In BCE Inc. v. 1976 Debentureholders, Canada’s highest court restored a ruling of the Quebec Superior Court in favour of Bell Canada Enterprises, which at the time had a plan of arrangement, approved by 97.93% of shareholders, for a $52-billion leveraged buyout. That plan of arrangement was opposed by three groups of BCE debenture holders who argued that the increased debt would devalue their debentures. In the end, the leveraged buyout was terminated at around the time the Supreme Court of Canada released its ruling. Had it gone through, a group led by Ontario Teachers Pension Plan Board would have purchased shares of BCE.

“‘Oppression’ carries the sense of conduct that is coercive and abusive, and suggests bad faith,” the Supreme Court of Canada said in BCE.  “‘Unfair prejudice’ may admit of a less culpable state of mind, that nevertheless has unfair consequences.”

In Mennillo, Chief Justice Beverly McLachlin noted the case “can be disposed of on the basis that Mr. Mennillo has failed to show a reasonable expectation that he would not be removed as a shareholder from Intramodal inc.’s books.”

In her concurring reasons Chief Justice McLachlin quoted from case history including BCE v. 1976 Debentureholders.

An oppression remedy “is an equitable action to protect reasonable and legitimate shareholder expectations,” she wrote. “Evidence of shareholder expectations is essential to whether conduct has been oppressive in a particular case.”