Directors can be sued under oppression remedy even when they did not personally benefit from conduct: Supreme Court

A recent Supreme Court of Canada ruling, upholding an oppression remedy award of more than $600,000 against corporate directors, provides “better-defined boundaries for personal liability of directors,” a litigation lawyer wrote Monday.

In a ruling released July 13, Canada’s highest court dismissed an appeal by Andrus Wilson of a Quebec Court of Appeal ruling.

Ramzi Alharayeri filed a lawsuit in 2010 against Wilson, Hans Black, David Tahmassebi and Rob Roy. The latter four had been directors of Wi2Wi Corp. Al-Harayeri had been a shareholder and CEO.

Alharayeri initially asked for damages of $4.693 million. In 2014, Justice Stephen Hamilton of the Quebec Superior Court, District of Montreal ordered Black and Wilson to pay Alharayeri $648,310 plus interest and additional indemnity.

Wilson was unsuccessful on appeal both to the Quebec Court of Appeal and to Canada’s highest court.

In 2005, Alharayeri was vice president of Actiontec Electronics Inc., which made Wi-Fi modules. Alharayeri was later issued 2 million common shares, a million “Class A” preferred shares and 1.5 million “Class B” preferred share of Wi2Wi.

Wi2W’s articles of incorporation stipulated the conditions under which Alharayeri could convert his preferred shares into common shares.

Alharayeri later resigned as CEO and asked the board for conversion of his preferred shares.

The board “decided to issue a private placement of convertible secured notes to its existing common shareholders in response to its continuing financial difficulties,” Justice Suzanne Côté of the Supreme Court of Canada noted, adding Alharayeri’s “proportion of common shares, and the value thereof, were significantly reduced.”

Alharayeri sued under Section 241 of the Canada Business Corporations Act, which provides for an oppression remedy.

In 2014, Justice Hamilton ruled that Black and Wilson “participated in” the private placement of Al-Harayeri’s A and B shares.

Justice Hamilton ruled that Alharayeri 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.”

In his factum, Wilson proposed a two-part test for imposing personal liability on director for oppressive corporate conduct.

“The oppressive conduct – though ultimately the conduct of the corporation – must be properly attributable to an individual director or subset of directors,” Wilson wrote. In the second part of the test, Wilson suggested that the “individual director against whom personal liability is sought must have used his or her position to obtain a personal benefit at the expense of the oppressed party.”

The Supreme Court of Canada disagreed.

“Treating a personal benefit as a necessary condition to a director’s personal liability inappropriately emphasizes the gain to the director, at the expense of considering the oppressive conduct leading to the complainant’s loss,” Justice Côté wrote. “For example, oppressive conduct that does not yield a personal benefit may trigger personal liability where the director acts in bad faith or in a Machiavellian fashion (for instance, where the director seeks to punish a shareholder for interpersonal reasons regardless of whether that punishment brings the director any personal benefit). But treating a personal benefit as a necessary condition would preclude personal liability in such a case, where it may otherwise be a fit and fair remedy.’

The Supreme Court of Canada “clarified – and restricted – the law and provided better-defined boundaries for personal liability of directors for oppression,” wrote Brian Awad, litigation lawyer with McInnes Cooper, in a blog posted July 17 to CanLII Connects.

A court order under an oppression remedy lawsuit “should go no further than necessary to correct the injustice or unfairness between the parties,” Justice Côté wrote, adding that an order should “remain rooted in, informed by, and responsive to the reasonable expectations of the corporate stakeholder.”

The July 13, 2017 ruling in Wilson v. Alharayeri “gives corporate leaders some comfort that, within limits, they will not be held personally liable for taking bold action in the company’s best interests,” Awad wrote July 17, adding the Supreme Court of Canada’s decision “will undoubtedly be applied to provincially-incorporated companies since every province has a similarly-worded oppression remedy provision in its corporations legislation.”