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CORPORATIONS - Shareholders - Directors - Powers - Issuance of shares - Personal liability - Evidence and procedure - Remedies – Damages - Oppression remedy

Thursday, July 13, 2017 @ 2:18 PM  

Appeal by Wilson from a judgment of the Quebec Court of Appeal which found him personally liable for oppressive conduct against the respondent, Alharayeri. Wilson was a director of Wi2Wi Corporation (Corporation), a technology company incorporated under the Canada Business Corporations Act (CBCA). From 2005 to 2007, Alharayeri was the President, the Chief Executive Officer (CEO), a significant minority shareholder and a director of the Corporation. He held 2 million common shares, 1 million Class A Convertible Preferred Shares (A Shares) and 1.5 million Class B Convertible Preferred Shares (B Shares) in the Corporation. Wilson held 100,000 Class C Convertible Preferred Shares (C Shares) in the Corporation through YTW Growth Capital Management Corp. In March 2007, as a result of recurring cash flow issues, the Corporation began to consider merging its operations with Mitec Telecom Inc. (Mitec). While negotiating the merger, Alharayeri also separately negotiated with Mitec the sale of his own shares in the Corporation in order to alleviate personal financial difficulties. Without notifying the Corporation’s Board, Alharayeri agreed to sell some of his common shares to Mitec and signed a share purchase agreement to that effect. On May 31, 2007, the Corporation’s Board learned of Alharayeri’s personal share purchase agreement, which ultimately led to Alharayeri’s resignation as President, CEO and director of the company. After Alharayeri’s resignation, Wilson became the Corporation’s President and CEO. The Corporation’s Board consisted of seven remaining directors. The Corporation’s audit committee was comprised of Wilson and another director, Black. After Alharayeri resigned, further negotiations were conducted by Alharayeri, the Corporation and Mitec, but neither a merger nor a share purchase agreement resulted. In response to the Corporation’s continuing financial difficulties, the Corporation’s Board decided to issue a private placement of convertible secured notes (Private Placement) to its existing common shareholders. Prior to the Private Placement, the Board accelerated the conversion of Wilson’s C Shares into common shares. It did so despite doubts expressed by the auditors as to whether or not the test for the C Share conversion had been met. As a result of the Private Placement, Alharayeri’s proportion of common shares, and the value thereof, were significantly reduced. Consequently, the value of his A and B Shares was also greatly reduced. After Alharayeri’s requests to have his A shares converted into common shares were unsuccessful, he filed an application for oppression under s. 241 of the CBCA against four of the Corporation’s directors, including Wilson and Black. The trial judge concluded that Wilson and Black, were personally liable for the Board’s refusal to convert Alharayeri’s A and B Shares into common stock and the failure to ensure that Alharayeri’s rights as an A and B shareholder were not prejudiced by the Private Placement. The Quebec Court of Appeal upheld the trial judge’s decision.

HELD: Appeal dismissed. The trial judgment holding Wilson and Black solidarily liable for the oppression and ordering them to pay the respondent in the amount of $648,310 was upheld. Alharayeri’s pleadings were sufficient to ground the imposition of personal liability and the trial judge appropriately exercised the remedial powers provided in s. 241(3) of the CBCA by holding Wilson personally liable for the oppression. The two-pronged approach outlined in the Budd decision remained the leading authority on the question of whether an order for compensation under s. 241(3) could properly lie against the directors of a corporation personally. The first prong required that the oppressive conduct be properly attributable to the director because he or she was implicated in the oppression. The second prong required that the imposition of personal liability be fit in all the circumstances. The Court outlined the following four general principles to guide courts in fashioning a fit order under s. 241(3): 1) the oppression remedy request must in itself be a fair way of dealing with the situation; 2) any order made under s. 241(3) should go no further than necessary to rectify the oppression; 3) any order made under s. 241(3) may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders; and 4) a court should consider the general corporate law context in exercising its remedial discretion. With respect to the first prong of the test for personal liability, the trial judge properly found that Wilson and Black, the only members of the audit committee, had played lead roles in the Board discussions resulting in the non-conversion of Alharayeri’s A and B Shares. Accordingly, Wilson and Black were implicated in the oppressive conduct. With respect to the second prong of the test, the imposition of personal liability was fit in all the circumstances, as Wilson had accrued a personal benefit as a result of the oppressive conduct. The Board accelerated the conversion of Wilson’s C Shares into common shares (but not the C Shares held by others) to allow him to participate in the Private Placement, despite issues as to whether the test for conversion had been met. This benefitted him by increasing his control over the Corporation, to Alharayeri’s detriment, whose own stake in the company was diluted due to his inability to participate in the Private Placement. The remedy went no further than necessary to rectify Alharayeri’s loss and it was appropriately fashioned to vindicate Alharayeri’s reasonable expectations as a Series A and B shareholder. The amount of $648,310 represented the value that would have accrued to the respondent had his reasonable expectations been respected.

Wilson v. Alharayeri, [2017] S.C.J. No. 39, Supreme Court of Canada, McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ., July 13, 2017. Digest No. TLD-July102017013SCC