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CORPORATIONS - General principles - Shareholders

Tuesday, December 05, 2017 @ 8:33 AM  


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Appeal by the defendants from a chambers judge's refusal to strike the plaintiffs' claims. The plaintiffs were former shareholders in a mortgage investment corporation for which the defendants provided financial management services. Any net income earned by the company was distributed to shareholders via dividends. The plaintiffs alleged the defendants mismanaged the company's mortgage portfolio. They sued, seeking an accounting of $3.7 million in management fees paid by the company to the defendants. The defendants applied to strike the claims based on the rule in Foss v. Harbottle, holding a shareholder did not have a personal cause of action for a wrong done to the corporation. The plaintiffs submitted that the legal nature of a mortgage investment corporation required a complete pass-through of any net earnings via dividend, and thus the company itself was incapable of suffering a legal wrong, whereas the plaintiffs themselves suffered a reduction in the redemption price of their shares. The chambers judge accepted the plaintiff's position in concluding that the rule in Foss v. Harbottle did not apply. The defendants appealed.

HELD: Appeal allowed. The nature of all corporations, including mortgage investment corporations, was that any loss would flow in some form or other to the detriment of shareholders. As a matter of law, the rule in Foss vs. Harbottle applied to a mortgage investment corporation. In the predicate proceeding, the claims being advanced were breach of contract claims of the mortgage investment corporation rather than independent personal claims of the shareholders. The loss was not recoverable by way of a shareholder suit. The rule in Foss v. Harbottle was dispositive of the plaintiffs' claims.

EY Holdings Ltd. v. Great Pacific Mortgage & Investments Ltd., [2017] B.C.J. No. 2349, British Columbia Court of Appeal, D.M. Smith, D.C. Harris and J.J.L. Hunter JJ.A., November 23, 2017. Digest No. TLD-December42017003