D&O Issues for Closely Held Corporations
Simon Bieber
Emerging Issues in Directors’ and
Officers’ Liability 2013
Law Society of Upper Canada
March 4, 2013
OVERVIEW
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Oppression Actions are becoming more and
more common to resolve disputes in closely
held corporations
Part of the reason is that oppression and the
remedies available are flexible and designed to
promote “fairness”
Oppression
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Since the Supreme Court’s decision in BCE
Inc. v. 1976 Debentureholders, the Courts
have used a two part test for oppression
The first part of the test requires a plaintiff to
establish a “reasonable expectation”
The second part of the test requires a plaintiff
to establish that the “reasonable expectation”
has been breached by oppressive conduct
“Reasonable Expectations”
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To determine whether there is a “reasonable
expectation”, the Court will look at a number of
factors, including:
- general commercial practice
- the nature of the corporation,
- the relationship between the parties,
- past practice,
- steps the claimant could have taken to
protect itself,
- representations and agreements, and
- the fair resolution of conflicting interests
between corporate stakeholders.
Breach of “Reasonable Expectations”
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The second part of the test requires some
showing of oppressive or unfair conduct
Oppressive conduct has been described in the
case law as “burdensome, harsh and
wrongful,” “a visible departure from standards
of fair dealing”, and an “abuse of power” with
respect to how the corporation’s affairs are
being conducted
Remedies
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Upon finding that the two part test has been
satisfied, the Court has a great deal of
flexibility to craft appropriate remedies (see
section 248 of the OBCA)
Some of the remedies used in recent decisions
include, removal of directors, compensation
orders, damages, an order requiring shares to
be sold
Recent Trends
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One of the more recent trends for litigation
involving closely held companies arises from
the use of “shotgun” clauses
This litigation usually involves closely held
corporations that are controlled by a few
individuals who are each a shareholder
(owner), officer (manager) and director of the
corporation
“Shotgun Clauses”
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A “shotgun” clause in a shareholders’
agreement allows a shareholder to offer to buy
the shares of other shareholders at whatever
price is in the offer
The recipient of the offer can either (i) accept
the offer or (ii) flip the offer around and
purchase the shares of the offeror at the price
contained in the offer
Purpose of Shotgun Clauses
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The purpose of shotgun clause is to address
the situation when there is a breakdown in the
relationship of those who own a corporation
In closely held corporations, this avoids a
stalemate when the few individuals who own
and control the corporation can no longer get
along
Without a shotgun clause or other mechanism
to resolve a stalemate, the corporation may
have to be wound up
Litigation Arising from Shotgun Offers
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Recently, there have been a number of
lawsuits arising from shotgun offers
Usually commenced by the shareholder who is
unhappy that his/her shares have been
acquired
The defendants usually include the
corporation, the other shareholders and the
officers and directors
Causes of Action
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The two most common causes of action that
are asserted against directors are breach of
fiduciary duty and oppression
Typically, the allegation is that the director
improperly misled the shareholder about some
aspect of the offer (e.g. about the nature of the
financing behind the offer), or that the director
worked with the offeror in making the offer to
the detriment of the recipient of the offer
Duties
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Court have uniformly concluded that there are
no fiduciary duties and no duty of good faith
that are owed to the recipient of the offer
This means that officers/directors can assist in
making the offer, share corporate information
with potential lenders and participate in
creating future business plans for the
corporation if the offer is successful
However, the directors’ duties to the
corporation continue, i.e. the director must
ensure that he/she does not usurp corporate
opportunities or use corporate assets for
personal benefit
Oppression
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Courts have found that the “reasonable
expectations” in the context of shotgun offers are
“bench-marked” by the shareholder agreement
Accordingly, if conduct is not required/ prohibited
by the shareholder agreement, there is likely no
“reasonable expectation”
Specific examples where Courts have held there
to be no “reasonable expectation” are (i) an
allegation that shares could only be acquired at
fair market value or (ii) that shotgun offer could
only be made using “conventional funding”
Summary
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It is difficult to establish oppression or breach
of fiduciary duty when offer is made in strict
compliance with the shareholder agreement
Directors still have duties to the corporation
Directors should ensure that recipient of the
offer has access to corporate records in order
to evaluate the offer