Chapter 8: Shareholders' Remedies

Question 1

What is the Foss v. Harbottle rule?

Answer 1

Shareholders have no locus standi to sue for a wrong committed against a corporation when that wrong was committed by the directors. Only the directors have standing, and only if they are not a minority.

Proper Plaintiff in an action. And about the majority rule principle: if the alleged wrong can be confirmed by the shareholders in a meeting then why should the court interfere?

Question 2

What are the four exceptions to the Foss v Harbottle rule?

Answer 2

1) Ultra vires acts,
2) Fraud against the minority
3) Acts requiring special majorities that had not been obtained; or
4) Acts giving rise to a personal cause of action.

However, even if shareholders win their claim, their winnings would have to be given back to the corporation (since they are suing on the corp’s behalf).

Question 3

How did the common law respond to the harshness of the Foss v. Harbottle rule?

Answer 3

Courts developed a form of derivative action under equity.

Question 4

Where is statutory authority for derivative actions found?

Answer 4

s. 238 of the CBCA and s.7 of the Third Schedule. They are virtually identical codifications of the derivative action claim.

Question 5

How is “complainant” defined for a statutory derivative action in CBCA?

Answer 5

a) A registered holder or beneficial owner, and a former registered holder or beneficial owner of a security of a corporation or any of its affiliates.
b) a director or an officer, or a former director or officer, of a corporation or any of its affiliates
c) the Director (or Registrar for NSCA) [the head hauncho in Ottawa (or Halifax)]
d) any other person who, in the discretion of a court, is a proper person to make an application under the Act. [Since creditors are not expressly included in the definition, this is where they try to squeeze in].

** Creditors are expressly included in the NSCA under s.4 of the third schedule. **

Question 6

What are the conditions precedent for bringing a derivative action?

Answer 6

1) You are a complainant
2) You have applied to the court for leave (s.239 CBCA, s.4(1) of Third Schedule)
3) Reasonable notice of 14 days given to directors of intention to bring suit
4) Must act in good faith and not as a remedy for a personal wrong
5) The action appears to be in the best interest of the corporation.

Question 7

Why is Re: Marc-Jay Investments Inc and Levy important?

Answer 7

It says that when a judge hears an application for a derivative action their role is simply to vet out frivolous or vexatious cases.

If there is a better means of dealing with a problem, or a possible breach of duty to the corporation and personal harm with you failing to distinguish the two, then courts are likely to refuse an application.

Question 8

Why is First Edmonton Place v. 315888 Alberta important?

Answer 8

Numbered company composed of 3 lawyers looking to enter into a long-term lease with First Edmonton Place. The lawyers say they will set up shop for ten years, First Edmonton Place says they will give them $140k, rent for for some months, and not made to sign a lease. They pay three months worth of rent and then take off. First Edmonton Place wants the Numbered Company to go after the lawyers to get the money back.

238(a): needs to be capable of being registered through the registrar.

The Court found First Edmonton Place was not complainants since they didn’t own interest in the Numbered Company.

238(d) test: “Would this person reasonably be entrusted with advancing the interests of the corporation?”

Derivative action serves to protect minority shareholders, AS WELL AS ensuring managerial accountability.

Court of Appeal wouldn’t let First Edmonton be a complainant because there needed to be a trial about whether there was a contract or even any debt. Really what FIrst Edmonton was doing was litigating a debt claim against a numbered company. Why a derivative action for this? Just file a debt claim!

Question 9

What happened in Abbey Glen Property Corp v. Stumborg et al?

Answer 9

The company won a derivative action against the directors. However, none of the shareholders present during the harm were present and so the new shareholders received a windfall. This was okay as the wrong was to the company- a separate entity regardless of the changing identity of shareholders.

Question 10

Why is Discovery Enterprises v Ebco Industries important in relation to derivative actions?

Answer 10

Who in practical terms functions as the plaintiff in a derivative action? Who instructs solicitors for the plaintiff, and who advises the company? Is the company the adversary of the minority shareholder, or does it merely look on passively as the minority and majority shareholders fight their battle?

ANS: The fact that the company’s name is used as plaintiff, presumably to ensure that it receives any damages or other sums ultimately awarded to it, should not obscure the substance of the litigation, which is a contest between the Class D and majority shareholders.

Question 11

What is a derivative action?

Answer 11

A suit launched on behalf of a wrong done to the company. It is always a class action.

Question 12

What happens when the same set of facts can give rise to both a derivative and personal claim?

Answer 12

Personal and derivative actions can be combined so long as they both arise from the same subject matter. (Goldex)

Question 13

What are the four categories of remedies for protecting an individual shareholder’s rights?

Answer 13

(a) compliance orders - CBCA 247, NSCA 3rd s.6
(b) appraisal rights,
(c) oppression remedies, and
(d) winding up order under the “just and equitable” rule.

Question 14

What are compliance orders?

Answer 14

Found in s.247 of CBCA and s.6 of the Third Schedule, this says that if somebody is not complying with rules under the memorandum/articles of incorporation, articles of associations/bylaws, or a USA (for CBCA only) then a complainant can apply to the court for an order directing compliance with the provision.

Question 15

What does Re Goldhar and Quebec Manitou Mines do?

Answer 15

Says that compliance order is there to remedy mechanical omissions, like failing to send out shareholders notices or failing to call an annual meeting.

You cannot use compliance orders to deal with allegations of breach of directors’ fiduciary duties.

Question 16

What are investigations?

Answer 16

Investigations are a means of obtaining information under s.229. They are not a remedy but used to establish the existence of something on an ex parte application when it appears to the Court that:

1) there was intent to defraud
2) business conducted in oppressive manner
3) Corporation formed or dissolved for fraud purposes
4) person concerned with incorporation are fraudulent.

Under NSCA ss.115-116 there is No Court Involvement!

Question 17

Catalyst Fund General Partner I Inc. v. Hollinger, (2004), 48 B.L.R. (3d) 194.

Answer 17

Who is Catalyst General Partner 1? This is probably a general partner in a limited partnership.

Index of suspicion
Para 42: The inspector could inspect into affiliated companies not incorporated under the CBCA.

(1) The court’s function in an investigation is to oversee the conduct of the investigation, to lend the court’s authority to the inspector and ensure that those affected are fairly treated.
(2) The courts also recognize that the inspection process should not be allowed to become overly intrusive, long or costly, or used as a means to overcome solicitor-client privilege, bona fide confidentiality undertakings or the legitimate individual rights of corporate insiders. These concerns must be balanced against the right of the shareholders of a corporation to know what is being done with their money, and to receive information to which they are legally entitled.

Question 18

Pavlides v. Jenson, [1956] Ch.565

Answer 18

Directors caused company to sell corporate assets worth in excess of 1mil pounds, and they earned 182k pounds. Minority shareholders complained and they alleged fraud and gross mismanagement. The court said that: “the action was not maintainable when only negligence was shown”. negligence is not enough to prove fraud on the minority. If it was only negligence then the SH could ratify it at a general meeting.

Question 19

Daniels v. Daniels, [1978] Ch. 406

Answer 19

Modifies Pavlides. Similar circumstances. The corporation has been robbed some how. The court orders that in order to establish fraud on the minority not only must a wrong be done to the corporation but that the wrong also benefitted the wrong-doing directors.

Question 20

Hercules Management v Ernst & Young, [1997] 2 SCR 165

Answer 20

“No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting”.

Question 21

Maloney: “Whither the statutory derivative action?”

Answer 21

“The paradox is revealed when the directors harm the corporation. They are responsible for the decision to bring a claim against themselves. In very limited circumstances the SH can resolve to bring a claim in general meeting”.

“Foss v Harbottle may not merely be subservience to form but a judgment on the part of the courts to attempt unlimited supervision of organizations designed to have a large measure of self-government”. So, if you let others besides the corporation sue then there will be a run to the courts. Slippery slope. Have the court review decisions minority SHs don’t like.

Question 22

What is required for a complainant to bring an action in the name of and on behalf of a corporation?

Answer 22

1. Must be brought in good faith,
2. 14 days notice to directors,
3. Involvement in action appears to be in the best interest of the corp.

Question 23

CBCA s.240

Answer 23

Once a court authorizes a derivative action it can do certain things.

Question 24

What are issues with the requirement of 14 days notice?

Answer 24

How complete does disclosure need to be? Too specific and the notice could never be given.

Tension between CBCA and NSCA 3rd Schedue s.4: Reasonable notice.

Question 25

What is the flow of a derivative action problem?

Answer 25

1) Who is permitted to commence the action
2) What pre-conditions must be satisfied before the action proceeds
3) what is the role of the court at the approval of commencement or intervention stage?
4) How are costs treated?
5) Is the permitted scope of orders and relief adequate?
6) Do these sections embrace all derivative/actions?

Question 26

What is the role of the court in approving the derivative action?

Answer 26

Their role is simply to vet out frivolous or vexatious cases. Small financial matters, personal vendettas.
(First Edmonton) (Re: Marc-Jays).

Question 27

Turner et al. v. Mailhot et al. (1985) 50 O.R. (2d) 560

Answer 27

30% SH that was unceremoniosuly dismissed. Wanted to bring an action and order for ocsts. Wanted the company to pay for the costs. What did the court say about costs in a derivative action?

Having leave for a derivative action is prima facie evidence for costs. In determining how much, if its really an action between two shareholders and not for the benefit for the corporation then you will get less costs than if its really an action against the corporation.

Giving costs to minority shareholders is to encourage minority shareholders to bring forward actions when their directors are misbehaving.

Question 28

What are defences to derivative action?

Answer 28

1) Action not in the best interest of the company:
Court must make that decision in heir gate-keeping function. How can you do this?
a) Appoint a litigation committee. Doesn’t go far if all the wrong-doing directors are on the committee. But if there is a board of 7 and 2 are the executive directors, and the other 5 are independent industry people that bring expertise.

Question 29

Auerbach v. Bennett (NYCA 1979)

Answer 29

Litigation committee will be granted deference under the business judgment rule.

Question 30

Zapata v. Maldonaldo (Delaware 1981)

Answer 30

Dials back the importance of deference to business judgment.

Question 31

Can the complainant obtain an order under s.240 that the benefits of the derivative action be restricted to those who contribute to the costs of litigation?

Answer 31

No. Section 240 is procedural and outlines how an action goes, and doesn’t affect the substantive rights of the parties. Try to get it elsewhere.

Question 32

Goldex Mines Ltd. v. Revil

Answer 32

Distinguishes personal claims from derivative claims. but says they can’t tell the difference between them if they are pleaded poorly.

Question 33

Themadel Foundation v. Third Canadian General Investment Trust

Answer 33

Public Pronouncements: grounds for SH to have reasonable expectation that co. will follow through.

Bona fides good faith required? “IT is not necessary that a want of finding of bona fides be made of every case when a court is asked to grant a remedy” para 12. It’s the expectations that are the issue, not whether somebody was trying to meet them and didn’t. These people may have been trying their best. Irrelevant.

Question 34

Should a claim for the oppression remedy be limited to personal (not derivative) claims?

Answer 34

MacIntosh: different sections, different acts. Nice silos.

Iacobucci: why do e care, not going to be a flood of litigation to worry about.

Question 35

Redekop v Robco COnstruction Ltd.

Answer 35

Breach of Fiduciary Duties:

Oppression: Robillard was engaged in affairds of the other company so much it was done at the expense of Robco and this made the original guy lose confidence in the other guy. He was losing as a member, so he had a personal claim.

Court has NO PROBLEM enforcing a derivative action instead of a personal claim. Against Foss v Harbottle. Well, sort of. You can bring your claim and say I have oppression, but also a derivative action.

This is a great example of needing to bring both claims.

Question 36

What’s the difference between oppression and derivative?

Answer 36

Derivative actions focus on legal duties; oppression focuses on fair treatment.

Can you have an oppression action for a derivative claim?

Question 37

Should creditors be able to bring oppression actions?

Answer 37

No. doing so erodes the solomon principle. We’ve got remedies for debits and creditors under tort and contract law.

Question 38

What 7 factors to consider reaonavlbe expect ions?

Answer 38

1 nor map commercial/business practices.

Nature (size) of corp

Question 39

Is a breach of a statutory duty or common law duty necessary to find oppression?

Answer 39

No. It’s based on reasonable expectations.

Question 40

Can oppression arise where the directors have met their duty of care and acted in the set interests of the corporation?

Answer 40

It could. It would be rare because the directors’ role is to act in the best interest of the corporation. If they could make a decision that doesn’t overly harm the minority then it’s probably okay.

The answer comes back to what the directors can take into account when figuring out the best interest of the company. Latitude from the business judgment rule.