Shareholder oppression is a complex legal concept that arises when a controlling shareholder or group engages in conduct that is oppressive or unfairly prejudicial to a minority shareholder. In Alberta, the Business Corporations Act provides remedies for oppressed shareholders. However, navigating these remedies can be intricate and challenging.

Understanding Shareholder Oppression

The Alberta Business Corporations Act governs shareholders’ rights and remedies in addition to a number of other relevant business rules and procedures, with section 242.1 being the most relevant section regarding shareholder oppression. This section refers specifically to a shareholder’s oppression remedy and is available to those who suffer oppressive conduct, unfairly prejudicial conduct or conduct that unfairly disregards their interests.

The oppression remedy is fairly broad in its interpretation, which grants the Court significant discretion to provide any remedy it deems appropriate for addressing an unfair situation. This enables the Court to assess claims of “oppression” brought by minority shareholders or other stakeholders and, if warranted, overturn decisions made by the majority in those circumstances.

Two-Part Test for Oppression

In the landmark Supreme Court of Canada case BCE Inc. v. 1976 Debentureholders, a two-step test for oppression was established:

1. Does the evidence substantiate the claimant’s asserted reasonable expectation?
2. Does the evidence demonstrate that this reasonable expectation was breached through conduct amounting to oppression, unfair prejudice, or an unfair disregard of a relevant interest?

To further understand the concept of shareholder oppression, several key elements must be considered:

Control:

The controlling shareholder or group must have the power to influence the corporation’s affairs. This can be achieved through direct ownership of a majority of shares or through indirect control mechanisms, such as shareholder agreements or family relationships.

Oppressive or Unfairly Prejudicial Conduct:

The conduct must be detrimental to the minority shareholder, such as:

• Diluting their interest: Issuing new shares without offering them to the minority shareholder, resulting in a decrease in their ownership percentage.
• Misappropriating corporate assets: Using corporate funds for personal gain or transferring assets to related parties without proper authorization.
• Refusing to pay dividends: Withholding dividends despite the corporation’s profitability, depriving minority shareholders of their share of earnings.
• Denying access to information: Preventing the minority shareholder from accessing important corporate records or information, hindering their ability to monitor the corporation’s affairs.
• Engaging in self-dealing: Conducting transactions between the corporation and a related party on terms that are unfavourable to the corporation.

Minority Shareholder’s Reasonable Expectations:

The minority shareholder must have legitimate expectations regarding their participation in the corporation. These expectations can be based on the corporation’s articles of incorporation, shareholder agreements, or the conduct of the parties. For example, if a minority shareholder has been involved in the management of the corporation for many years, they may have a reasonable expectation of continued involvement.

Categories of Oppression under the Alberta Business Corporations Act

Section 242 of the Alberta Business Corporations Act outlines protections against three levels of wrongful conduct, which fall under the broader concept of shareholder oppression. These three categories include oppression, unfair prejudice, and unfair disregard, each representing different degrees of harm and misconduct in shareholder relationships.

1. Oppression: Oppression is the most severe form of misconduct, and refers to actions that are burdensome, harsh, and wrongful. It involves a blatant departure from fair dealing and may constitute an abuse of power. Examples of oppression include actions that significantly harm a shareholder’s rights or interests through overtly unjust treatment.
2. Unfair Prejudice: Unfair prejudice represents a less extreme, but still wrongful, level of misconduct. This category encompasses behaviours such as squeezing out minority shareholders, failing to disclose transactions involving related parties, making structural changes that harm financial stability, issuing dividends without proper declarations, or favouring certain shareholders over others.
3. Unfair Disregard: The least serious of the three categories, unfair disregard, involves actions that show a lack of respect for a shareholder’s interests but fall short of more overtly harmful conduct. Examples include refusing to pursue legal claims against a director, unfairly reducing dividends owed to a shareholder, or withholding property that belongs to the claimant.

Remedies for Shareholder Oppression Under the Business Corporations Act

The Alberta Business Corporations Act offers a range of remedies for oppressed shareholders, including:

Winding Up:

The court may order the dissolution of the corporation, leading to the sale of its assets and distribution of proceeds to shareholders. This drastic remedy should only be considered in extreme cases with no other viable solution.

Purchase of Shares:

The court can compel a controlling shareholder to buy the minority shareholder’s shares at a fair price. This remedy can be appropriate when the controlling shareholder’s conduct has made it impossible for the minority shareholder to remain in the corporation.

Specific Relief:

The court may order the controlling shareholder to cease oppressive conduct or take specific actions to remedy the situation. For example, the court may order the controlling shareholder to reinstate a minority shareholder to the board of directors or to provide access to corporate information.

Appraisal:

The court can order an appraisal of the minority shareholder’s shares to determine a fair value for potential purchase. This remedy is often used in conjunction with a purchase order, as it helps to ensure that the minority shareholder receives fair compensation for their shares.

Derivative Actions:

In cases where the oppressive conduct harms the corporation itself, rather than just an individual shareholder, a derivative action may be brought. This process is further outlined in section 240 of the Alberta Business Corporations Act. Derivative action allows shareholders to initiate legal action on behalf of the corporation to address wrongdoing or enforce corporate rights. Although derivative actions do not directly compensate oppressed shareholders, they can serve to correct broader injustices within the corporation.

Challenges in Proving Shareholder Oppression

Despite the available remedies, proving shareholder oppression can be challenging due to:

Burden of Proof:

The minority shareholder bears the burden of demonstrating oppressive or unfairly prejudicial conduct. This can be difficult without clear evidence, such as documents, emails, or witness testimony.

Subjective Nature of Oppression:

Determining what constitutes oppression can be subjective, making it challenging for the court to assess the situation. Factors such as the size of the corporation, the nature of the business, and the relationship between the parties can all influence the court’s decision.

Fiduciary Duties:

While controlling shareholders have fiduciary duties to the corporation and its shareholders, defining and enforcing these duties can be complex. The specific nature of these duties can vary depending on the circumstances of the case.

Alternative Dispute Resolution:

In some cases, parties may resolve disputes through mediation or arbitration. However, these methods may not always be appropriate or effective, particularly when the parties are unable to reach a mutually agreeable solution.

Additional Considerations

Shareholder Agreements:

Well-drafted shareholder agreements can help to prevent or resolve shareholder disputes. Such agreements can set out the rights and obligations of shareholders, including provisions related to voting, dividends, and dispute resolution.

Corporate Governance:

Good corporate governance practices can also help to mitigate the risk of shareholder oppression. This includes having independent directors, implementing effective internal controls, and ensuring that the corporation’s affairs are conducted in a transparent and ethical manner.

Calgary and Strathmore Business Lawyers Advise Clients on Shareholder Disputes

Shareholder oppression is a complex legal issue with significant implications for corporations and their shareholders. While the Alberta Business Corporations Act provides remedies, proving oppression and obtaining relief can be challenging. Understanding the intricacies of shareholder oppression and seeking legal advice is crucial for those facing such situations. Getz Collins and Associates, with offices in Calgary and Strathmore, Alberta, are experienced in business law, civil litigation, employment law, and more. Contact us today at (587) 391-5600 or online for a consultation.