Limitation periods set defined time limits on when someone must commence a lawsuit once they discover they have been wronged. If a lawsuit is not brought within the limitation period, it can be dismissed out of hand. It is generally accepted that if the directing mind of a corporation has knowledge of a wrong done to the corporation, that knowledge is imputed onto the corporation.
But what happens when a corporation has been wronged, and the wrongdoers are the corporation’s controlling board of directors? If that wrong is discovered by a minority shareholder, is their knowledge imputed onto the corporation? This is an important consideration, given that the claim belongs to the corporation and can generally only be brought by the corporation.
The Saskatchewan Court of Appeal’s decision in CPC Networks Corp. v McDougall Gauley (“CPC Networks”) sheds light on this issue. In this case, minority shareholders of a company became aware of a wrong carried out by majority shareholders. Years later, the minority shareholders took control of the company and filed a statement of claim (the “Statement of Claim”). One of the matters at issue in this case was whether the limitation period had expired when the Statement of Claim was filed.
CPC Networks was an appeal from four orders made by a Queen’s Bench Judge. This blog focuses on the appeal of the order denying leave to commence a derivative action (the “Derivative Action”) and the order striking the Statement of Claim.
In 2009, a dispute arose between two minority shareholders and a majority faction within a corporation (the “Corporation”) that led to a series of court proceedings. The minority shareholders alleged that the majority faction had hatched a plot to force them out and acquire their shares. One of the proceedings was a Derivative Action commenced in 2012 claiming the existing directors and the Corporation’s lawyers had engaged in fiduciary breaches which caused damage to the Corporation. The lawyers had ceased acting for the Corporation in 2013. This proceeding was adjourned indefinitely.
By the fall of 2016, the minority and majority shareholders reached a settlement, which resulted in the minority taking control of the Corporation. By January 2018, the Corporation had brought a Statement of Claim against its prior lawyers.
The Saskatchewan Court of Appeal’s Decision
The application for leave to commence the Derivative Action and a competing application by the lawyers to strike the Statement of Claim were both decided in September 2019.
The judge dismissed the application to commence the Derivative Action and allowed the application to strike the Statement of Claim, effectively ending both lawsuits. Both of these orders were based on the belief that the claims were barred by the applicable limitation period because the minority shareholders had discovered the claim by 2012.
Both of these decisions were overturned by the Saskatchewan Court of Appeal, based on legal errors applying limitation periods to corporations: i.e. whether the minority shareholders’ discovery constituted discovery of the corporation for the purposes of applying limitation periods was an arguable issue, and the lower court judge erred by dismissing it out of hand.
Justice Barrington-Foote noted there is sparse case law in Canada relating to limitation periods and corporate knowledge, pointing out that most judges seem to simply assume that the knowledge of the complainant is the relevant consideration. However, he went on to note the decisions in Ridel v Goldberg, 2019 ONCA 636 and Doyle Salewski Inc. v Scott, 2019 ONSC 5108, which suggest that it is not until those with knowledge and independent of the wrongdoing have control of the corporation that the limitation period is commenced.
Justice Barrington-Foote accepted this position and held that there was an arguable issue as to whether the Corporation had knowledge of the claims while they were controlled by the wrongdoers, or whether the knowledge of the Corporation only arose once the minority seized control of the Corporation, so as to commence the limitation period.
CPC Networks, although not definitively deciding the issue of corporate knowledge for the purposes of limitation periods, strongly suggests that where a minority shareholder gains knowledge of wrongdoing within a corporation but has no control to bring a claim on behalf of the corporation, that knowledge cannot automatically be imputed onto the corporation.
Instead, it is a fact-specific analysis looking at when a corporation “knows” and when the corporation is realistically in a position to act and seek redress, given the control being exercised by the wrongdoer. CPC Networks would seem to pull the Canadian case law toward the American “Adverse Domination Doctrine,” which tolls limitation periods while the controlling directors/officers dominate the corporation.
Ultimately, what CPC Networks shows is that the specific factual circumstances and the timing of discovering a corporate wrong should be considered very carefully, with appropriate consideration given to the applicable corporate law principles, when applying limitation periods to wrongs done to a corporation by controlling insiders.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.