This summer, the Supreme Court of Canada upheld a judgment holding two directors personally liable for $648,310. Under Canadian corporate statutes, courts are given broad powers to remedy conduct that is oppressive or unfairly prejudicial. The Supreme Court confirmed that one of the remedies to oppressive conduct is to hold directors personally liable.
In the case of Wilson v Alharayeri, 2017 SCC 39, the corporation in question conducted a private placement. Convertible secured notes were issued to the corporation’s existing common shareholders and each such shareholder could convert the notes into common shares. This resulted in the dilution of the proportion of common shares held by any shareholder not taking part in the placement.
Prior to the private placement, one of the minority shareholders of the corporation, Mr. Alharayeri, requested that his preferred shares be converted into common shares (in order to take full advantage of the private placement). The two directors serving on the corporation’s audit committee, Mr. Wilson and Mr. Black, influenced the board of directors to not convert Mr. Alharayeri’s preferred shares, effectively preventing Mr. Alharayeri from fully participating in the private placement and resulting in a dilution of his share holdings. Simultaneously, Mr. Wilson and Mr. Black recommended that Mr. Wilson’s own preferred shares be converted into common shares thus allowing him to maximize his own participation in the private placement.
At trial, the court found both Mr. Wilson’s and Mr. Black’s conduct oppressive. Both directors were held personally liable for $648,310, the value of Mr. Alharayeri’s shares as if they had been converted to common shares prior to the private placement.
The trial decision was upheld on appeal. Mr. Wilson then appealed to the Supreme Court. In an unanimous decision, the Supreme Court upheld the trial judge’s decision of imposing personal liability on the two directors.
The Supreme Court adopted a two-prong test for imposing personally liability for oppressive conduct:
- The oppressive conduct must be properly attributable to the director because of his or her action or inaction.
- The imposition of personal liability must be “fit” in all the circumstances.
The Court articulated four guiding principles to help determine if personal liability is “fit” in all the circumstances:
- the remedy requested must be a fair way of dealing with the situation;
- the order should go no further than is necessary to rectify the oppression;
- the order may only vindicate the reasonable expectations of the security holders, creditors, directors or officers in their capacity as corporate stakeholders; and
- the court should consider the general corporate law context when exercising its remedial discretion.
The Supreme Court stated that while bad faith and personal gain should be considered when assessing director liability, neither is required in order to hold a director personally liable. The oppression remedy remains a discretionary, equitable remedy that must be assessed in light of all the circumstances of a particular case.
For directors, this case affirms that courts will impose personal liability where the circumstances merit it. The principles enunciated by the Supreme Court will help provide guidance to determine if an action may result in personal liability. In light of this recent judgment, directors may wish to consult counsel to avoid actions that may result in personal liability.
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.