Written By By Scott Bower, Russell Kruger and Stephanie Clark
A corporation's failure to follow legal formalities under the Canada Business Corporations Act, RSC 1985 c C-44 [CBCA] does not, by itself, establish oppression, the Supreme Court recently held in Mennillo v Intramodal inc., 2016 SCC 51 [Mennillo]. A majority of the Court stated that, even though a shareholder or creditor may have a reasonable expectation that the formal requirements set out in the CBCA will be followed, a failure to do so does not necessarily amount to conduct that is "oppressive, unfairly prejudicial or unfairly disregarding" of that shareholder's interests.
In Mennillo, Mr. Mennillo, brought a claim based on oppression under s. 241 of the CBCA against the defendant company, Intramodal. Mr. Mennillo argued that when he resigned as a director, he had also been unfairly stripped of his position as a shareholder by the other director, Mr. Rosati. After Mr. Mennillo notified Mr. Rosati that he was resigning as director, Intramodal's lawyer filed an amending declaration with the Registraire des entreprises removing Mr. Mennillo as a director and a shareholder. The Supreme Court found that, in light of all of the circumstances, Mr. Mennillo had no reasonable expectation of being treated as a shareholder after his resignation, as discussed below.
An oppression claim under s. 241 of the CBCA requires the claimant establish two elements: 1) that the claimant's reasonable expectations were violated, and 2) that the conduct complained of was "oppressive, unfairly prejudicial to or unfairly disregarding" of the claimant's interests.
The trial judge had found that Mr. Mennillo did not want to remain a shareholder and told Mr. Rosati to remove him as such. In particular, the trial judge found that Mr. Menillo agreed to remain a shareholder on the condition that he guarantee Intramodal's debts. Having decided he longer wanted to do that, he transferred his shares. The Supreme Court ruled that there was no basis on which to reverse the trial judge's findings, based on a standard of palpable and overriding error.
A source of difficulty in Mennillo arose from the fact that the two parties had largely not followed formal CBCA requirements in setting up and running the corporation. While the parties duly incorporated the company, they did not put any aspect of their arrangement in writing, never paid for the initial shares, and never signed Mr. Mennillo's original share certificate. Notably, none of the formal requirements of transferring Mr. Mennillo's shares to Mr. Rosati had been observed. The CBCA requires, among other things, that the shares transferred to Mr. Rosati be endorsed by Mr. Mennillo (s. 76(1)), and that the shares be delivered (ss. 60(1) and 65(3)) – this was never done.
However, that non-compliance was not the cause of Mr. Mennillo no longer holding his shares. The trial judge held these inconsistencies with the CBCA to be an "error or oversight on the part of Mr. Rosati's lawyer." The Supreme Court agreed, stating at paragraph 57:
On these findings of fact, Mr. Mennillo’s oppression claim is groundless. He could have no reasonable expectation of being treated as a shareholder: he no longer was and expressly demanded not to be so treated. As against Intramodal, the most that can be said is that the corporation failed to carry out his wishes as a result of not observing certain necessary corporate formalities. But in light of these findings, it cannot be said that the corporation acted oppressively or that it illegally stripped him of his status as a shareholder ... What happened is that the corporation failed to make sure that all the legal formalities were complied with before registering the transfer. The acts of the corporation which Mr. Mennillo claims to constitute oppression were in fact taken, albeit imperfectly, in accordance with his express wishes. But it cannot be unfairly prejudicial to Mr. Mennillo for the corporation to register a transfer of shares that he wished to happen, and that ... he can no longer attack. As a consequence, all of Mr. Mennillo’s claims must fail.
Justice Côté, as the sole dissenting judge, would have held that compliance with the CBCA is one of the reasonable expectations held by a shareholder or creditor. Failing to observe those legal requirements is tantamount to unlawfully stripping a shareholder of his or her status.
While the majority of the Supreme Court did not say that non-compliance with corporate formalities will never contribute to an oppression claim, in these circumstances it was held that the non-compliance did not result in a violation of Mr. Mennillo's reasonable expectations. This decision is consistent with established authority holding that oppression should be judged according to "business realities" and not "narrow legalities". The Supreme Court's decision confirms that an oppression claim must be judged in its own context and on its own unique facts.