The Supreme Court of Canada (SCC) recently provided some clarity to the test for finding directors personally liable for oppressive conduct in Wilson v Alharayeri (Wilson).1 Under most Canadian corporate statutes, the "oppression remedy" provides for relief to stakeholders where conduct is (i) oppressive; or (ii) unfairly prejudicial to; or (iii) unfairly disregards the interests of stakeholders. The oppression remedy provides courts with broad discretion to make any order it thinks fit to correct matters complained of by a stakeholder against not only a corporation but also against directors of that corporation. The difficult issue tackled by the SCC in Wilson was determining when a court is justified in making an order for damages under the oppression remedy personally against a director, as opposed to the corporation itself.

Wilson involved actions of the Board of Directors of Wi2Wi Corporation in relation to Ramzi Alharayeri, a shareholder and the former President and Chief Executive Officer of the company. The Board determined to proceed with a private placement of convertible secured notes to its holders of common shares. Alharayeri held two classes of preferred shares that were convertible into common shares if certain financial targets were met. Prior to proceeding with the private placement, the Board determined not to permit the conversion of Alharayeri's convertible preferred shares, which prevented Alharayeri from participating in the private placement. Conversely, the conversion of a third class of preferred shares, some of which were beneficially owned by Andrus Wilson, the new President and Chief Executive Officer, was permitted and as a result Wilson participated in the private placement. Significantly, the financial statements of Wi2Wi indicated that the financial tests for conversion of Alharayeri's convertible preferred shares had been met. On the other hand, the auditors of Wi2Wi had expressed doubts as to whether the test for conversion of Wilson's convertible preferred shares had been satisfied.

Alharayeri filed an action under the oppression remedy against four of Wi2Wi's directors, including Wilson, alleging that they had unfairly disregarded Alharayeri's reasonable expectations. The trial judge, in a decision upheld by the Quebec Court of Appeal, found that Alharayeri's expectations were reasonable and had been unfairly disregarded. Both Wilson and one other director, Hans Black who were members of Wi2Wi's audit committee, were found personally liable as they had advocated against conversion of Alharayeri's shares. As the only members of Wi2Wi's audit committee, it was determined that Wilson and the other director must have known that the conversion rights for Alharayeri's shares had crystallized and had significance influence over the decision to disallow the conversion of the shares. They were also found to have personally benefitted from the decision to prevent the conversion of Alharayeri's shares as it allowed them to increase their control of Wi2Wi through participation in the private placement. Wilson was additionally found to have benefitted from the conversion of his convertible preferred shares notwithstanding issues as to whether the test had been met.

The SCC confirmed the lower court's decision and provided guidance on applying the test for finding directors personally liable under the oppression remedy.

Developed in Budd v Gentra Inc.2, the Budd Test is the standard test to determine the personal liability of a director, if any, once oppressive conduct is found. The SCC in Wilson described the Budd Test as requiring a two pronged approach:

  1. the oppressive conduct must be properly attributable to the director because of his or her implication in the oppression; and
  2. the imposition of personal liability must be fit in all the circumstances.3

In discussing the Budd Test, the SCC referred to examples, such as personal benefit and bad faith, in which personal orders against a director may be appropriate. However, courts have differed in their understanding of these examples; some courts treating them as factors to be considered, others as necessary conditions for the imposition of personal liability. With this in mind, the SCC upheld the Budd Test as the proper test when determining the personal liability of a director, and further elaborated on the test by identifying four general principles to guide courts in fashioning a fit remedy.

  1. the oppression remedy request must in itself be a fair way of dealing with the situation;4
  2. any order should go no further than necessary to rectify the oppression;5
  3. any order may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders;6 and
  4. a court should consider the general corporate law context in exercising its remedial discretion.7

The Budd Test was given greater clarity by the SCC, especially in regards to fashioning a "fit" order of personal liability. However, the SCC was careful not to be too specific when addressing the Budd Test in order to enable sufficient flexibility and discretion and to allow for fact specific application.

It is noteworthy that one of two main elements are likely to be present in all successful personal liability oppression claims against directors — personal benefit and/or bad faith. The SCC emphasized that personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct.8

The SCC also confirmed that a "lead role" alone is not sufficient to find a director personally liable; "something more" is required to satisfy the Budd Test. In Wilson, it was not enough that Andrus Wilson assumed a lead role in disallowing Alharayeri's preferred share conversion. However, the fact that Wilson personally benefited by allowing for the conversion of his convertible preferred shares and participating in the private placement, resulting in a devalued position for Alharayeri, was enough to find personal liability and distinguish him from other Board members (other than Hans Black who was found to be personally liable as he also had a lead role in the oppressive conduct and participated in the private placement). Further, the SCC confirmed that despite the Board voting unanimously in favour of the private placement, this in itself was not enough to remove personal liability when evaluating the conduct of Wilson.

The SCC recognizes that this decision does not provide perfect certainty of personal liability to corporate directors going forward. Inherent in a court's oppression remedy power is broad discretion in situations that are highly fact specific. With this in mind, it is essential that corporate directors always declare potential conflicts of interest as early as possible, and where appropriate, evidence their dissent towards potentially oppressive board decisions.

Footnotes

1 Wilson v Alharayeri, 2017 SCC 39 [Wilson].

2 Budd v Gentra Inc. (1998), 43 BLR (2d) 27.

3 Wilson at para 31.

4 Wilson at para 49.

5 Wilson at para 53.

6 Wilson at para 54.

7 Wilson at para 55.

8 Wilson at para 50.

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