Dispute Resolution doesn't usually publish case comments. But the Supreme Court of British Columbia's decision in Southpaw Credit Opportunity Master Fund LP et al v. Asian Coast Development (Canada) Ltd. et al, 2013 BCSC 187, is worth making an exception for because it contains several points of interest in the shareholder oppression field. It is a useful illustration of the fact-specific nature of the necesary shareholder's objectively reasonable expectations. It is a useful reminder that, before oppression can result in a remedy, it must have actually caused the harm complained of. And it includes an interesting discussion of the concept of accessory liability in the oppression context.
BACKGROUND
Asian Coast Development (Canada) is (now) a British Columbia Company, building a resort and casino complex in Vietnam, the first of its kind in that country, at a total estimated cost of US$4.2 billion. In early 2008 – just in time for the world financial crisis – it obtained from the Vietnamese government the crucial "investment certificate" necessary to proceed with the project. That required Asian Coast to raise a total of $795 million by specific deadlines, failing which the government had the right to withdraw the certificate – and put an end to the company's raison d'etre.
A group of investment of funds we'll call "Harbinger" (and for which the authors acted) was the first institutional, and largest, shareholder in Asian Coast. By 2008 it had invested $42 million. Not surprisingly, it negotiated a host of protections for its investment, including comprehensive security, rights of consent to, and first refusal on, further issues of equity and debt, and remedies for the Asian Coast's default on its commitments which would essentially give Harbinger control of the company. Harbinger did not have any representation on the Asian Coast board of directors at the material time.
Two other groups of investment funds, which we'll call "Bessemer" and "Southpaw", invested $20 million and $4.6 million in Asian Coast later, in full knowledge of Harbinger's position. Bessemer negotiated price protection in its subscription agreement. Southpaw did not.
Needless to say, in the financial climate beginning in the fall of 2008 it proved extraordinarily difficult for Asian Coast to meet the deadlines in the investment certificate. It was unable to attract additional investment. It repeatedly missed those deadlines and defaulted under its arrangements with Harbinger. Harbinger repeatedly forbore from enforcing its rights, not surprisingly exacting a price for doing so.
By October 2009 the situation was dire. Asian Coast approached Harbinger for a $3 million bridge loan. They negotiated. A penny warrant proposed by Harbinger as part of the transaction brought into play Bessemer's price protection. Asian Coast approached Bessemer, which said it would loan the company half the required money on the same terms as Harbinger proposed. Harbinger refused to allow Bessemer to participate in the transaction and revised it to delete the warrant. Asian Coast and Harbinger eventually agreed on terms, which Harbinger felt were commensurate with the risk it was undertaking, but which Bessemer and Southpaw later claimed were commercially unreasonable.
In December 2009, Asian Coast approached both Bessemer and Southpaw about participating in its ongoing efforts to raise the money required by the investment certificate, through an equity raise. Bessemer's response was that it was not prepared to participate and, indeed, questioned why it had made its investment in the first place. Southpaw also declined.
By January 2010 Asian Coast was in dire straits again. It approached Harbinger for an additional $12.5 million to meet its urgent obligations. It also canvassed other possible sources, but not Bessemer or Southpaw. Eventually, Harbinger again agreed to provide the necessary financing, again on terms which Bessemer and Southpaw later claimed were commercially unreasonable.
Throughout early 2010 Asian Coast continued to try to raise equity financing, without success. In July 2010, Harbinger agreed to restructure its position to make the company more attractive to new investors, and to loan it a further $125 million. One side effect of those transactions was the substantial dilution of the other shareholders, including Bessemer and Southpaw,.
In 2011 Asian Coast was able to secure another substantial institutional investor. The first phase of the complex opened in July 2013.
THE LITIGATION
Bessemer and Southpaw sued Asian Coast and Harbinger for shareholder oppression under s.241 of the Canada Business Corporations Act (under which Asian Coast had been incorporated at the material time). As required by the BC Supreme Court Civil Rules, the claim was made by petition supported by affidavit evidence. Essentially, Bessemer and Southpaw claimed that Asian Coast had oppressed them by entering into the October 2009 and January 2010 transactions with Harbinger without canvassing whether they, and the company's other shareholders, were prepared to offer better terms. They claimed that the terms of those transactions interfered with Asian Coast's ability to raise equity from new investors and eventually resulted in their shareholdings being diluted. They claimed Harbinger was an accessory to Asian Coast's oppression. They sought an order requiring Harbinger to buy their shares in Asian Coast for their original purchase price of $24.6 million.
After much preliminary skirmishing (including about sealing orders, disclosure of documents and conversion to an action to be tried on viva voce evidence), cross examinations on affidavits and the commencement of a separate action against Harbinger for intentionally interfering with Bessemer and Southpaw's economic relations with Asian Coast, the oppression claim was heard on affidavit evidence in September 2012 by Justice Carol Ross of the Supreme Court of British Columbia. On February 6, 2013 Justice Ross dismissed the claim with costs, in written reasons for judgment.
REASONABLE EXPECTATIONS
The first step in Justice Ross's analysis was to consider Bessemer and Southpaw's claim they had objectively reasonable expectations that Asian Coast would canvass them about providing the necessary interim financing before concluding deals with Harbinger. She seems to have accepted that the company should have canvassed sources of financing other than Harbinger, but that the degree of canvassing required depended on the circumstances.
In the circumstances of the October 2009 transaction, Justice Ross's view was that Asian Coast should have canvassed at least Bessemer to see if it would make the necessary loan on better terms than Harbinger. As she put it, "There was no down side." If nothing else, Asian Coast should have given itself as much leverage for its negotiations with Harbinger as possible. It was not reasonable to decide to negotiate with Harbinger without canvassing Bessemer. Asian Coast's failure to do so was unfairly prejudicial to Bessemer and Southpaw.
However, Justice Ross viewed the January 2010 situation differently, because of Bessemer and Southpaw's December 2009 refusals to participate in Asian Coast's attempted equity raise. In those circumstances, Justice Ross concluded it was reasonable for Asian Coast to conclude that neither was prepared to invest any further funds in the company, including through the interim financing required in January 2010. Therefore it was not a breach of Bessemer or Southpaw's objectively reasonable expectations for Asian Coast not to approach them about that financing.
CAUSATION
The next issue Justice Ross considered was whether Asian Coast's breach of Bessemer and Southpaw's reasonable expectations had caused the share dilution of which they complained. Their claim was that, had Asian Coast canvassed them for interim financing in October 2009, Bessemer would have loaned the company the money on more favorable terms than Harbinger actually did, and that it would have done the same in January 2010. They also claimed that, without Harbinger's terms in place, Asian Coast would have been able to find new investors and the dilutive July 2010 transactions would not have taken place.
Justice Ross essentially rejected this claim on the facts. As she said, "Every link in the alleged chain of causation is problematic." She was not persuaded that Bessemer would have provided the necessary interim funding in October 2009 or January 2010 on more favorable terms than Harbinger actually did. She noted Bessemer never actually offered better terms, only to participate in the October 2009 transaction on the same terms as Harbinger. She also noted that, while the expert evidence conflicted about whether Harbinger's terms impaired Asian Coast's ability to find new investors, Bessemer and Southpaw did not identify any potential investors who had declined to invest because of them. It was "pure speculation" that, without those terms, some investor would have invested on better terms. So, although it was unfairly prejudicial for Asian Coast not to canvass Bessemer and Southpaw about the October 2009 transaction, that did not cause the July 2010 share dilution of which they complained, and they were therefore not entitled to a remedy for it.
ACCESSORY LIABILITY
Bessemer and Southpaw's claim against Harbinger was one of accessory liability. Because Justice Ross dismissed their primary oppression claim against Asian Coast, their accessory claim against Harbinger also failed. Nonetheless, Justice Ross made some interesting comments about this type of claim.
The claim was based on the venerable authority of Lumley v. Gye (1853), 118 ER 749, as interpreted by the House of Lords in OBG v. Allan [2007] UKHL 21. While one might be forgiven for thinking that line of authority concerned the specific tort of inducing breach of contract, Bessemer and Southpaw presented it as authority for a general concept of accessory liability. Justice Ross assumed, without deciding, that such a concept was applicable in an oppression claim.
Justice Ross accepted that accessory liability required "inducement, incitement or persuasion" of the person primarily liable, as set out in CBS Songs Ltd. v. Amstrad Consumer Electronics Plc [1988] AC 1013, in a patent infringement context. However, she concluded that the evidence did not support a finding that Harbinger participated sufficiently in Asian Coast's unfairly prejudicial conduct to satisfy that test. Despite cross examination of Harbinger's deponent, there was no evidence Harbinger had induced, incited or persuaded Asian Coast not to canvass Bessemer and Southpaw about the October 2009 or January 2010 transactions, nor that it had intended the company to oppress its other shareholders.
CONCLUSION
So, the question of accessory liability in a shareholder oppression context will have to wait for another day. Meanwhile, this decision reinforces a fundamental practical point about oppression claims – they are extremely fact dependent. What is oppressive in one case – or in one of a series of closely related transactions – may not be in another.
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