One Sunday each month OnPoint Legal Research provides Slaw with an extended summary of, and counsel’s commentary on, an important case from the British Columbia, Alberta, or Ontario court of appeal.
Jaguar Financial Corporation v. Alternative Earth Resources Inc., 2016 BCCA 193
AREAS OF LAW: Corporations; Oppression; Disclosable interest; Mineral exploration
~Shareholders are only entitled to relief for oppression if they can show they held a reasonable expectation with respect to the corporation’s conduct, and that said conduct oppressively disappointed that expectation. ~
BACKGROUND: The Respondent, Jaguar Financial Corporation, owned 18.55% of the Appellant, Alternative Earth Resources’, shares. The Appellant sold its geothermal operations and at the 2014 AGM its shareholders approved a change in its business to mineral exploration and development. There was no need for further shareholder approval, subject to TSX Venture Exchange acceptance, for the board to proceed with this change. One of the Appellant’s three directors, Mr. Cooper, was a shareholder and the CFO of Black Sea Copper & Gold Corp. The Appellant reviewed a potential acquisition of Black Sea in 2015. Cooper disclosed his interest in Black Sea, and the other two directors reviewed and negotiated the terms of the transaction. The Appellant signed a letter of intent with Black Sea. The Respondent then filed a petition under the Business Corporations Act, alleging that the transaction sought to benefit the Appellant’s existing officers and directors to the Respondent’s detriment. The Respondent alleged that the Black Sea transaction was essentially a reverse takeover, and that it was tainted by conflicts of interest, and deliberately structured to avoid shareholder scrutiny. The chambers judge found that all of the Appellant’s incumbent directors had material interests in the transaction, and not just Cooper. The judge went on to hold that the transaction was not fair and reasonable to the Appellant because it was approved with undue haste and not negotiated at arm’s length. He found that the decision to enter into the Black Sea transaction was made before the directors received certain information including a fairness opinion. The judge further held that the Appellant’s conduct was oppressive or prejudicial to the Respondent, because the Appellant’s efforts were directed at preventing the Respondent from putting forth a takeover bid. This meant that the Respondent had suffered unique harm. The Respondent brought a later petition alleging that the Appellant was not following the orders from the first petition and that the incumbent directors were inappropriately depleting the Appellant’s cash reserves. The Respondent sought orders that would require the Appellant to make certain public disclosures, appoint an independent chair to call and conduct the 2015 AGM, and limit the Appellant’s spending to prevent it from retaining a proxy solicitor. The chambers judge found that the Appellant had acted oppressively to the Respondent and other shareholders, and had breached their reasonable expectations.
APPELLATE DECISION: The appeal was allowed. The chambers judge purported to exercise jurisdiction under s. 150(2) of the Business Corporations Act to enjoin the transaction. Under that provision, a director or senior officer must have disclosable interest, which must not have been approved in accordance with the Act, and the transaction must not have been fair and reasonable to the company. The Court of Appeal found that the judge erred in law in finding that the other directors had a disclosable interest by virtue of the “employment benefits” that would accrue to them, nor did he consider whether the benefits were material. Section 147(4)(c) provides that a director does not have a disclosable interest merely because the transaction relates to that director’s remuneration in their capacity as director or employee. The chambers judge also erred in enjoining the Appellant from entering into the proposed transaction without properly considering the application of ss. 147, 148, and 149 of the Act. The chambers judge had no jurisdiction to enjoin the Black Sea transaction under s. 150. On the matter of oppression, the Court of Appeal noted that a petitioner must show it held a reasonable expectation with respect to the conduct of the affairs of the company, and that the reasonable expectation was disappointed by conduct that was oppressive or unfairly prejudicial. This is assessed on an objective and contextual basis. In this case, the Court of Appeal held that the judge made a palpable and overriding error in concluding on an objective basis that the Respondent held a reasonable expectation that the business of the Appellant was restricted to the kind of projects referenced in some of its press releases, without reference to the more general mandate given the Board at the 2014 AGM. Furthermore, the Respondent’s principal had a history including significant regulatory sanction for misconduct in the securities industry, and dissipating shareholder value in other enterprises. The Appellant’s board was of the reasonable view that it was in the Appellant’s best interests to resist the appointment of directors nominated by the Respondent.
Counsel Comments provided by Hein Poulus, Q.C., and Joseph Ensom, Counsel for the Respondent, Alternative Earth Resources Inc.
“In overturning two related decisions of the BCSC, the Court of Appeal clarified the law relating to both the oppression remedy and disclosable interests in corporate transactions. The BCSC decisions had surprised the profession in three respects.
First, they all but eliminated the dividing line between oppression claims and derivative actions.
Second, they broadened very significantly the statutory meaning of “disclosable interest” – an interest that disables a director from participating in corporate decision making.
Third, they lowered significantly the hurdle that faces an applicant for an order that the court appoint an independent chairperson for a shareholders’ meeting.
The Court of Appeal came to conclusions on all three points that accorded with the prior understanding in the profession. Perhaps the Court’s most interesting conclusion is that the rule in Foss v. Harbottle is alive and well: the oppression remedy is not available where the alleged injury is to the company and the claimant suffers no separate harm. This conclusion deserves some additional context.
AER’s position at both levels of court was that each of Jaguar’s complaints related solely to harm done to the corporation and, therefore, Jaguar could only pursue relief on behalf of the corporation by way of a derivative action.
The chambers judge rejected that argument, even though it rested on Court of Appeal authority.
In Pasnak v. Chura, 2004 BCCA 221, Mr. Justice Donald stated the rule: “The authorities are clear that a shareholder must show direct and special harm in order to maintain a personal action for oppression, otherwise he must seek leave to bring a derivative action in the name of the company”.
Pasnak was the leading authority on that issue until BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, in which the Supreme Court of Canada cast some doubt on the dividing line, perhaps unintentionally. In its reasons, the SCC provided several examples of oppressive behavior, some of which appeared, at first blush, to be examples of harm that would only be suffered by the company, such as paying excessive directors’ fees.
The uncertainty created by the BCE examples did not go unnoticed. In Icahn Partners LP v. Lions Gate Entertainment Corp, 2011 BCCA 228, Madame Justice Newbury commented on the difficulty that the examples in BCE present: “Whether the Court thereby intended to signal that derivative actions (for breach of fiduciary duty) and oppression claims should in its view be collapsed into one category, despite their different treatment in Canadian corporate legislation, remains to be seen.”
After the Icahn case, the dividing line once again came before our Court of Appeal in Khela v. Phoenix Homes Ltd., 2015 BCCA 202 in which Madam Justice Neilson re-affirmed the principle in Pasnak. An Ontario Court of Appeal case, Rea v. Wildeboer, 2015 ONCA 373, was to similar effect.
It was in this context that the chambers judge found that Jaguar was not required to show harm peculiar to its interests, as distinct from those of the shareholders generally, in order to bring an oppression claim. The decision represented a “collapse” of derivative actions into oppression claims, as contemplated in Icahn, and was a surprising departure from the prior authorities.
In the Court of Appeal, Mr. Justice Savage found that the chambers judge had erred by not following the prior BCCA authorities, and held that the examples contained in the SCC obiter in BCE cannot be interpreted as authority to collapse the distinction between oppression and derivative actions.
Accordingly, unless and until the Supreme Court of Canada rules otherwise, the rule in Foss v. Harbottle is alive and well in the context of oppression claims in British Columbia.”