Insights

The Personal Liability of Corporate Directors

Wilson v Alharayeri, 2017 SCC 39

Often the separate legal entity status of a corporation can provide directors with a feeling of protection when performing their duties and functions. However, in a recent decision, the Supreme Court of Canada has made it clear that this may be a false sense of security and a director should be prepared to defend his or her personal assets when accused of acting in an unfair manner towards a corporate stakeholder.

The recent Supreme Court decision, Wilson v Alharayeri, 2017 SCC 39 [Wilson] demonstrates the broad power courts have when exercising their discretion under the corporate oppression remedy. This discretion includes the ability to hold a corporate director personally liable for their oppressive conduct.

In Wilson, Mr. Alharayeri was the President, CEO, and minority shareholder in the technology corporation Wi2Wi. Alharayeri was forced to step down from his position after an undisclosed potential conflict of interest.

At the time, Wi2Wi was experiencing considerable cash flow problems and was looking for a solution. After Mr. Alharayeri’s resignation, the Board decided to issue a private placement of convertible secured notes to its shareholders. This “Private Placement” would drastically dilute the proportion of common shares held by any shareholder who did not convert their shares.

Prior to the Private Placement, the Board accelerated the conversion of Mr. Wilson’s shares, despite the fact that they may have not met the necessary conversion test, and never informed Mr. Alharayeri of his rights to convert his shares. Mr. Wilson had discussed the matter with other Board members and decided that, given Mr. Alharayeri’s resignation, it was best that he not be given the opportunity to convert his shares. Subsequently, Mr. Alharayeri’s proportion of shares in the corporation was significantly reduced, prompted him to bring an application for oppression under section 241 of the Canadian Business Corporations Act, RSC 1985, c C-44 [ CBCA] against four of Wi2Wi’s directors including Mr. Wilson. Both the Quebec Superior Court and the Quebec Court of Appeal held that Mr. Wilson, and another director, Dr. Black, were personally liable to Mr. Alharayeri.

Section 234 of Saskatchewan’s Business and Corporations Act, RSS 1978, c B-10 [SBCA] contains an identical oppression remedy to the one found in the CBCA, which states:

Application to court re oppression

241 (1) A complainant may apply to a court for an order under this section.


Grounds

(2) If, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates:

(a) any act or omission of the corporation or any of its affiliates affects a result;

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner;

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.

Both the SBCA and the CBCA give a court the power to make an order compensating an aggrieved person; however, neither explains whether liability should fall on the individual personally or on the corporation. This was the issue before the Supreme Court.

Justice Côté writing for the court endorsed the two-pronged test for personal liability the Ontario Court of Appeal set out in Budd v Gentra Inc (1998), 43 BLR (2d) 27. The first stage of the test requires that the alleged oppressive conduct be attributable to the director personally because of the exercise of their power. The second stage of the test requires that “the imposition of personal liability be fit in all the circumstances.” In her decision, Côté J. admits that this second “fitness” requirement is particularly vague; however, she provides four guiding principles that a court should keep in mind when conducting its oppression analysis. Those principles are:

  1. 1. The request for an oppression remedy must be a fair way in dealing with the situation and the following five situations provide indicia of fairness:

    1. (a)Where directors obtain a personal benefit from their conduct;

    2. (b)Where directors have increased their control of the corporation by the oppressive conduct;

    3. (c)Where directors have breached a personal duty they have as directors;

    4. (d)Where directors have misused a corporate power;

    5. (e)Where a remedy against the corporation would prejudice other security holders;

  1. 2. An oppression order should go no further than necessary to rectify the oppression;

  2. 3. Any order made under the oppression remedy should “serve only to vindicate the reasonable expectations of security holders, creditors, directors, or officers in their capacity as corporate stakeholders.” Côté J. added that an oppression remedy must not be used solely to serve a tactical purpose; and,

  3. 4. A court should not substitute an oppression remedy for other forms of relief which may, given the circumstances, better address director liability.

Applying these principles, Côté J. found that in this situation it was appropriate and fair to hold the directors, Mr. Wilson and Dr. Black, personally liable to Mr. Alharayeri.

While this decision does provide a basic framework for how to apply the test for oppression, when a court should hold a director personally liable for their conduct remains vague. Côté J. notes the following points of interest in her judgment:

  1. 1. Section 241 of the CBCA (or section 234 of the SBCA) gives the trial judge broad discretion;

  2. 2. A director needs neither to obtain a personal benefit nor act in bad faith to be found personally liable under the oppression remedy. However, these are both strong indicators that it would be fair to hold a director personally liable in the circumstances; and

  3. 3. A director does not need to exercise control over a corporation for a court to hold them personally liable.

Clearly, Côté J. and the Supreme Court were not prepared to create a one size fits all test when it comes to the personal liability of directors under the corporate oppression remedy. However, this decision provides courts with a road map of how to get there.

In conclusion, directors need to be aware of their exposure to personal liability under a claim of oppression. This decision offers directors little protection and gives broad discretion to lower courts to hold directors personally liable for conduct that is deemed to be oppressive, unfairly prejudicial, or unfairly disregarding to the interests of a corporate stakeholder.

As well, corporate stakeholders, who feel that a director’s action has wronged them, should know that they have the ability to pursue that director’s personal assets and not just the assets of the corporation.