Thursday, November 24, 2016

Supreme Court Tosses Oppression Remedy Claim

Mennillo v. Intramodal Inc. 2016 SCC 51


In the above-noted case, the Supreme Court of Canada refused to allow an appeal involving a claim for shareholder oppression under the Canada Business Corporations Act (“CBCA”). 


The plaintiff’s claim for oppression was dismissed by the trial judge and the Quebec Court of Appeal.  The Supreme Court affirmed those decisions in an 8 to 1 decision. 


Johnny Mennillo and Mario Rosati, two friends, agreed to create a road transportation company.  They agreed that Mennillo would contribute the money to start up the business while Rosati would bring his skills to run the company.  Rosati incorporated Intramodal in 2004 and the board of directors passed a resolution to issue 51 shares to Rosati and 49 shares to Mennillo.  Throughout the operation of the company, Rosati and Mennillo rarely complied with the requirements of the CBCA and almost never put anything in writing.  They did not enter into a partnership agreement or a shareholders' agreement and there was no written contract or any other legal formality relating to Mennillo’s advances of substantial amounts of money to the company.   


Less than a year after incorporation of Intramodal, Mennillo sent a letter to the company indicating that he was resigning as an officer and director of the company.  At trial, Mennillo testified that he never intended to stop being a shareholder, but Rosati alleged that Mennillo also resigned as a shareholder and accordingly the company transferred his shares to Rosati.  Mennillo sued claiming that the corporation and Rosati had wrongfully stripped him of his status as a shareholder and applied for an oppression remedy pursuant to section 241 of the CBCA. 


The trial judge dismissed Mennillo’s oppression claim based on the factual finding that Mennillo had undertaken to remain as a shareholder only so long as he was willing to guarantee the corporation's debts and later was not willing to do so.  The Court of Appeal dismissed Mennillo’s appeal.


The Supreme Court of Canada held that the trial judge’s factual findings were not reviewable because the trial judge had committed no palpable and over-riding error. 

Justice Cromwell wrote the main reasons for decision of the majority of the court.  He held that in light of the trial judge’s factual findings, Mennillo’s oppression claim was groundless.  What really happened is that the corporation failed to make sure that all the legal formalities were complied with before it registered a transfer of shares to Rosati.  However, the fact that a corporation fails to comply with the requirements of the CBCA does not on its own constitute oppression.   What triggers the remedy is conduct that frustrates the reasonable expectations of the shareholder not simply conduct that is contrary to the CBCA. 


Justice Cromwell reasoned that an issuance of shares can only be cancelled if (a)  the corporation’s articles are amended; or (b) the corporation reaches an agreement to purchase the shares which requires that the directors pass a resolution.  Meeting the requirements with respect to the maintenance of shared capital is not optional given that it is the share capital that is the common pledge of the creditors and is the basis for their acceptance of doing business with the corporation. 


However, there was no doubt that Mennillo knew that this formality had not been complied with when the company proceeded to register the transfer of shares in its books and he was aware that he had not endorsed his share certificate when the shares were transferred to Rosati.  As he was aware of the situation of which he now complains more than three years later, his claim in that regard was prescribed.


Justices Moldaver agreed with Chief Justice McLachlin who wrote separate concurring reasons.  The Chief Justice held that the appeal could be disposed of on the basis that Mennillo had failed to show a reasonable expectation that he would not be removed as a shareholder from the corporation’s books given that he asked to be removed as a shareholder.  This is confirmed by the fact that Mennillo subsequently ceased to conduct himself as an equity shareholder and advance money to the corporation as a loan.  The trial judge’s findings of fact were supported by the evidence.


Justice Côté was the only dissenting judge.  She wrote a long and convoluted dissent which, at times, seemed to prefer form over substance.  She held that the fact that one shareholder claims he and his fellow shareholder entered into an agreement for the transfer of shares does not relieve the corporation of its legal (and somewhat artificial) duty to "make the necessary inquiries" before passing a resolution approving that transfer of shares and registering the transfer in its books.  She held that the CBCA imposes strict requirements be met before a transfer of shares is registered including that the security be endorsed and that the transfer be rightful.  The corporation’s failure to make such inquiries, in this case, was in itself a form of oppression.   




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