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15 Feb

Oppression claim for pre-shareholder conduct against directors and officers allowed to stand

Tuesday, February 15, 2022Stephen A. Thiele, Howard WolchLitigationRules of Civil Procedure

The Rules of Civil Procedure permit a court to strike a claim on the grounds that it discloses no reasonable cause of action. In general, the Court applies a “plain and obvious” test on such a motion.

In corporate law, shareholders of a corporation can bring a claim for oppression against other shareholders and directors and officers of a corporation. But the law can be technical and sometimes it is unclear whether a plaintiff falls within the category of a complainant who can bring an oppression action or whether the directors and officers of a corporation are proper defendants.

On a motion to dismiss a plaintiff’s oppression claim against directors and officers of a corporation on the grounds that the claim disclosed no reasonable cause of action, the Court, in Ninth Square Capital Corp. v. Boyes, 2021 ONSC 3878, was required to explore these issues.

In this case, the plaintiff was a 50% shareholder in a privately-held company called Spartan Wellness Corporation. In September 2018, it entered into a contract to sell its shares to MPX Bioceutical Corporation (“MPX”) in return for shares and warrants in MPX. MPX was a public company.

Unbeknownst to the plaintiff, however, while it was seeking to sell its shares to MPX, MPX was negotiating to sell its shares and the Spartan shares it was about to buy to iAnthus Capital Holdings Inc. (“iAnthus”). Although iAnthus was a publicly-traded company, the structure of this transaction would result in MPX being amalgamated into a wholly-owned subsidiary of iAnthus called MPX ULC, with the non-US assets of MPX, which included the Spartan shares, being spun out into a new company known as MPX International Corporation (“MPXI”). MPXI would be a privately-held corporation that would be owned by the existing shareholders of MPX.

Under this transaction, MPX assigned the agreement it had entered into with the plaintiff for the purchase of the plaintiff’s shares to MPXI. But no consent for the assignment was obtained from the plaintiff, who contended that consent was required.

The plaintiff brought an action for oppression and breach of the duty of good faith against the directors and officers of MPX on the grounds that the intent of its transaction was to acquire shares in a publicly-held corporation, not a privately-held corporation. Through the alleged wrongful assignment of the agreement between the plaintiff and MPX, the plaintiff essentially claimed that the consideration it was expected to have received under that agreement had been unilaterally changed.

The defendants argued that the plaintiff did not have the status of being a “complainant” under section 245 of the Ontario Business Corporations Act (the “OBCA”) and that they, as directors and officers of MPX, were not proper defendants. With respect to the first argument, the defendants submitted that plaintiff’s complaint referred to conduct that arose before it became a shareholder of any MPX entity and therefore the plaintiff had not acquired the status of being a security holder. Based on Joncas v. Spruce Falls Power & Paper Co., 2000 CanLII 22359 (ONSC), aff’d 2001 CanLII 6156 (ONCA), the defendants contended that a plaintiff must have a legal right to be a shareholder in order to bring an oppression claim.

The directors and officers also argued that an oppression order would be inappropriate against them in the circumstances because the pleading did not disclose how their conduct caused the plaintiff harm or explain the grounds for their personal liability beyond the fact that they were directors and officers of MPX.

The Court disagreed with the defendants’ arguments.

The Court rejected the defendants’ interpretation of Joncas and found, instead, that that the plaintiff fell within the category of a beneficial shareholder as described therein. The Court accepted that a beneficial shareholder included one who had an equitable claim to shares whether they were issued or not. The fact that the agreement at issue contained a clause that permitted the purchaser to assign its rights, it did not give the purchaser the right to assign its obligations.

As alleged in the statement of claim, the defendants understood that the share purchase agreement could not be assigned without the plaintiff’s consent. There was a press release that indicated that MPX shareholders would be receiving iAnthus shares, which is what the plaintiff claimed, rather than shares in MPXI. This claim was even stronger given that an email from one of the individual defendants to the plaintiff advised that if it did not consent to the assignment, it would receive shares in iAnthus.

The Court also found that, in any event, the plaintiff was a complainant under s. 245(c) of the OBCA. Included within the definition of “complainant” is “…any other person who, in the discretion of the court, is a proper person to make an application under this Part.”

The Court accepted that the defendants’ argument to block the plaintiff’s action was founded on a corporate technicality that should not be used to deprive it of standing or to deprive it of its claim under a rule 21 motion.

With respect to whether the directors and officers of MPX were proper defendants, reliance was placed on Wilson v. Alharayeri, 2017 SCC 39 (CanLII) wherein the Supreme Court of Canada had set out five situations in which personal orders could be made against directors. The plaintiff argued that two of those five situations applied to its case: (i) the directors obtained a personal benefit from their conduct, and (ii) the directors breached their personal duty as directors. The Court accepted that it appeared that at least two of the individual defendants had received a financial benefit in the transaction. Meanwhile, the plaintiff had pleaded that the failure to disclose the iAnthus arrangement during negotiations of the Spartan purchase amounted to a breach of the duty of good faith.

The Court noted as well that the five situations in Wilson were not exhaustive and that the factors were not to be slavishly applied.

Lastly, the Court held that the claim disclosed sufficient facts to tell the defendants what the claim was against them. There were both individual and collective claims made against the defendants to show that it was not plain and obvious that the plaintiff could not succeed at trial. The claim against the defendants plainly asserted that “…they knew of the iAnthus arrangement and despite that knowledge they entered into the Spartan agreement without disclosing that the plaintiff would not receive shares in a public company as the Spartan agreement promised.”

In corporate law, directors and officers can be personally liable for misrepresentations or other torts they commit on behalf of a corporation, and can be found to have committed acts of oppression. A failure to disclose can constitute oppression since oppression can be based on either an act or an omission.

Accordingly, the defendants’ motion to strike the plaintiff’s action was dismissed, and the Court, under Rule 6.01 of the Rules of Civil Procedure, consolidated the action that was brought against them with an action that had only been brought against the corporate entities. The second action was not seen as abusive, as was submitted by the defendants. Rather it was brought separately to avoid procedural debates that might be anticipated if the plaintiff had sought to bring a motion to add the individual defendants to the action against the corporate defendants. The action against the individual defendants was commenced near the expiry of the limitation period.

Representation by Gardiner Roberts LLP

Howard Wolch, a senior partner in Gardiner Roberts LLP’s Litigation and Dispute Resolution Group acted as co-counsel for the plaintiff.

Mr. Wolch was assisted throughout in connection with legal issues raised in the motion by Stephen Thiele, a partner and the firm’s Director of Legal Research.

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