In its decision Mennillo v. Intramodal inc., 2016 SCC 51 (Intramodal), the Supreme Court of Canada (Court) was asked whether a corporation’s failure to comply with statutory formalities was oppressive against a shareholder. The majority ruled that based on the facts the company’s failure to comply with certain Canada Business Corporation Act (CBCA) requirements did not trigger the oppression remedy. In the words of Justice Cromwell, who provided reasons for the majority, “sloppy paperwork on its own does not constitute oppression” (para 5).
Companies, directors and their shareholders should be cautious, however, not to draw the wrong lesson from the majority’s decision in Intramodal. Compliance with corporate statutes, whether federal or provincial, is not optional. In addition to violating the law, a failure to comply with corporate statutory formalities can still trigger an oppression remedy where the violation frustrates the reasonable expectations of a company stakeholder, which includes a company’s shareholders, directors, officers and creditors.
As this post will discuss, the decision in Intramodal did not establish a precedent that statutory non-compliance on its own cannot result in an oppression remedy.
The Oppression Remedy
Arguing that his shares had been transferred without his knowledge or consent, Mr. Mennillo applied for relief solely pursuant to the CBCA’s s. 241 oppression remedy. Under this provision, a court may order relief to a company stakeholder where it is satisfied that a corporation, or the corporation’s affiliates, acted in a manner that was oppressive or unfairly prejudicial to the stakeholder’s interests. The oppression test was set-out by the Court in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (BCE). Under the BCE oppression framework, a claimant must first identify the expectation which they claim was violated, while also establishing that this expectation was reasonably held. Second, the claimant must show that their reasonable expectation was violated by an act or omission that was oppressive, unfairly prejudicial, or unfairly disregarded their rights (paras 8 and 9).
The question before the Court in Intramodal was whether the appellant as a shareholder was prejudiced, oppressed, or had his rights unfairly disregarded when he was frozen-out of his equity position in Intramodal inc. (Company).
The Company was incorporated under the CBCA in July of 2004 by two friends, Mr. Mennillo and Mr. Rosatti, who at the time were issued 49 and 51 shares, respectively, with both also assuming roles as Company directors. According to testimony at trial, the arrangement was for Mr. Mennillo to run the Company’s day-to-day operations, while Mr. Rosatti provided initial funding and acted as guarantor of the Company’s debts.
From the beginning, the Company practiced a “virtually complete lack of formality” in its business dealings (para 22). Flouting many CBCA statutory requirements, neither shareholder paid for their initial shares, Mr. Mennillo never signed his share certificate, while notices of the initial subscription and authorizing resolutions were never signed by Mr. Mennillo in his capacity as director (paras 20 to 22).
The Company’s informal tendencies created the problems at issue in Intramodal when, in May 2005, within a year of incorporation, Mr. Mennillo resigned as a director and officer of the Company. The parties disputed whether or not Mr. Mennillo intended to remain as a shareholder post-resignation. Despite the purported uncertainty around his shareholder status, in July 2005, Mr. Rosatti’s lawyer submitted a declaration with Quebec’s Enterprise Register to remove Mr. Mennillo as a director and shareholder of the Company (para 24). This declaration was technically invalid, however, as the lawyer failed to comply with the CBCA’s s. 76 requirement that a registered security may only be transferred if endorsed by the transferee (paras 70 and 71). Had an application been made by Mr. Mennillo at this point (or within three years), the share transfer could have been annulled. During this time, and shortly thereafter, with the Company’s transportation business prospering, Mr. Mennillo was repaid all monies that he had advanced to the Company plus a bonus (paras 25 to 31). In 2010 Mr. Mennillo applied for an oppression remedy against the Company.
Why the Appellant was not Oppressed
Mr. Mennillo’s oppression application was based on the assertion that his shares had been improperly transferred, thereby stripping him of his equity rights. The success of the application hinged on whether he had expected to still be a shareholder after the improper share transfer.
The trial judge found that he had no such expectation, that Mr. Mennillo no longer wished to be a shareholder, and that he no longer had any expectation to be treated as one (para 34). Finding no palpable error on which to overturn the trial judge’s factual findings, the Court’s majority accepted that Mr. Mennillo no longer intended to carry-on as a shareholder of the Company when he submitted his resignation in 2005 (para 55). As a result of this finding, Mr. Mennillo’s oppression claim could not succeed as he could have had no reasonable expectation to be treated as a shareholder after his shares had been transferred. Although the Company failed to observe legal formalities in transferring Mr. Mennillo’s shares, the majority of the Court found that Mr. Mennillo no longer wished to be a shareholder, and so the methods by which his shares were transferred could not be classified as oppressive.
Why Compliance has not been Lessened or the Oppression Remedy Weakened
Had it been found at trial that Mr. Mennillo intended to remain a shareholder, as one can presume is the expectation of the vast majority of shareholders, the oppression remedy, as well as a host of other remedies, could have been used to correct the invalid transfer of shares.
Beyond the oppression remedy, a failure to comply with statutory requirements with respect to routine corporate matters, such as the transfer and registration of shares, can lead to a host of other sanctions against a non-compliant company. For example, as Justice Côté noted in her strong dissent, even on these facts Mr. Mennillo could have sought relief by applying to rectify the Company’s records (CBCA, s. 243), or by seeking an order that the Company comply with the legislation (CBCA, s. 247) (para 97). Furthermore, the majority of the Court also noted that pursuant to the Civil Code of Quebec (art.1422), the Company’s improper transfer of shares could have been annulled had such a ruling been sought within the three year statutory cut-off (para 74).
In short, despite the Company’s failure to comply with statutory provisions, the facts in Intramodal were tailor-made for a finding against oppression. Yet despite this finding, the result in Intramodal should not lull companies into dealing with their filing and documenting responsibilities informally, or to conclude that the oppression remedy has somehow been curtailed.