ONTARIO – Shareholder Disputes – Oppression Remedy – On an application for relief from oppression by the founder and senior employee of a small corporation, who had been removed as an employee and director of the corporation before all of his shares vested, the Court should focus on whether the respondents’ conduct was equitable, fair and reasonable in the circumstances of the case. Where an application judge considered only whether the respondents’ conduct was lawful, an error of law occurred, and the dismissal of the oppression application was set aside on appeal. The Court of Appeal remitted the case back to the Superior Court for trial on the merits.
Pereira v. TYLT Technologies Inc. (TYLTGO)
2023 ONCA 682 (CanLII) (October 18, 2023)
Ontario Court of Appeal (Roberts, Favreau and Copeland JJ.A.)
This was an appeal from the decision of Justice Michael J. Valente of the Ontario SCJ dismissing the appellants application for an oppression remedy under the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended (the “CBCA”). (para. 1)
The Appellant, Pereira, founded a business that performed last minute delivery services for merchants and fulfillment centres. At a point when he owned 100% of the shares, the Appellant brought in the Respondent Paul, who had technical skills, and transferred 42.5% of the shares to Paul. The parties entered into a shareholders’ agreement, which provided that their shares were to vest over time and would be fully vested by August 2020, provided that each of them was still employed by the corporation. (paras. 5-7)
In their attempts to grow the business and attract other investors, the corporation was accepted into a program in Silicon Valley, California, which invests in new businesses and helps them pitch their ideas to American investors. (para. 8-10)
To advance their participation this program, Pereira and Paul incorporated TYLTGO and maintained the same shareholdings. They also signed a new shareholders agreement that provided for new vesting provisions and a stock restriction agreement that provided in the event of a “triggering event”, TYLTGO had “the right, but not the obligation” to purchase all the unvested shares of the terminated shareholder at a price per share of $0.0001, as may be adjusted for stock splits or other matters. The stock restriction agreement defined a “triggering event” as including the termination of a shareholder “for any reason”. (paras. 11-12)
Paul assured Pereira that these agreements were needed to instill confidence in prospective investors but that Pereira’s and Paul’s roles in the business would not change. (para. 14)
In October 2020, two American tech industry entrepreneurs, Sadhu and Hussein, invested $1 million in the business. Hussein, Paul and Pereira were all directors of the business. Hussein was the chair of the Board. Pereira remained as CEO. (para, 16)
As a result of “allegations of senior management interpersonal conflict and mismanagement”, about which the application judge did not make specific findings, Pereira eventually agreed, under pressure from Sadhu and Hussein, to step aside as CEO in favour of Paul. In August 2021, Paul and Hussein voted to terminate Pereira’s employment. They also exercised repurchase rights under the stock restriction agreement and bought Pereira’s unvested shares for what the application judge described as “a fraction of their true value”. In October 2021, Paul and Hussein voted to remove Paul as a director and replace him with Mr. Ali, the head of engineering. (paras. 17-20)
The Application Judge’s Decision
In response to Pereira’s application for relief from oppression under s. 241 of the CBCA, the application judge held that his role was not to determine whether Pereira was wrongfully terminated from TYLTGO or the true value of his unvested shares. Rather, his role was to decide whether Pereira had been oppressed pursuant to the CBCA and, if so, the appropriate remedies. (para. 21-22)
The application judge was not satisfied that Pereira had established that it was reasonable for him to expect that he would not be terminated given the terms of the stock restriction agreement. As such, his analysis focused primarily on the issue of whether Pereira had established that his alleged verbal understanding with Paul that he would never be terminated would supersede the strict terms of the stock restriction agreement. (para. 23)
The application judge also held that, because there was no evidence that Paul conspired with Sadhu and Hussein to terminate Pereira’s employment, he was “prepared to accept [Paul’s] evidence that he acted to ensure the interests of [TYLTGO] were protected and advanced”. The application judge concluded his analysis by commenting that he was concerned that a finding of oppression in this case would mean that a verbal agreement could supersede the clear terms of a written agreement between the parties. (paras. 24-26) As a result, the application judge dismissed Pereira’s application.
Court of Appeal Decision
Favreau J.A. allowed the appeal and set aside the application judge’s dismissal of Pereira’s oppression remedy application on the basis that “the application judge improperly focused on whether the respondents’ conduct was lawful rather than on whether it was equitable, or, put differently, he failed to consider whether it was fair and reasonable in the circumstances of this case for Pereira to be removed as a director and for his shares to be bought back at a deeply discounted price.” (para. 42)
In arriving at the Court of Appeal’s decision to allow the appeal, Favreau JA took into account the matters in the following paragraphs.
Favreau JA reviewed the principles applicable to oppression remedy applications and noted that the CBCA gives the Court broad remedial powers, including the power to make an order setting aside a transaction and compensating an aggrieved person. Referring to CBCA s.122(1)(a) , Justice Favreau also stated that directors owe a fiduciary duty to act in the best interests of the corporation, and that in considering the best interests of a corporation, directors may look at the interests of shareholders and employees, amongst others: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 para. 36. (paras. 27-29)
Determining whether to grant an oppression remedy involves a two-part inquiry: (1) Was there a breach of reasonable expectations of the complainant; and (2) whether the conduct amounted to oppression, unfair prejudice or unfair disregard. In the present appeal, the Appellant “must identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held”. (paras. 30-32)
Favreau JA held that the application judge approached the issue of Pereira’s reasonable expectations too narrowly. The oppression remedy is equitable in nature. Rather than considering what was fair and reasonable in the circumstances of this case, the application judge focused primarily on the strict terms of the written agreements between the parties which permitted termination of Pereira’s employment without cause and the purchase of his unvested shares at a very significant discount. In so doing, the application judge failed to consider Pereira’s expectations as one of the founders of this small company and as such, the application judge failed to apply the framework in the BCE case. (para. 33-34)
The application judge also erred by describing Pereira’s expectations in terms that made them sound inherently unreasonable without looking at the context in which he held those expectations. The application judge then failed to consider whether Pereira’s expectations were reasonable having regard to the list of factors set out in BCE. (para. 35)
In the context of whether Pereira reasonably expected to remain with TYLTGO indefinitely or at least until all of his shares vested, the application judge should have sought to characterize Pereira’s expectations more narrowly in a manner consistent with the factual context, and to then assess whether they were objectively reasonable having regard to the factors enumerated in BCE. However, having characterized Pereira’s expectation that he would remain with TYLTGO indefinitely, the application judge erred by failing to consider the factors in BCE at para. 72 to determine whether Pereira’s expectations were objectively reasonable. (para. 36-39)
Favreau JA further held that the failure to consider the size and nature of TYLTGO, the relationship between the parties, including Pereira’s role as a founder of the company, and whether Pereira’s termination and divestment were a fair resolution of the conflict between the parties were only examples of the factors the application judge failed to consider. (para. 40-41)
As there were findings of fact necessary on both the termination and the remedy, the Court of Appeal remitted the case back to the Superior Court to be decided by way of a trial.