ONTARIO – Corporations – Oppression Remedy – Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”) -Failure of the majority shareholder 1) to permit access to financial records of two corporations; and 2) to transfer the proceeds of sale of properties to the minority shareholders, as agreed in a shareholders’ agreement, was oppressive and unfairly prejudicial to the minority shareholders – Majority shareholder’s payment of part of the sale proceeds to himself without notice an approval of the other shareholders was also oppressive and unfairly prejudicial to the other shareholders, even after due consideration of the “business judgment rule”.

Wang et al v. Wei et al.
2024 ONSC 7005 (December 13, 2024)
Ontario Superior Court of Justice (Owen Rees J.)

Background

This was a shareholders’ dispute among the shareholders of Xtreme Trampoline Park Inc. (“Xtreme”). Xtreme operated an indoor trampoline park in Kanata, Ontario and also owned 100% of XTP Holdings Inc. (“XTP”), a corporation incorporated to purchase the Barrhaven project discussed herein. Both corporations are incorporated under the CBCA. The case involved XTP’s purchase and subsequent sale of two properties for the construction of a trampoline park project in Barrhaven, Ontario. The Barrhaven project was funded by shareholder loans, but it could not proceed because of zoning problems. (paras. 1-4)

The Respondent Wei owns 50% of the shares of Xtreme and was the president, CEO and a director of the corporations. The four applicants collectively own the remaining 50% but individually held different percentages of the shares. The relationship of the shareholders was governed by an August 2015 Shareholders’ Agreement (“the SA”). (paras. 10-14) On April 4, 2017, the parties entered into a Supplementary Shareholders’ Agreement (“the SSA”), which dealt with the financing and liquidation of the Barrhaven project. (para. 22)

Facts

Due to the zoning problems, the shareholders agreed to sell the Barrhaven properties in July 2018. At the same time, the shareholders agreed to purchase a property in Kingston and the shareholders, including Wei, loaned money to Xtreme for that purchase. (paras. 28-31)

The shareholders also unanimously agreed that when the Barrhaven properties were sold a portion of the funds would be used to repay the loan for the Kingston project, and the remaining funds would be returned to the shareholders in the form of a pro rata share repurchase in order to avoid the tax implications of a personal capital gain. (para. 32) During the COVID-19 pandemic, Xtreme had to suspend its operations. Wei claimed to have loaned $150,000 to Xtreme but the amount was not verified. (para. 34)

Before the September 2021 closing of the Barrhaven sales, Wei opposed distribution of the sale proceeds to the shareholders on the basis that loans had to be repaid first, including to himself and that Xtreme needed capital for the Kingston project. (paras. 35-36) The disagreement about distribution was deferred by agreement of the real estate lawyer to hold the portion of the proceeds due to the applicants in trust pending agreement of all the shareholders or a court order. The other half of the funds were released to Wei. (paras. 37-40)

Shareholder resolution to distribute the balance

In August 2023, when the business of Xtreme had improved, Wei proposed a distribution of the sale proposed on the basis of share ownership. That distribution would have given Wei 50% of the funds due to the applicants. The applicants opposed the resolution but Wei, as chairman of the meeting, cast tie-breaking vote and passed the resolution. (paras. 42-44)

In November 2023, the parties appeared to have the payment of the money held by the real estate solicitor worked out but there was a delay in an attempt to work out a favourable tax treatment of the payment. However, in January 2024, Wei instructed the real estate solicitor to pay the funds to Xtreme, which was done. In February 2024, portions of the funds were in fact distributed to the applicants but then, Wei refused to distribute the balance because of other financial issues in the business. (paras. 45-48)

Analysis

Rees J. held that in assessing a claim of oppression, the court must ask two questions: (1) Does the evidence support the reasonable expectations asserted by the applicants? and (2) Does the evidence establish that their reasonable expectations were violated by conduct falling within the terms of “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest? Rees J. held that corporate acts and omissions were attributable to Wei, who was the managing director. The applicants claimed and Rees J. held that there were three categories of reasonable expectations which were unfilled by Wei as set out below. (para. 50-52)

Access to accounting records of Xtreme and XTP

Mr. Wang was the only applicant who was a director of both corporations and became the treasurer of Xtreme under the SSA. Rees J. found that Wang and the other applicants reasonably expected that he would have timely and meaningful access to the accounting records of the corporation, both under the SA and the SSA and in accordance with s.20(4) of the CBCA, which refers to “adequate accounting records”. (paras. 54-59)

Rees J. held that Wei unfairly disregarded the applicants’ reasonable expectation by failing provide Wang with full access to all of the corporations’ bank accounts. Rees J. further that “Wei’s conduct was deliberate and that it had the effect of making Wang unable to properly fulfill his duties as director of both companies and as treasurer of Xtreme and that Wang could not carry out the financial oversight reasonably expected by the applicants as minority shareholders.” (paras. 60-61)

Distribution of proceeds of the Barrhaven sales

Rees J. held that the applicants were entitled to expect distribution of the sale proceeds in accordance with the terms of the SSA. The judge rejected Wei’s argument the payment was subject to the determination of a liquidation of Xtreme under CBCA s. 211 which was in progress and held that “liquidation” in the context of the SSA referred to the completion of the sale of the Barrhaven properties. (para. 62-74)

Business Judgment Rule and Oppression

To determine whether Wei’s refusal to pay the sale proceeds was oppressive to the applicants, Rees J. considered the business judgment rule, which provides that “courts should give appropriate deference to the business judgment of directors who take into account the best interests of the corporation, so long as a business decision lies within a range of reasonable alternatives.” BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, para. 40 (para. 76)

Rees J. held that while it was reasonable for Wei to defer payment of the Barrhaven proceeds during the pandemic, there was no evidence of current liquidity concerns. The Court considered and rejected Wei’s argument that the test for liquidity was the limitation on a corporation’s acquisition of its own shares set out in s. 34(1) of the CBCA. Rees J. concluded that Wei’s opposition to payment of the Barrhaven sale proceeds to the appellants was oppressive. (paras. 77-95)

Accounting to determine the proper amount owed to the applicants

Rees J. directed that the respondents provide an accounting of the use of all funds arising from the Barrhaven sales to enable the Court to determine the proper amount owed to the applicants. (paras. 96-99)

Wei’s surreptitious removal of the funds held in the real estate solicitor’s trust account

Rees J. then conducts an in-depth analysis of Wei’s removal of balance of the Barrhaven sale proceeds held by the real estate lawyer and concludes that: “Wei obtained the trust funds surreptitiously without informing the applicants that he did so. This is not the action of someone who acted honestly and in good faith” and that “Wei knowingly caused the real estate solicitor to release those funds from his trust account in breach of the parties’ agreement and the reasonable expectations of the applicants.” (paras. 113-114)

Remedy

Having concluded that the respondents oppressed in the applicants in several ways, Rees J. considers the Court’s wide remedial discretion under CBCA s.241 “to fashion such remedy as it thinks fit” (referring to Catalyst Fund General Partner I Inc. v. Hollinger Inc., 2006 CanLII 7392 para. 49. (para. 118-119)

Rees J. directed the respondents to do the following:

1. Provide meaningful access to the corporate accounting records;
2. Provide an accounting of the Barrhaven sales and the disposition of loans and payments; and
3. Preserve $1,359,497.05, the amount Wei surreptitiously obtained from the real estate solicitor less the amount already paid to the applicants, in an interest-bearing account pending further direction of the court. ( 120)

Editor’s Note:

Rees J.’s decision does not make new law, but it is instructive because it is an example of the factual intricacies that must be proved to enable the Court to make a finding of oppressive or unfairly prejudicial conduct and the considerations that the Court must take into account in concluding that the reasonable expectations of minority shareholders have not been met. It is also instructive that the Court considers whether the business judgment rule justified the majority shareholder’s acts but Rees J. concluded that the majority shareholder’s conduct was contrary to the reasonable expectations of the minority shareholders and was therefore oppressive.