Corporate Liability as a Result of Family Law Claim: Are You Prepared?

A recent decision of the Alberta Court of King's bench sheds light on the application of the oppression remedy in the context of a matrimonial dispute and highlights the importance of anticipating potential shareholder disputes and having an appropriate unanimous shareholder agreement (“USA”) in place to address them.

Legal Citation

Berman v 905952 Alberta Ltd, 2021 ABQB 434 (CanLII)

Facts

The Plaintiff, Ms. Berman, brought an action against her former husband, his business partner, and two corporations under sections 215 and 242 of the Business Corporations Act (“BCA”). She did so to recoup an equitable interest in the corporations granted to her at trial.

At trial, the Court awarded her child and spousal support, as well as an equalization payment on their matrimonial property. Since Mr. Berman claimed to be unable to pay this amount, Ms. Berman was granted an equitable interest in 70% of his shares. This made her a beneficial shareholder under the BCA.

In this action, she was seeking to compel Mr. Berman and his partner, Mr. Sicherman, to liquidate and dissolve their corporations under ss. 215(1) and 242 of the BCA for satisfaction of her property interest. Ms. Berman claimed oppression on the grounds that they had disregarded her interests as a beneficial owner for the purposes ordered by the court.

Decision

The Court began by quoting cases in which family law intersected with corporate law. The Court noted that, per Aubin v Petrone, 2020 ABCA 13, “obligations imposed by family law are on equal footing with other legal obligations and deserve fair balancing where interests compete.” This tension is something of a theme throughout the decision, as Mr. Berman argued that any perceived act of oppression can be explained as a valid business decision conducted in the best interests of the corporate entity and his business partner.

The Court noted the oppression remedy is sometimes used to dissolve family-run corporations following divorce proceedings. This case was complicated by the fact that the oppression remedy is being used to resolve a dispute over unrelated matrimonial property. It was further complicated by the presence of Mr. Berman’s business partner who owned 50% of the shares in both corporations and had nothing to do with the couple’s separation. Sicherman was regularly identified as an innocent third party who was added as a defendant by the plaintiff, and not by the Court’s earlier judgment.

The court mentioned that Peregrym v Peregrym, 2015 ABQB 176 “raised the possibility of utilizing the oppression remedy in this particular context, but it appears the parties in that case ultimately resolved their matter outside of the court process.” Therefore, the case is considered “novel.”

S. 242 of the BCA imposes a two-part test for finding oppression in a corporate context. The claim must be brought by a shareholder who has experienced a breach of reasonable expectations on the part of the other shareholders. They must also have experienced oppression (being conduct that is abusive, coercive, or bad faith in nature), unfair prejudice, or unfair disregard. Remedies include, among other things, liquidation and dissolution of the corporation. S. 215 contains similar equitable grounds for liquidation and dissolution of a corporation (though a different test applies).

Ms. Berman first argued that the defendants engaged in oppressive conduct by failing to abide by a Court order. The order required Mr. Berman to provide to Ms. Berman his share of the proceeds of a sale made by the corporation in 2018. Crucially, Ms. Berman acquired beneficial shares in the corporations after both the sale and Court order were made.

The BCA states that a complainant for oppression must be a past or present owner, and that this does not include “potential” or “future” shareholders. Relying on LSI Logic Corp. of Canada, Inc. v. Logani, 2001 ABQB 710, the Court further stated that a shareholder’s “reasonable expectations” pursuant to s. 242 can only arise at the time the shareholder acquires their shares. Thus, the Court refused to hold that she could have a reasonable expectation as required to seek the oppression remedy. The Court explained again that while family law matters will be treated as equal to other facets of the law, finding oppression in this instance “would place an unfair and unwieldy burden on corporations – making them responsible for discovering and considering potential shareholders expectations, before they become shareholders, when making corporate decisions.”

Oppression was also argued over Mr. Berman’s refusal to allow Ms. Berman to vote at a Shareholders’ meeting after she had become a beneficial shareholder. Ms. Berman wanted the shareholders to vote to sell a pair of properties for the purposes of liquidation, per the trial judgment and her equitable interest therein. Mr. Berman argued that this would not be in the best interests of the corporation, as the properties were being held for capital appreciation.

The Court stated that Ms. Berman, as a merely beneficial owner, did not have the right to vote per s. 142(1) of the BCA. Yet, the Court found that Mr. Berman still had a duty to accommodate the wishes of his stakeholder:

[134]   I agree as a matter of law that the directors of a corporation are obligated to resolve conflicting interests in accordance with their duty to act in the best interests of the corporation, while at the same time, treating individual stakeholders affected by corporate actions fairly. The question, however, is to determine how this general statement applies to the present case. Considered from the perspective of the corporation’s best interests, in furtherance of its stated goal to profit from real estate development, it would appear that the corporation’s best interests from a profit generating perspective would be to continue to hold onto the BI Corp properties until market conditions improve.

 

[135]   On the other hand, as a responsible corporate citizen, BI Corp is obligated to treat Ms. Berman who is a key stakeholder fairly. This means that Ms. Berman’s interests must also be taken into consideration by the corporation. This is a small closely held corporation, not a large enterprise with multiple stakeholders and multiple competing interests. BCE advises that “[r]easonable expectations may emerge from the personal relationships between the claimant and other corporate actors. Relationships between shareholders based on ties of family or friendship may be governed by different standards than relationships between arm's length shareholders in a widely held corporation” at para 75.

The Court found that Mr. Berman held 70% of his own shares in trust for Ms. Berman as ordered by the court, and it was improper of him to exclude her interests over those of the corporation. Her expectation that he would vote in her best interests was reasonable, and his deliberate ignorance therein constituted oppression.

However, Mr. Berman’s partner had only a duty to take into account the general wishes of the shareholders, not to vote on their behalf. The oppression lay only with Mr. Berman, and not the corporation as a whole (or with Mr. Sicherman), and it had no obligation to liquidate the properties. Any remedy for oppression would apply only to Mr. Berman and not to Mr. Sicherman or to the corporation.

The Court further found that it would not be equitable to dissolve the corporation under s. 215, as this would be unfair to Mr. Sicherman, given the oppression was Mr. Berman’s alone:

[159]   It is submitted that the liquidation remedy would be particularly unfair to Mr. Sicherman, who has been dragged into this litigation through no fault of his own, including by being named personally in this oppression action, which was not required by the judgment. Mr. Sicherman has acted fairly throughout, and his interests will suffer significantly if a winding up is ordered, especially due to the tax ramifications. As an innocent third party, this remedy would result unjust and inequitable consequences for Mr. Sicherman. 

Since corporations are legal entities composed of people and relationships, the appropriateness of favouring the wishes of a beneficial shareholder under family law against the interest of the corporation will vary from case to case. The size, complexity and decision-making processes of a corporation are all important in this regard. This decision suggests that the Court will be more likely to dissolve under oppression a smaller and less complex corporation with fewer owners. The history of the corporation’s decision-making and the competing interests of its members will also be taken into account.

Takeaways

The case involved multiple stakeholders having competing interests, including those arising from a matrimonial dispute, and the decision provides clarity on the availability of the oppression remedy in such circumstances.

In particular, the Court had the opportunity to reiterate what “reasonable expectations” mean in the context of an oppression action. It is clear that family law obligations, while important, will not be interpreted in such a manner as to place an “unfair and unwieldly burden on corporations – making them responsible for discovering and considering potential shareholders expectations, before they become shareholder, when making corporate decisions.”

Reasonable expectations can only arise after a party has become a registered or beneficial owner of a security of a corporation. When making decisions regarding corporate affairs, directors, officers, and shareholders of corporations aren’t required to predict and take into account the reasonable expectations of a family member of a shareholder, who may potentially one day become a shareholder of the corporation.

The Court also signaled that it is not prepared to allow a family law interest to be given precedence over other competing interests, particularly those of an innocent third party. Even where oppression is found vis-à-vis a single director or shareholder who is connected to the family law dispute, the remedy will not follow the corporate entity or other shareholders unless they willingly get involved in the oppressive conduct.

As mentioned at the outset, one other very important observation may be drawn from the decision, and that is the importance of having a USA in place. In this case, Mr. Berman and Mr. Sicherman operated their business without such an agreement. In the end, this caused Mr. Sicherman significant emotional and financial strain as he was dragged into his business partner’s matrimonial dispute.

Many USAs contain language which cause a shareholder default where shares become the subject of matrimonial proceedings. In most cases, this provides either the corporation or the other shareholder(s) with an option to purchase the defaulting shareholder’s shares, sometimes at a discounted purchase price.

While all aspects of this type of provision should be considered (there can be some negative tax consequences, for example) having such an agreement in place in this case may have dissuaded Ms. Berman from seeking remedy against the shares in the first place. It may have also allowed Mr. Sicherman to declare a default and take sole ownership and control of the business, leaving Mr. Berman to deal with his matrimonial dispute on his own without involving Mr. Sicherman or the corporations.

We encourage the shareholders of any corporation with multiple shareholders to consider entering into a USA. Anticipating and planning for a potential dispute in a USA can save shareholders substantial distress (and legal fees) in the future.

For questions regarding the implications of the decision on your business, your corporation’s USA, or whether you should consider implementing a USA, please contact a member of our Corporate Commercial Securities Practice Group.

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.