The Blurred Distinction between Oppression and Derivative Actions

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In Yen v. Ghahramani, 2023 BCCA 403, the Court considered an appeal from the dismissal of an application to amend a notice of civil claim. The action concerned a shareholder dispute involving two individuals and their respective holding companies. As the plaintiffs (Mr. Yen and his holding company, a major shareholder) sought an order winding up or liquidating the company, the company was a defendant along with Mr. Ghahramani and his holding company, the other major shareholder.

In essence, the plaintiffs sought to add allegations of oppression against Mr. Ghahramani, firstly on the basis of the company’s adversarial stance in the litigation. The company, on Mr. Ghahramani’s instructions, made allegations that essentially repeated Mr. Ghahramani’s allegations against Mr. Yen. The plaintiffs also sought to add allegations that Mr. Ghahramani, in breach of his fiduciary duty as a director of the company, had wrongfully used resources of the company for personal gain.

The Court first considered the proper role of a company in an oppression proceeding, and confirmed that when the company is facing dissolution, it may be in the company’s best interests to be separately represented. However, while the company does not necessarily have to adopt a neutral role, there is an inevitable conflict when the company receives its instructions from a shareholder in a closely-held corporation who is also a defendant in the action. As it is possible for a shareholder to be oppressed or unfairly prejudiced in such circumstances by having to litigate against two adversaries rather than one, the Court permitted the plaintiffs to amend their notice of civil claim to make allegations based on litigation conduct.

For the second category of proposed amendments, based on the alleged misuse of the company’s resources, the chambers judge had not permitted the amendments on the basis of Foss v. Harbottle. In cases that have applied Foss v. Harbottle, courts have found there to be no direct injury to a shareholder, and potentially only indirect harm to a shareholder in the form of the diminished value of the shares, when a director uses a corporation’s resources other than to advance the corporation’s interests. In such circumstances, courts have held that only the corporation can make a claim, including by derivative action.

The Court allowed the appeal and permitted the amendments, however, noting an “evolution” in the rigour with which Foss is applied. In particular, in the context of closely-held corporations some courts have described an “overlap” between oppression and derivative claims and determined that a derivative action would be counterproductive, particularly if the derivative action results in money returning to a corporation controlled by the majority shareholder who had acted wrongfully. Moreover, there are recognized exceptions to the rule that a director does not owe a fiduciary duty to shareholders when there is either a family relationship or a special relationship of trust and dependency between the director and the shareholder. In those situations, a shareholder can make a claim against a director related to the director’s use of corporate resources.

As these authorities “blur the line between oppression and derivative actions” involving closely-held corporations, the Court concluded that the chambers judge erred in holding that the amendments related to the use of the company’s resources were bound to fail.

While the appeal in Yen v. Ghahramani only dealt with pleadings rather than final determinations of these issues, the Court’s reasons on the proper role of a corporation in an oppression proceeding and the blurred line between oppression and derivative actions are instructive for shareholder disputes in closely-held corporations.

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