Oppression Proceedings for Non-Shareholder Spouses

Alberta has generally been the province with the highest rate of entrepreneurship in Canada as reported by the Global Entrepreneurship Monitor (‘GEM’). This means that many spouses separating in Alberta are shareholders in corporations (‘shareholder spouse’), whether it be a majority or minority ownership. However, the other spouse in many circumstances is not a shareholder (‘non-shareholder spouse’) and therefore, appears to have no ability to influence the operations of the other’s corporation, its operations or deal with its assets. For example, forcing the repayment of loans owed to the corporation as an accounts receivable so that the corporation has the means to pay a dividend payment to the shareholder spouse.

The purpose of this brief commentary is to explore the Court’s ability to provide a non-shareholder spouse an interest sufficient for them to bring what is commonly referred to as a ‘shareholder oppression claim’ under section 242(1)(c) of the Business Corporations Act (“BCA”). Such a claim may be the only way that a non-shareholder spouse may collect the debt owed to them by the shareholder spouse pursuant to the Family Property Act, RSA 2000, c F-4.7.

In the case of Peregrym v Peregrym, 2015 ABQB 176, (“Peregrym”), the parties had been married for 18 years and had three children, one of which was not yet the age of majority at the time of the parties’ hearing.

The Respondent in this case owed the Applicant an equalization payment of $292,055.00. However, the Respondent alleged that he had no personal means or assets to satisfy his obligation to make the equalization payment owed to the Applicant. However, the Respondent held a minority stake as a shareholder in a farming corporation, PED Farms Ltd. (‘PEDA’) (previously created as a “butterfly” reorganization). The value of the Respondent’s shares at the date of trial was $1,757,500.00 (without a minority discount). The Court found that 200 of the 325 shares held by the Respondent were characterized as exempt property under section 7(2) as a gift from his father and therefore, exempt from division with the Applicant. The value of the 200 exempt shares at the date of trial was $826,025.00.

The Court ordered that the Applicant was not entitled to the increase in value of the exempt shares, however, was entitled to equal division of the non-exempt shares based on the parties’ contributions to the joint economic partnership, referring to the non-shareholder spouse’s contributions as a homemaker. The Court stated at paragraph 57 that the Applicant had “performed a substantial and disproportionate amount of the parties’ household, acreage, childcare and parental responsibilities.” Further, the Court at paragraph 343 found that both parties made “significant direct, and indirect, contributions to the acquisition, conservation, improvement and management of the matrimonial property, including the acreage, the residence and the corporate shares — Julie by fulfilling the traditional role of farm wife and mother and working outside of the home, Dallas by focussing on his farming work at Peregrym Farms and at D.J. Hog Farms to earn money for the family.”

Regarding the brief discussion above, although the Court at paragraph 346 found that the Respondent owed the Applicant an equalization payment of $292,055.00, the Respondent’s position is that he had no means with which to pay the Applicant, and PEDA’s Articles of Incorporation contained a restriction on the transfer of shares without Director approval. Therefore, the Court was unwilling to force a share transfer to the Applicant.

Normally an Order for Security over the PEDA shares would give the Applicant security for payment of the equalization amount, however, the Respondent’s PEDA shares were already encumbered to guarantee PEDA’s line of credit. Therefore, the Court according to section 9(2)(c) FPA imposed a trust over the Respondent’s PEDA shares in favor of the Applicant, providing the Applicant beneficial ownership which conferred both in personam and in rem rights in the shares. To ensure that the Respondent obtained a benefit from her interest in PEDA, the Court directed that the Applicant commence an oppression action under section 242(1)(c) of the BCA and a preservation order until such hearing.

The Respondent’s position was that the Applicant was seeking relief against PEDA who was not a party, not the Respondent, and that since the Applicant had no interest in PEDA that she could not access the BCA mechanisms. The Court at paragraphs 373 to 374 stated that this is no longer an issue because the Applicant has been vested with a beneficial ownership interest in the Respondent’s shares sufficient for her to be considered a “complainant” under section 239(b)(i) of the BCA and thereby bring an oppression claim.

An oppression proceeding under the BCA provides the judge hearing the application to, amongst other remedies:

1. Revise the Articles of Incorporation of a company;

2. Order the corporation purchase back shares;

3. Vary or set aside a transaction or contract to which the corporation is a party; and

4. Order compensation to the claimant be paid or order liquidation of the corporation.

Therefore, a shareholder spouse may not have personal assets or means of satisfying their equalization payment obligation to their non-shareholder spouse upon separation. However, it is possible for the non-shareholder spouse to seek the Court’s assistance with lifting the corporate veil to access corporate assets to satisfy the shareholder spouse’s obligation. If the corporation does not have the means of satisfying this debt with cash on hand, then oppression proceedings by non-shareholder spouses will allow access to mechanisms whereby the Court according to section 243 of the BCA can direct a dividend payment, revision to Articles of Incorporation, or even liquidate the corporation. The full Oppression Relief section (s. 242(3)) has been provided below for ease of reference.

242

(3) In connection with an application under this section, the Court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing, any or all of the following:

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or bylaws;

(d) an order declaring that any amendment made to the articles or bylaws pursuant to clause (c) operates notwithstanding any unanimous shareholder agreement made before or after the date of the order, until the Court otherwise orders;

(e) an order directing an issue or exchange of securities;

(f) an order appointing director in place of or in addition to all or any of the directors then in office;

(g) an order directing a corporation, subject to section 34(2), or any other person, to purchase securities of a security holder;

(h) an order directing a corporation or any other person to pay to a security holder any part of the money paid by the security holder for securities; (i) an order directing a corporation, subject to section 43, to pay a dividend to its shareholders or a class of its shareholders;

(j) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(k) an order requiring a corporation, within a time specified by the Court, to produce to the Court or an interested person financial statements in the form required by section 155 or an accounting in any other form the Court may determine;

(l) an order compensating an aggrieved person;

(m) an order directing rectification of the registers or other records of a corporation under section 244;

(n) an order for the liquidation and dissolution of the corporation;

(o) an order directing an investigation under Part 18 to be made;

(p) an order requiring the trial of any issue;

(q) an order granting permission to the applicant to:

(i) bring an action in the name and on behalf of the corporation or any of its subsidiaries, or

(ii) intervene in an action to which the corporation or any of its subsidiaries is a party, for the purpose of prosecuting, defending or discontinuing an action on behalf of the corporation or any of its subsidiaries