Supreme Court Decision Clarifies Personal Liability Of Directors

The Supreme Court of Canada recently ruled on whether directors of corporations can be held personally liable in oppression cases. The court ruled that they can be held liable.

A shareholder asked the corporation to convert his preferred shares into common shares. The board of director refused the shareholders request. Shortly after the refusal, the corporation issued a private placement on preferred shares. This resulted in the drop in the value of the shares and the drop of the value of the shareholder’s shares.

However, the board had allowed to convert the shares of the president of the organization, who was also a member of the board. This same board member also spoke out against the conversion of the shares of the shareholder.

After examining the facts of the case, the court found that the shareholder had been unfairly treated. The court also found that the president of the organization had taken unfair advantage of his position to deny the shareholder his request.

When finding that the director was personally liable in the case, the court affirmed the principles set out in another Ontario Court of Appeal case.

In the case Budd v. Gentra Inc., the lower court set out a test to determine whether personal liability should be apportioned to a director. Two factors must be present when finding liability, which are:

  1. The unfairly prejudicial or oppressive conduct must be able to be attributable to the director
  2. The imposition of personal liability in the specific circumstances of the case is fair

Using these principles, the court found the shareholder had been treated unfairly and ordered the director to pay compensation to the shareholder.

Directors who are involved in a shareholder dispute should seek the advice of an experienced corporate lawyer.

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