Canada: Ontario Court Of Appeal Affirms Broad And Expansive Approach In Oppression Remedy Claims

Overview:

In a recent decision, the Ontario Court of Appeal ("ONCA") affirmed that courts must look beyond "narrow legalities" and consider the full picture in claims for an oppression remedy.

In Pereira v. TYLT Technologies Inc. (TYLTGO),¹ the ONCA overturned an application judge's decision dismissing a claim for oppression and remitted the matter back to the Superior Court of Justice to be decided by a way of a trial. This decision is a reminder that oppression is a broad and equitable remedy that requires courts to focus on what is fair in the circumstances of any given case, having regard to the claimant's reasonable expectations.

Background:

The appellant, Jaden Pereira, was a founder and majority shareholder of TYLT Innovations Inc., a predecessor company that later became the respondent, TYLT Technologies Inc. ("TYLT"). Pereira brought on the respondent, Aaron Paul, as a co-founder and minority shareholder, and re-incorporated the business as TYLT shortly thereafter. After the re-incorporation, Pereira and Paul signed shareholder and employment agreements, and attracted a $1 million venture capital investment from an entrepreneur named Sumon Sandhu.

The agreements included a stock restriction agreement with a vesting provision for common shares. This provision stated that the unvested TYLT shares belonging to Pereira and Paul would vest in 25% increments over a three-year period, and would fully vest by July 2023. The agreements also provided that, upon a "triggering event", TYLT would have the right to purchase all of the unvested shares of the terminated shareholder at a price of $0.0001 per share. A "triggering event" was defined in the agreement to include the termination of a shareholder for any reason, whether with or without case, or any voluntary resignation of employment or engagement by the shareholder.

Following some alleged conflict amongst the board of directors, Pereira's employment was terminated, and he was removed as a director of TYLT in 2021. TYLT also purported to exercise repurchase rights under the stock restriction agreement, and bought Pereira's unvested shares for a fraction of their true value.

Pereira brought an application for an oppression remedy under s. 241 of the Canada Business Corporations Act, RSC 1985, c C-44 ("CBCA") against Paul and TYLT.

The Application Judge's Decision:

The application judge dismissed Pereira's application. The court articulated the two-stage approach to determining claims for oppression mandated by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders ("BCE")²:

• first, the party seeking a remedy must establish that there has been a breach of their reasonable expectations;
• second, if a breach of reasonable expectations is established, the court must be satisfied that the conduct at issue amounts to "oppression," "unfair prejudice" or "unfair disregard."³

After reviewing the evidence, the application judge found that he was not satisfied that Pereira had established that it was reasonable for him to expect that he would effectively remain with the company indefinitely given the terms of the stock restriction agreement. His Honour also raised concerns that Pereira's alleged verbal agreement with Paul that Pereira would not be terminated could not supersede the terms of the written agreements.⁴ Pereira appealed the application judge's decision to the Ontario Court of Appeal.

The ONCA's Decision: The ONCA allowed the appeal and overturned the application judge's decision. The Court found that the application judge took an overly narrow approach by focusing primarily on the language of the documents signed by the parties, rather than all the circumstances, including Pereira's role in founding the company and the events that led to his termination and the repurchase of his shares.

The ONCA also observed that while the application judge correctly identified the principles in BCE, his application of those principles to the facts before him was antithetical to the equitable nature of the oppression remedy, which requires courts to consider not only strict legalities but also what is fair and reasonable in the circumstances of each case.⁵

Specifically, the ONCA laid out the following principles, rooted in the BCE two-stage inquiry, to determine whether Pereira's reasonable expectations were breached upon his termination and the repurchase of his shares:

• The oppression remedy seeks to ensure fairness, granting courts the "broad, equitable jurisdiction to enforce not just what is legal but what is fair." The impugned conduct does not need to be unlawful to be unfair.
• The court must take an objective and contextual approach regarding the claimant's reasonable expectations.
• The court should consider several non-exhaustive factors when determining a claimant's reasonable expectations, including the general commercial practice, the nature of the corporation, the relationship between the parties, past practices, steps the claimant could have taken to protect itself, representations and agreements, and the fair resolution of conflicting interests between corporate stakeholders.

In applying these principles to this case, the ONCA determined that the application judge described Pereira's expectations in terms that made them sound inherently unreasonable, without considering whether they could be described in more objectively reasonable terms given the factual context.

For example, it may have been unreasonable for Pereira to expect to be with the business forever (as found by the application judge), but given his role as one of the founders of the company, it may not have been unreasonable for him to expect that he would continue as an officer, director and/or shareholder at least until his shares fully vested in 2023. The ONCA found that the application judge should have sought to characterize Pereira's expectations more narrowly in a manner consistent with the factual context, and then to assess whether they were objectively reasonable having regard to the factors enumerated in BCE.

The court also determined that the matter was not appropriate to be adjudicated as an application given the need to make findings of fact, including findings of credibility. Accordingly, although it was not requested by either party, the ONCA ordered that the application be converted to an action, and that the matter be remitted to the Superior Court of Justice to be decided as a trial.

The Takeaway:

The ONCA's decision affirms that in prosecuting or defending claims under the oppression remedy, parties and their lawyers must consider not only the parties' strict legal or contractual rights, but also what is fair and equitable with regard to the claimant's reasonable expectations.

In this case, the terms of the restricted stock agreement clearly provided for a share vesting schedule, and stated that if a "triggering event" occurred, the terminated shareholder might be obligated to sell their unvested shares back to the corporation for effectively no value. The respondents were purporting to exercise legitimate rights under these agreements in terminating Pereira's employment and taking steps to repurchase his unvested shares. The determination of whether this conduct amounts to oppression has now been left to the judge hearing the evidence at trial.

However, the ONCA's decision serves as a reminder that conduct that is otherwise lawful may still be found to be oppressive, if a claimant can establish that its expectations were objectively reasonable, that such expectations were breached, and that the impugned conduct is oppressive, unfairly prejudicial, or unfairly disregards that claimant's interests with regard to all of the circumstances.

Footnotes

1. 2023 ONCA 682 [Pereira].

2. 2008 SCC 69

3. Pereira, supra note 1 at para 31.

4. Pereira, supra note 1 at para 23.

5. Pereira, supra note 1 at para. 34.

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