Is it just mere formalities?
- Subtitle: Litigation and Arbitration
In Mennillo v. Intramodal Inc., the Supreme Court of Canada examined whether a corporation’s non-compliance with the corporate formalities of the Canada Business Corporations Act can constitute shareholder oppression.
Johnny Mennillo and his associate Mario Rosati were together the sole shareholders and officers of Intramodal, a small privately run company. Since its incorporation in July 2004, Intramodal’s corporate governance was handled on an informal basis — if at all. Seldom did they comply with the requirements of the CBCA or put anything in writing. They never signed a formal shareholder’s agreement, nor did they properly sign and issue share certificates.
Upon Mennillo’s resignation as officer and director in May 2005, Intramodal filed an amending declaration with the corporate registry removing him as a director as well as a shareholder. The corporation, however, did not follow the legal formalities under the CBCA before registering the share transfer to Rosati. Notably, Mennillo did not properly endorse or deliver the transferred shares.
Five years later, Mennillo brought an oppression claim under s. 241 of the CBCA, arguing that he had been unjustly deprived of his shareholder status. The corporation countered that Mennillo had, in fact, willingly transferred his shares to Rosati.
The trial judge dismissed Mennillo’s oppression claim, finding on the facts that he no longer intended to be a shareholder of the corporation and that he had transferred his shares to Rosati. Moreover, Mennillo had agreed to remain a shareholder only for so long as he would guarantee the company’s debts — which he no longer wished to do. The trial judge further found that the corporation’s failure to observe the formalities of a share transfer was caused by an error or oversight by Rosati’s lawyer. The Québec Court of Appeal upheld the trial judge’s judgment.
The SCC dismissed the appeal, confirming that Mennillo’s oppression claim was unfounded.
Applying its decision in BCE Inc. v. 1976 Debentureholders, the SCC reaffirmed that in order to obtain redress under s. 241 CBCA, a claimant must: (a) “identify the expectations that he or she claims have been violated and establish that said expectations were reasonably held”; and then (b) establish that the corporation violated its reasonable expectations by conduct that is “oppressive,” “unfairly prejudicial” or that “unfairly disregards [its] interests.”
Given that the SCC found no palpable and overriding error in the trial judge’s factual findings, it followed that Mennillo could have no reasonable expectation of being treated as a shareholder. While the corporation may have failed to observe certain requirements of the CBCA, this does not, in and of itself, mean that it acted oppressively. Nor did it illegally strip Mennillo of his shareholder status.
After confirming that Mennillo’s oppression claim was unfounded, the majority of the SCC went on to discuss three important points of corporate law:
The retroactive cancellation of shares is not possible by way of simple oral consent. This is because a corporation can cancel issued shares only where (a) it amends its articles or (b) the shares are bought back on the basis of a director’s resolution and the express consent of the shareholder and the solvency and liquidity tests are met.
Non-compliance with the CBCA requirements for a share transfer (i.e., endorsement and delivery) could, in some circumstances, be grounds for an action annulling the transfer. However, in this case, seeing as Mennillo had been aware of the corporation’s non-compliance for more than three years, any potential action seeking to annul the transfer would be time-barred by the time he brought his claim.
The CBCA requirements for a conditional issuance of shares do not apply where a corporation is not a party to an agreement. Moreover, in this case, no conditions were attached to the shares themselves. As such, the informal agreement between Mennillo and Rosati to the effect that the former would remain a shareholder conditional upon his guarantee of the corporation’s debts was not subject to such formalities.
The upshot of the SCC’s decision in Mennillo is that a corporation’s failure to follow the formal requirements of the CBCA does not — in and of itself — give rise to an oppression remedy. However, this decision does not exclude the possibility that an oppression remedy is triggered where non-compliance does frustrate a shareholder’s “reasonable expectations,” as determined on a case-by-case basis.
Hubert Camirand and Daniel Baum are lawyers with Langlois LLP in Montreal.
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