Failure to register share transfer doesn’t mean that it didn’t happen: Supreme Court of Canada denies oppression remedy claim
June 15th, 2017
The Supreme Court of Canada in Mennillo v. Intramodal Inc. held that a small, closely held corporation’s failure to comply with some of the requirements under the Canada Business Corporations Act (CBCA) before registering a share transfer was not in and of itself oppressive conduct prohibited by the CBCA’s oppression remedy at Section 241.
Intramodal was a two-person privately-held road transportation company established by Johnny Mennillo and Mario Rosati in 2004. Before Intramodal was incorporated, Mennillo and Rosati agreed upon their roles in the company by way of a handshake. Rosati would contribute his skills to the business and Mennillo would provide financing. After Intramodal’s incorporation, Mennillo and Rosati became Intramodal’s directors, officers and shareholders. Neither paid for their shares and Mennillo’s share certificate was never signed, both of which run afoul of the requirements under the CBCA. The dealings between the parties were very informal. The parties rarely complied with the formalities of the CBCA or put things in writing.
Mennillo resigned as a director and officer of Intramodal by way of letter on May 25, 2005. A notice of resignation was prepared by Intramodal’s lawyer and Mennillo signed it. The notice referred to Mennillo’s removal as director and officer only. Mennillo subsequently advanced loans to Rosati which were repaid by 2009. In December 2009, Rosati gave Mennillo a cheque marked “Full and Final Payment”.
A dispute subsequently arose about whether Mennillo continued to be a shareholder of the company. Mennillo argued that he did not intend to be removed as a shareholder when he resigned as an officer and director in 2005. Intramodal denied this and argued that Mennillo had in fact resigned as a shareholder and transferred his shares to Rosati consistent with the parties’ agreement that Mennillo would only hold shares so long as he was guaranteeing the company’s debts.
Intramodal’s lawyer filed an amended declaration indicating that Mennillo had been removed as director, officer and shareholder of Intramodal as of July 2005. This declaration was signed by Intramodal’s lawyer but not Mennillo.
Mennillo brought an oppression claim against Intramodal under section 241 of the CBCA alleging that Intramodal’s conduct in removing him as a shareholder was, in the words of the CBCA, “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder [i.e. Mennillo], creditor, director or officer, the court may make an order to rectify the matters complained of.”
Trial and Appellate Court
At trial, the judge dismissed Mennillo’s oppression claim and found that Mennillo held his shares in Intramodal on the condition that he was guaranteeing its debts. As of May 25, 2005, the fact was that Mennillo did not want to be a guarantor for Intramodal’s debts and thus, he could not continue as a shareholder. Mennillo asked to be removed as a shareholder and his shares were transferred to Rosati. Intramodal had not complied with the formalities of the CBCA to complete the actual transfer of Mennillo’s shares to Rosati, but the court found that this was simply an error or oversight.
The Quebec Court of Appeal dismissed Mennillo’s appeal.
Elements of Oppression
The Supreme Court revisited their decision on the nature and elements of an oppression claim as set out in their prior case BCE Inc. v. 1976 Debentureholders. To establish oppression, a claimant must:
- Identify the expectations they claim to have been violated and show that the expectations were reasonably held; and
- Show that those reasonable expectations were violated by conduct that is oppressive, unfairly prejudicial to or unfairly disregarding of the interests of any security holder.
The Supreme Court affirmed the trial judge’s decision and held that Mennillo’s oppression claim must fail because he could not have had any reasonable expectation of being treated as a shareholder after May 25, 2005. As of that date Mennillo had expressly requested to be removed as a shareholder and that his shares be transferred to Rosati.
While there was no evidence in writing of the share transfer having been effectuated, it was open to the trial judge to deem that it had been in effect completed given the informal nature of the parties’ business dealings and their history of carelessness toward the corporate formalities required under the CBCA. Intramodal’s sloppy paperwork did not, in and of itself, invalidate the share transfer nor was it oppressive, prejudicial or did it unfairly disregard Mennillo’s interests. Intramodal had treated Mennillo exactly as he wanted to be treated.
Oppression will be judged on a contextual approach
Many of the legal difficulties that arose in this case were as a result of the parties’ lax approach to formality in the parties’ business dealings. The Supreme Court reinforced the notion that an oppression claim will be judged on a contextual approach. The courts will consider the conduct of the parties throughout a business relationship in determining the reasonable expectations of a claimant advancing an oppression claim.