Start-up share issuance has been the subject of a successful oppression remedy. In Fedel v. Tan [2010] 101 (3d) 481, In the first iteration of the business, Tan promised Fedel that Fedel would have a forty percent interest in Gum Products International Inc. importing seaweed into Ontario. Tan’s promise, in effect, to split the gross sales revenue 55% for Tan and 45% for Fedel. Fedel became a director. (para 6)
Tan was at all times the sole shareholder (para 8)
In the second iteration of the business a few years later, there was an oral agreement that the business would continue with Tan having 60% and Fedel having 40% (para 11).
Again, no shares were ever issued to Fedel. Fedel became a director of the new company. (para 13). Tan told Fedel that Fedel’s shares were being held by Tan in trust (para 22).
In a dispute with a parent company Fedel reduced his commissions owing to himself in order to settle the dispute on behalf of the company which he had the interest in (GPI). This made him a contributor to the capitalization (para 18).
Interestingly, in unrelated litigation against the company to which Fedel now claimed 40% ownership (GPI), Fedel had actually taken the position that he was not an owner (this being a strategy to avoid possible liability that would have attached to GPI). (para 20). The Applications judge did not deem this to be sufficient contradiction to reject Fedel’s 40% argument.
Ultimately Fedel started an application to get his share interest and GPI terminated Fedel (para 26).
The Court of Appeal agreed that there was an oral agreement and that the oral agreement was sufficient to establish the ownership interest (para 44,50)
The applications judge found ‘reliance’ on Tan’s oral statements. (para 46)
query: was a finding of reliance strictly required as a necessary condition of establishing the 40% ownership
The Applications judge found Fedel to be a proper complainant under s. 245 of the Ontario Business Corporations Act. Tan had carried on the business in an oppressive manner by disregarding Fedel’s interests as a security holder (para 29).
The first instance award was made up of three components: Fedel’s total contribution, share of profit and value of the business.
Court of Appeal:
Although the aggrieved oppressee sought an order delivering share certificates, it was open to the judge to have awarded compensation in lieu of delivery of certificates
The oppression remedy is not limited to breach of contract remedies (para 51). Merely because a claim could be framed as a breach of contract does not preclude an oppression application (para 56-57).
The oppression remedy is aimed against ‘internal corporate maneuvers that the creditor cannot protect against.’ (para 56). This language was endorsed again by the Court of Appeal in Ernst & Young v. Essar Global Fund Ltd. [2017] O.J. No. 6723
commentary #1: An important result is that Tan (oppressor) argued that just because Fedel (victim) may have had a right to acquire shares as promised by Tan, that, ipso facto, does not give Fedel an ‘interest’ in the corporation. Tan is effectively arguing that an oral agreement between two natural persons does not implicate the corporation (para 62).
The Court of Appeal did not allow this somewhat sophistic discrimination between the operating mind (66) who made the deal and the corporation which was the target of Fedel’s claim. The Court did the standard analysis: closely held private corporation, Tan was the controlling shareholder, long-relationship, high level position held by Fedel. Fedel lent money to corporation and the judge at first instance described it as a partnership. (This ‘contextual’ analysis was followed in 1217174 Ontario Ltd. v. 141608 Canada Inc. [2017] O.J. No.6727
commentary #2: the case implicated other cases referred to. In Anthopoulosv LaPalme [2003] O.J.No.5452. Anthopoulos (oppressee) built a building and could not sustain it. LaPalme (oppressor) agreed to buy the building from Anthopoulos in exchange for Anthopoulos getting a 40% share percentage in the new owing corporation. The agreement between the parties insisted that Anthopoulos keep the rents above $360,000 per year and if he didn’t he forfeited his shares. The ‘oppressor’ never bother delivering any shares to Anthopoulos and simply waited until Anthopoulos failed to produce the required annual rent. LaPalme (oppressor) simply argued that Anothopoulos had forfeit his shares.
Pepall J. in Anthopoulos, said: the shares should have been delivered as a pure matter of contract interpretation regardless of later forfeiture. And yes the shares were later forfeit.
The importance of the case is that it is another example that the oppression remedy is an instrument to order the delivery of shares (86,89) notwithstanding all the noise that is inevitable raised by set-off type counterarguments.
Pepall J. in Anthopoulos relied upon what is possibly the cornerstone case Bayliss v Harris [1993] O.J. No. 2655 where Bayless was a 20 share holder in Associates (where he worked and contributed for several years). Associates was merged with Partnership (1990). Bayless had been promised 40% by Harris. It never materialized. Bayless was terminated (1992). The judge ordered delivery of shares (para.9,16) , and then ordered that the shares be purchased back(para 16).
commentary #3: Fedel v. Tan has been used to rely upon post-agreement conduct (Canadian Northern Shield Insurance Co. v. 2421593 Canadian Inc.[2018] O.J. No. 5879
