Responding to an Amalgamation Squeeze-out under the OBCA
July 7, 2006
Jonathan C. Lisus
Ontario’s Business Corporations Act (the "OBCA")2 permits an amalgamation of two corporations if each receives approval to do so by way of a special resolution of its shareholders.3 An amalgamation may permit a majority shareholder to squeeze-out a minority shareholder with relative ease. The mechanism may be used to complete a going-private transaction following a takeover bid, or simply as a single-step squeeze-out to evict minority shareholders.
An amalgamation undoubtedly triggers a shareholder’s dissent and appraisal rights. This paper will consider other means by which shareholders can respond to an amalgamation squeeze-out. Specifically, we discuss the scope of the oppression remedy and its utility as an alternate or supplement to the right of dissent. It is submitted that, in the context of a squeeze-out from a private corporation, the oppression remedy affords some scope to thwart a squeeze out or at least improve the terms of exit.
II. Mechanics of the Squeeze-out
The typical squeeze-out is structured as follows. The majority of Corporation A incorporates Corporation B of which they hold all the common shares. The majority then proposes that Corporations A and B be amalgamated and continued as Corporation B. The amalgamation is approved by special resolution of the shareholders of each amalgamating corporation. As part of the amalgamation, the common shares of Corporation A are exchanged for redeemable preference shares in Corporation B. The preference shares are then redeemed at a specific price. The minority shareholders are evicted. The majority shareholders retain 100% ownership of the common shares of the amalgamated corporation.
Sections 174-179 of the OBCA provide the legislative basis for this squeeze-out. The provisions require the adoption of an amalgamation agreement by special resolution of each corporation. The notice of meeting of shareholders must include a copy of the amalgamation agreement and a notice that shareholders may dissent and claim the fair value of their shares.4 Holders of a series or class are entitled to vote separately as a series or class if the amalgamation agreement contains a provision that, if contained in a proposed amendment to the corporation’s articles, would entitle such holders to vote separately as a class or series under s. 170 (for instance, a change in the rights attached to the shares of such series or class).5
If the corporation is an offering corporation,6 further requirements are prescribed by s. 190.7 The corporation must have an independent, qualified valuer prepare a written valuation indicating a per security value or range of values for each class of affected securities not more than 120 days prior to the amalgamation.8 An information circular describing the valuation and other matters must be sent to shareholders not less than forty days prior to the shareholders’ meeting at which the amalgamation is to be voted on.9 In determining whether shareholder approval has been granted, securities are disregarded in the vote if they are held by (i) affiliates of the corporation, (ii) beneficial owners that will receive a greater consideration than other shares of the same class, or (iii) beneficial owners that effectively control the corporation and have entered into an understanding that they would support the going private transaction. Exemptions from these requirements may be granted by the Ontario Securities Commission (the "OSC").10 The OSC has promulgated Rule 61-501 to regulate going-private transactions.
Section 185(1)(c) provides shareholders with a right of dissent from an amalgamation.11 Subject to the fulfillment of certain procedural requirements, the right of dissent entitles the dissenting shareholders to be paid the fair value of their shares.
The entirety of s. 185 is, by its opening words, subject to s. 248, the oppression remedy.12 Moreover, the right to be paid fair value is given "[i]n addition to any other right the shareholder may have".13 However, once the shareholder demands payment of fair value, it "ceases to have any rights as a shareholder other than the right to be paid the fair value of the shares…",14 unless such demand is withdrawn or the amalgamation agreement is terminated.15
If a minority shareholder facing a squeeze-out is concerned only with receiving fair value for its shares, the remedy is straightforward. The s. 185 appraisal remedy provides an absolute right to fair value so long as the dissenting shareholder meets the procedural requirements and the corporation meets certain tests of solvency.16
The appraisal remedy is little comfort for the shareholder who wants to remain in the corporation. Moreover, it cannot compensate for past oppression that has damaged the value of a minority’s shares: see Ford Motor Company of Canada, Ltd. v. Ontario Municipal Employees Retirement Board, 2006 CanLII 15 (ON C.A.).
A minority shareholder in a private corporation might be surprised to find that the OBCA accords no obvious procedural safeguard to protect against a forced eviction. Although the case law is relatively undeveloped, there is reason to believe that the oppression remedy may provide a means by which the minority can enhance its position and circumscribe the majority’s power to evict.
A. Appraisal and Oppression: Concurrent Remedies
The first issue to examine is whether a shareholder’s exercise of the right to dissent precludes the shareholder’s recourse to the oppression remedy.
A shareholder’s plan of attack is partially dependent on the timing of the proposed transaction. Courts have indicated an unwillingness to undo amalgamations after the fact. See, for instance, Neonex International Limited v. Kolasa (1978), 84 D.L.R. (3d) 446 (B.C.S.C.), where Bouck J. stated:
See also Palmer v. Carling O’Keefe Breweries of Canada Ltd. (1989), 67 O.R. (2d) 161 (Div. Ct.). Note, however, that in Ferguson v. Imax Systems Corp. (1983), 43 O.R. (2d) 128 (C.A.), the Court of Appeal granted an order under the oppression remedy to prohibit the company from implementing a resolution that had previously been passed. And in Ruskin v. Canada All-News Radio Ltd. (1981), 7 B.L.R. 142 (Ont. H.C.), where the company filed its articles of amalgamation on the day the motion was heard for an interlocutory injunction, the court nevertheless granted the injunction.
If the shareholder seeks an injunction prior to the adoption of the resolution, the shareholder will not yet have perfected its right of dissent under s. 185(10) (which calls for the dissenting shareholder to demand fair value within twenty days of notice that the resolution has been passed). In these circumstances, there is no immediate overlap between the exercise of the oppression remedy and the right of dissent – the former may be used in an attempt to enjoin the proposed resolution, failing which the latter may be used to claim fair value.
If the minority shareholder wants only compensation under the oppression claim, it does not face the time constraints of an injunction. In these circumstances, there may be an overlap between the oppression claim and the exercise of the right of dissent. Ontario courts have made clear, however, that shareholders may indeed have simultaneous recourse to the two remedies.
In Brant Investments Ltd. v. Keeprite Inc. (1983), 44 O.R. (2d) 661 (H.C.J.), the company proposed a special resolution to create a new class of preference shares that were to be issued in connection with the acquisition of assets from its controlling shareholder. The minority shareholders believed the acquisition was not in the best interests of the company. They voted against the resolution and exercised their rights of dissent under s. 184 of the Canada Business Corporations Act, S.C. 1974-75-76, c. 33 (the "CBCA").
Prior to a determination of fair value, the company decided to make a rights offering to its existing shareholders. The minority shareholders applied under s. 234 of the CBCA for, among other things, an order restraining the company from proceeding with the rights offering. The company applied to strike out the notice of motion on the grounds that the minority shareholders had no standing to bring an application under s. 234.
Callaghan J. held that the minority shareholders could bring the oppression claim, despite the fact that they had already exercised their right of dissent under s. 184:
I see nothing inconsistent with permitting a dissenting shareholder to exercise his appraisal remedy under s. 184 and at the same time permitting such shareholder to proceed as a complainant under s. 234. Section 184 of the CBCA requires a dissenting shareholder within 20 days of receipt of notice of the fundamental change proposed by way of special resolution to send a notice of demand for payment of the fair value of shares (s. 184(7)). That is a very short period of time in which a shareholder could reasonably be expected to make an intelligent choice between two available remedies...
I am of the view that Parliament has clearly indicated that the existence of the rights under s. 184 are in addition to the rights conferred under s. 234 to test the substantive fairness of a qualifying transaction. If a dissenting shareholder qualifies as a "complainant" under s. 231 as a former registered holder of a security, then such shareholder may resort to both remedies where appropriate. (paras. 13-14)
At trial,18 the court agreed with the motions judge on this issue, but noted that there is a "measure of anomaly" involved in simultaneous recourse to the two remedies:
Assertion of the right to dissent, which is granted by s. 184, logically implies a decision on the part of the shareholder to sever his connection with the company, recover the amount of his investment and be gone. Assertion of a claim under s. 234 on the other hand implies a continued interest in and concern for the affairs of the corporation. (para. 46)
In Arthur v. Signum Communications Ltd.,  O.J. No. 86 (Ont. Gen. Div.), aff’d  O.J. No. 1928 (Div. Ct.), significant amendments were made to a company’s articles to alter its share capital. The effective purpose of the amendments was to limit the minority shareholder’s holdings, and to permit the majority shareholder to increase his holdings at no personal cost. The shareholder dissented, and also claimed compensation for oppression resulting from the reorganization.
Justice Austin rejected the assertion that the taking of a step expressly authorized by the OBCA could not be oppressive. The court affirmed its power to test "qualifying transactions for substantive unfairness" (para. 131). Justice Austin followed Brant and held:
It is clear, therefore, that the right to claim for oppression and the right to dissent and get fair value co-exist…In the circumstances of this case, to deny Arthur the right to claim relief from oppression would be to use the dissent provisions of the OBCA to legitimate the expropriation of his minority interest. (para. 128)
The minority shareholder in Arthur was ultimately granted both fair value under the appraisal remedy and additional compensation under the oppression remedy which reflected his wrongful exit from the corporation.
The additional compensation was equal to the difference between the fair value claim on the date of the resolution and the estimated value of the corporation at the hypothetical time at which the shareholder would have sold his shares if he had not been forced out by the oppressive conduct. The Divisional Court approved of this approach:
There is no double compensation or other error in principle in awarding the dissent/appraisal remedy which reflects future participation prospects as they are seen on the day before the impugned conduct, and also the oppression remedy which reflects the loss actually suffered by Arthur by reason of being wrongfully deprived of the right to participate in the corporation’s fortunes as they actually unfolded. (para. 10)
Recognition of the existence of concurrent remedies makes sense. Section 185(4) expressly provides that the right of dissent is "in addition to any other right the shareholder may have", whereas s. 185(14) provides that the shareholder "ceases to have any rights as a shareholder other than the right to be paid the fair value of the shares". Read together, s. 185(14) appears to be aimed at the removal of a shareholder’s rights to continued participation in the company, whereas s. 185(4) preserves the shareholder’s remedies that arise from the fundamental change: see Welling, Corporate Law in Canada: The Governing Principles, 2nd ed. (Toronto: Butterworths, 1991) at pp. 578-579.19 Moreover, a former shareholder has standing to pursue the oppression remedy under s. 248.
Other jurisdictions have approached the issue in a similar manner. In Wind Ridge Farms Ltd. v. Quadra Group Investments Ltd.,  12 W.W.R. 203 (C.A.), the Saskatchewan Court of Appeal held that the two remedies were concurrent in the context of a shareholder’s failure to exercise his right of dissent. The court followed Brant and observed at para. 25 that:
The shareholder has concurrent remedies under ss. 184 and 234. Both remedies are available to minority shareholders provided the shareholder is able to bring itself within the requirements of the relevant sections of the OBCA. In effect the shareholder has options. The shareholder may pursue the oppression remedy under s. 234 and the right of dissent under s. 184 or the shareholder may pursue the right to dissent under s. 184 alone or the oppression remedy under s. 234 alone.
Courts in Alberta have also followed Brant but have interpreted the concept in a restrictive manner. In Alberta Treasury Branches v. SevenWay Capital Corp. (2000), 83 Alta. L.R. (3d) 145 (C.A.), the Alberta Court of Appeal agreed that a shareholder’s exercise of its right to dissent (in that case, under Alberta’s Business Corporations Act, S.A. 1981, c. B-15) did not preclude recourse to the oppression remedy. However, picking up on the "perceived anomaly" expressed by Anderson J. in Brant, the court held that "[i]t would be a rare case indeed where the very same conduct that creates a right to dissent (which is exercised) will be found to be oppressive and requiring remedy" (para. 36), and suggested that such circumstances militate against recourse to the oppression remedy. Recall that this latter point was not shared in Arthur.
And in LSI Logic Corp. of Canada Inc. v. Logani (2001), 204 D.L.R. (4th) 443, the Alberta Court of Queen’s Bench said in obiter that: "a former shareholder's right to complain about prior oppressive conduct is not necessarily extinguished because the shareholder dissented to a fundamental change, provided the change is not related to the oppression" (para. 115).
It is submitted that the "perceived anomaly" between the two remedies is, at least in the context of a squeeze-out, misperceived. In this context, the exercise of the right to dissent is not necessarily a manifestation of a desire to sever one’s connection to the corporation. Rather, it is merely an expression that, if forced out, the shareholder wishes to contest the consideration that is offered. Furthermore, recourse to the oppression remedy does not necessarily suggest a shareholder’s continued interest in the corporation. The oppression claim might seek only compensation for the oppressive conduct as a supplement to the shareholder’s appraisal remedy. See, for instance, Arthur, in which, as discussed above, the shareholder received both fair value and damages to reflect the oppression that caused the shareholder’s exit from the company. See also Ford Motor Company of Canada, Ltd. v. Ontario Municipal Employees Retirement Board, 2006 CanLII 15 (ON C.A.), in which the shareholders were granted damages for historical oppression in addition to the fair value they received under the appraisal remedy.
B. The Use of the Oppression Remedy to Challenge Amalgamation Squeeze-Outs
To this point we have considered the general proposition that a shareholder may have simultaneous recourse to the oppression and appraisal remedies. Can the oppression remedy thwart, or at least provide compensation for, a squeeze-out?
Early authority was encouraging for minority shareholders. In 1978, in two cases heard within one week of each other, shareholders successfully enjoined the completion of the proposed amalgamations: see Carlton Realty Co. v. Maple Leaf Mills Ltd. (1978), 22 O.R. (2d) 198, 4 B.L.R. 300, 93 D.L.R. (3d) 106 (Ont. H.C.J.) and Alexander v. Westeel-Rosco Ltd., (1978), 22 O.R. (2d) 211, 4 B.L.R. 313, 93 D.L.R. (3d) 116 (Ont. H.C.J.). The former was decided under the Business Corporations Act, R.S.O. 1970, c. 53, and the latter under the Canada Business Corporations Act, S.C. 1974-75-76, c. 33. Both cases involved public companies.
In Carlton, the plaintiffs held 3.5% of the common shares of the defendant Maple Leaf. Maple Leaf had proposed an amalgamation with its parent company, which owned 94.5% of its shares. The parent company had previously made a takeover bid for all of the remaining outstanding shares of the corporation, and had also acquired shares on the open market. The plaintiffs ultimately sought, inter alia, an interim and permanent injunction to restrain the amalgamation, and alternatively an order that the minority shareholders constitute a separate class of shareholders for the purpose of the approval of the amalgamation agreement. The OSC had previously held a hearing on the matter but had declined to interfere. Nevertheless, Steele J. granted the interlocutory injunction:
A person is entitled to retain his property if he so wishes, except where there is a right held by another to forcibly take it. It matters not for this purpose what price the taker is willing to pay. I see no clear right under the Act to permit the taking of the applicants’ common shares by the means proposed. It may be that there is such a right by implication under other sections, but that is not for me to decide on this application. (p. 205)
Montgomery J. arrived at the same result in Westeel-Rosco. In that case, the defendant corporation sought to squeeze-out the minority holders of 23.5% of the common shares. The defendant had previously attempted to acquire such shares in a take-over bid. It failed to reach the threshold of 90% required under the CBCA to oust the remaining shareholders without their consent. Montgomery J. held:
If the Legislature intended this section to encompass expropriatory powers, they should have said so in clear, unambiguous words. In my view the section should not be construed to import such powers. They now purport to do indirectly what they failed to accomplish directly on a take-over bid. (p. 218)
Montgomery J. queried whether the minority shareholders should be able to vote as a separate class, and noted that the company had failed to comply with the provisions of the CBCA in that it had not entered into an amalgamation agreement (p. 221). On the issue of irreparable harm, he aptly noted: "How do you unscramble an egg?" (p. 222).20 The interlocutory injunction was granted.
Both Carlton and Westeel-Rosco involved offering corporations attempting to use the amalgamation squeeze-out to complete a going-private takeover bid. Since the date of those decisions, the OBCA has been amended and the OSC has released Rule 61-501 (preceded by Policy Statement 9.1) to codify the procedures that apply to going-private transactions in the context of an offering corporation.21
Together, s. 190 of the OBCA and Rule 61-501 make clear that a corporation may use an amalgamation to squeeze-out minority shareholders in a going-private transaction so long as the procedural requirements of fairness set out therein are met. It has been said that:22
The fundamental premise behind section 190 of the OBCA and OSC Policy 9.1 [now Rule 61-501] is that [going-private transactions] can be beneficial for the parties to the transaction, they can promote cost reduction and efficiency and they are only harmful to the public interest where they transcend the bounds of codified fairness. Enhanced disclosure, the availability of independent valuations and mandatory approvals by the majority of the minority are the means chosen by the OBCA and OSC Policy 9.1 to promote fairness. (para. 18)
In the context of the public corporation, then, it would seem that if the transaction is completed in accordance with s. 190 and Rule 61-501, there will be little room for a minority shareholder to resist the transaction on the basis of oppression. As Fruman J. stated in LSI Logic Corp. of Canada Inc. v. Logani (2001), 204 D.L.R. (4th) 443 (Alta. Q.B.) at para. 30, "detailed securities regulation of going private transactions has gradually replaced court and corporate challenges based on fairness".
The law relating to non-offering corporations is considerably less clear. The express procedural requirements of the OBCA demand very little. The amalgamation provisions give no indication that the drafters considered their application to evict a minority shareholder. Part XV, which deals with compulsory acquisitions is, as noted above, restricted to offering corporations: see Re General Accident Assurance Co. of Canada v. Lornex Mining Corp. (1988), 66 O.R. 2(d) 783 (Ont. H.C.J.).
It is doubtful that a corporation can shield itself from any claim of oppression merely because it has met the basic criteria set out in the amalgamation provisions of the OBCA. Arthur makes this clear:
The fact that the defendants purported to be exercising legal rights is not sufficient. Section 247 requires the court to test qualifying transactions for substantive fairness. (para. 131)
See also Lornex, in which, after finding that the company had met the procedural requirements of the OBCA, the court went on to consider whether the proposed reorganization was oppressive.
However, there is little clarity in the law as to the circumstances in which a squeeze-out might be found to be oppressive. Generally speaking, it might be argued that the fairness of a squeeze-out is dependent on the procedure, purpose and substantive effect of the transaction. We consider below the possible circumstances in which the procedure or substance of a squeeze-out might give rise to a successful claim of oppression.
C. Procedural Fairness
Several procedural protections are accorded to minority shareholders of an offering corporation facing a squeeze-out. As noted above, these include independent share valuations, the provision of information relating to the amalgamation and requisite approval of the transaction by a majority of the minority.23 It might be argued that the absence of these procedural protections impugn the fairness of a squeeze-out transaction for a private corporation as well. For instance, Peterson, in Shareholder Remedies in Canada,24 suggests that the "OBCA code provides useful guidelines in determining whether a private company squeeze-out is permissible" (para. 18.113).25
The requirement of approval by the majority of the minority has been described as a "classic indicium of fairness".26 It is arguably the most potent response a minority shareholder has to a squeeze-out. If a majority of the minority must approve the transaction, the majority’s power to unilaterally expel the minority shareholder is curbed. The requirement also ensures that a veto power is not vested in the hands of each and every shareholder. As a result, a balance is struck between efficiencies sought by the squeeze-out and the protection of the minority’s rights.
The problem is there is no hint of this procedural requirement in the amalgamation provisions of the OBCA.
In contrast, the CBCA was amended in 2001 to require that, in addition to the requirements of the amalgamation provisions, a squeeze-out transaction be approved by an ordinary resolution that excludes affiliates of the corporation and holders that would, following the squeeze-out transaction, be entitled to consideration of greater value or to superior rights or privileges than those available to other holders of shares of the same class.27 In other words, a majority shareholder who retains 100% ownership of the common shares of the amalgamated corporation may not vote upon the squeeze-out.
The only case that has addressed the issue on its merits decided that the OBCA did not require a vote by the majority of the minority as a condition precedent to an amalgamation squeeze-out. See Re General Accident Assurance Co. of Canada v. Lornex Mining Corp. (1988), 66 O.R. 2(d) 783 (H.C.J.).
The applicants resisted a proposed amalgamation squeeze-out under the OBCA. It was held that the amalgamation was not governed by the requirements of the compulsory acquisition provisions, as such provisions apply only to an "offering corporation". The company was not an "offering corporation" within the meaning of the OBCA: although it was a public company, it was not listed on the Toronto Stock Exchange, and presumably it had not filed a prospectus in Ontario.28
The applicants argued that under the amalgamation provisions of the OBCA the "majority and minority shareholders must vote as separate classes since they lack a commonality of interests" (p. 788).29 Ewaschuk J. rejected this argument on the basis of the plain language of the provisions as well as the ultimate recourse of a shareholder to the oppression remedy:
were s. 247 not available to supervise abuse of the rights of minority shareholders, I might have strained to construe s. 175(3) [now s. 176(3)] in the manner contended…However, I need not torture the language to hold that "class" applies only to commonality of interests, as opposed to its literal and more natural meaning to apply to a whole class of shares, e.g., to all holders of common shares. The application of s. 247 achieves the objective of due regard to and fairness for the interests of the minority shareholders. (p. 788)
Ewaschuck J. went on to consider whether the proposed reorganization was oppressive. He accepted the proposition that "differing treatment within the same class of shareholder…constitutes some evidence that the interests of the shareholder not receiving participating (voting) shares is unfairly prejudiced or disregarded" (p. 789). He noted, however, that the company had appointed independent evaluators and an independent committee to ensure that the consideration received by the shareholders was fair. As a result, the proposed reorganization was not oppressive. Ewaschuk J. also noted that the appraisal remedy was open to the applicants if they felt aggrieved by the offer. The applicants, however, were not interested in contesting fair value – their aim was a permanent injunction to prevent the reorganization.
It has been suggested that Lornex’s rejection of majority of the minority approval was incorrect: see Fraser & Stewart, Company Law of Canada, 6th Ed. (Carswell: Toronto, 1993), at pp. 566-567. Any consideration of the case, however, should keep in mind the unique facts. Although the company was not an "offering corporation", it was subject to the guidelines and scrutiny of the OSC, as some of its shareholders were in Ontario. The court was of the view that the company would have been granted an exemption from majority of the minority approval by Policy Statement 9.1 on the basis that its majority shareholders owned more than 90% of its shares. The minority shareholders had protested to the OSC, who had declined to act on the complaint. Thus, the facts did not involve a private corporation beyond the jurisdiction of securities regulation. Perhaps the case may be distinguished on this basis.
Lornex has been followed in the scant judicial consideration it has received, but not in a manner that affirms its authority in the context of the private corporation. For instance, in LSI, the Alberta Court of Queen’s Bench applied Lornex to find that there was no majority of a minority requirement under s. 176 of the CBCA. However, LSI was a public company subject to the voting requirements of the OSC’s Policy Statement 9.1. A majority of the minority had voted for the amalgamation (as permitted by the OSC, the vote had included shares that had been tendered into the initial takeover bid). As Fruman J. stated at para. 45:
there is no need to read into the section a separate minority voting requirement to remedy some perceived mischief. In Canada today, unlike England in 1976, voting requirements are already dealt with in applicable securities regulations, as part of a bundle of provisions intended to address fairness.
The court’s reasoning does not support the extension of its decision into the context of a private corporation, which is not subject to mandated procedures of fairness under securities regulations. In (Re) St. Lawrence & Hudson Railway Co.,  O.J. No. 3934 (Gen. Div.), Blair J. cited Lornex with apparent approval at para. 38, but held that a plan of arrangement under s. 192 of the CBCA required approval by "a sufficient majority of the minority in the class…[w]hat the level of approval of that minority should be is a question for determination in the circumstances of each case" (para. 37). (On the facts of the case, an overwhelming majority of the minority had approved of the arrangement.) Lornex was also followed in Re Quintette Coal Ltd. (1991), 62 B.C.L.R. (2d) 218 (S.C.), but the case dealt with a reorganization under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36.
One might argue that, contra Lornex, a minority’s approval of an amalgamation squeeze-out is intrinsic to the fairness of the transaction. There is authority to this effect, both common law and statutory. The court is accorded an overarching authority by s. 241 to ensure that the transaction is not oppressive. Accordingly, it could be argued that the absence of an express procedural requirement in the OBCA is not fatal to the argument that minority approval is a necessary condition to the fairness of a squeeze-out. Moreover, there is an argument to be made that a shareholder’s reasonable expectations may include minority approval of any squeeze-out transaction. Each step to this argument is considered below.
(i) Minority Approval: Common Law and Statutory History
The requirement of minority approval of squeeze-out transactions has a long history in the common law. In Re Hellenic & General Trust,  3 All E.R. 382 (Ch. D.), for instance, a company applied for the sanction of the court to a scheme of arrangement whereby (i) the ordinary shares of the company were to be cancelled, (ii) new ordinary shares were to be issued to the majority shareholder’s parent, such that it retained 100% ownership, and (iii) other shareholders were to be provided with cash for the loss of their shares. The scheme had been approved by ¾ of the "class" of ordinary shares, as required under s. 206 of the Companies Act 1948. However, one minority shareholder, which held 13.95%, objected to the scheme. The controlling shareholder held 53.01% of the shares. As a result, the scheme would not have been approved by ¾ of the shareholders if the controlling shareholder’s votes had not been tabulated.
The court held that the price offered to the minority shareholders was "more than fair" (p. 388). Nonetheless, Templeman J. refused to sanction the scheme. The controlling shareholder lacked a "common interest" with the rest of the class. As such, the minority shareholders should have convened a separate class for consideration of the scheme. The court cited with approval at p. 385 the following statement by Esher MR in Sovereign Life Assurance Co v. Dodd,  2 QB 573 at 580:
…if we find a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes.
In the circumstances of Hellenic, Templeman J. held that it was:
incongruous that the loudest voice in theory and the most significant vote in practice should come from the wholly owned subsidiary of the purchaser. No one can be both a vendor and a purchaser… (p. 386)
The Supreme Court of Canada arrived at a similar conclusion in Esso Standard (Inter-Amer.) Inc. v. J. W. Ents,  S.C.R. 144, 37 D.L.R. (2d) 598. The case addressed the interpretation of s. 128(1) of the Companies Act, R.S.C. 1952, c. 53 (the "Companies Act"). The relevant provision permitted a company that acquired 90% of a target’s shares in a takeover bid to compulsorily acquire the untendered shares. In this case, the acquirer was a wholly-owned subsidiary of a company that owned 96% of the shares in the target company. The parent company, by no surprise, tendered its shares into the bid. The facts superficially met the requirements of s. 128(1), since more than 90% of the shares were tendered. However, Judson J. for the Court held that the transaction fell outside the meaning of the provision:
A transfer of shares…is meaningless in these circumstances as affording any indication of a transaction which the Court ought to approve as representing the wishes of 90% of the shareholders. This 90% is not independent. (p. 604)
In other words, the "substantial identity of interest between the majority shareholders and the transferee company" constituted "the whole proceeding…a sham with a foregone conclusion, for the purpose of expropriating a minority interest on terms set by the majority" (p. 603). Judson J. also noted that "evidence of value" was irrelevant in light of the failure to meet the specified procedural requirements.
The above cases support the proposition that approval of a squeeze-out by the minority of shareholders is central to the fairness of a transaction, regardless of whether the value offered thereby is fair. Similar thoughts were expressed in Westeel-Rosco (Montgomery J. stated, at p. 221, that "[i]n essence, Jannock wants to vote on both sides – as a vendor and as a purchaser"). Secondary literature has expressed a similar position: see Finkelstein, "Expropriation of Minority Interests and the Appraisal Remedy" (1985), 27 B.L.R. 234. The notion is reinforced by the express provisions of the OBCA relating to going-private transactions, and by Rule 61-501. The right to dissent and claim fair value is not seen as adequate in itself to ensure the fairness of a transaction. The additional procedural safeguard of minority approval is generally seen as essential.
(ii) Reasonable Expectations
In Lornex, however, Ewaschuk J. refused to interpret the OBCA as requiring minority approval because to do so would have required him to "torture" the language of the provisions. He confessed that he might have "strained" to interpret the provisions in this manner if the minority holders did not have recourse to the oppression remedy.
There are two arguments that might be made in rebuttal. First, previous courts have not been similarly hamstrung by a lack of express language. In Esso Standard, the Court acknowledged that the provisions in the Companies Act were based upon provisions in a previously enacted English Act. The English Act contained express language that excluded from consideration shares beneficially held by the acquirer. The Companies Act omitted this language, but the Court nonetheless read into the provision a requirement that the 90% threshold be met by a transfer between parties without an "identity of interest". And in Re Hellenic, the English court found that the meaning of the term "class" must "depend on the circumstances" (p. 385). As per Bowen LJ in Dodd, the court "must give such a meaning to the term ‘class’ as will prevent the section being so worked as to result in confiscation and injustice" (p. 583).
It must be remembered that the amalgamation provisions of the OBCA were not drafted specifically for squeeze-outs. The provisions apply to all amalgamations. It could thus be argued that the absence of express language requiring minority approval should not be interpreted as evidence that the legislature intended to suggest that an amalgamation is necessarily fair despite the absence of minority approval. The circumstances of the amalgamation must be taken into account in order to give effect to the purpose of these provisions.
Secondly, and perhaps most importantly, a court need not interpret the amalgamation provisions in the above manner in order to impugn a transaction on the basis that minority approval was not received. As the court noted in Lornex, the oppression remedy is available to "supervise abuse of the rights of minority shareholders" in the context of a squeeze-out (p. 788). One might argue that, even if the amalgamation provisions do not mandate minority approval, a squeeze-out that is conducted without minority approval is presumptively oppressive, since the fairness of such transactions has generally been held to depend on minority approval (by common law, statute, and securities regulations).
This argument can be more fully developed by reference to the basic purpose of the oppression remedy. The protection of shareholder’s reasonable expectations has been said to be the "unifying thread" of the oppression remedy, and the "touchstone to entitlement to compensation for oppression": see CanBev Sales & Marketing Inc. v. Natco Trading Corp. (1996), 30 O.R. (3d) 778 (Gen. Div.), at p. 791, affd (1998), 42 O.R. (3d) 574 (C.A.) and Ford, at para. 122, respectively. It might be argued that presumptively a shareholder can reasonably expect that the majority will not have the absolute power to eject the minority at the time of its choosing, i.e., that minority approval will be required for the ejection to be completed.
For instance, in Ferguson v. Imax Systems Corp. (1983), 43 O.R. (2d) 128 (C.A.), the court granted a permanent order preventing the company from amending its articles in a manner that would squeeze out the minority shareholder. Fair value, in other words, was not a sufficient remedy in Imax; a forced eviction at any price was unfair to the shareholder. At a minimum, it might be argued, a minority shareholder can reasonably expect that it will have some say in a transaction that forces it out of the corporation.
The presumption of a reasonable expectation of minority approval might be rebutted if the specific circumstances of the case suggest that a shareholder should not have held this expectation. See, for instance, Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 481 (C.A.), in which the Ontario Court of Appeal considered the validity of a shareholder’s reasonable expectation of participation in a family business. Recall also that in Lornex the court was of the view that the company would have been granted an exemption by Policy Statement 9.1 from majority of the minority approval because its majority shareholders owned more than 90% of its shares. The court could have held that, in light of the OSC’s position, the minority shareholders had no reasonable expectation that minority approval would be required in a squeeze-out. In each case, the analysis of reasonable expectations should consider whether Rule 61-501 would provide an exemption of minority approval. Similarly, the level of minority approval required should be determined by reference to the provisions of Rule 61-501 and any other relevant circumstances (see St. Lawrence & Hudson Railway).
(iii) Other Procedural Protections
The requirement of minority approval imposes no significant administrative cost on a private corporation. In contrast, the provision of independent valuations and an information circular are not easily imported into this context. Both involve significant costs that might be out of proportion to the benefits realized in this setting. See, for instance, the comments of the Industry Canada Paper at para. 52:
The cost…of providing procedural fairness can be daunting and sometimes prohibitive. For example, having to obtain valuations or fairness opinions for a company with only five minority shareholders may be unnecessary where the shareholders are intimately aware of the financial situation and prospects of the corporation.
Accordingly, it is doubtful that a private corporation’s failure to abide by these procedures could be said to be at odds with a shareholder’s reasonable expectations.
Nonetheless, the principles that underlie these procedures might be imported into the analysis. Oppression might result if, for instance, the majority shareholder misleads the minority as to the value of its shares, or conceals from it information relevant to its decision to dissent and claim fair value. As per Arthur, "lack of adequate and appropriate disclosure of material information to the minority shareholders" is one indicium to be taken into account in the oppression analysis (para. 132). See also Peterson, Shareholder Remedies in Canada, at para. 18.120:
The majority likely has control of the board, which, in turn, appoints officers and hires management. Within these spheres of influence reside all the expertise and knowledge as to the prospects and value of the business. When a majority squeezes out a minority, disclosure is needed to ensure that the minority receives fair value.30
The level of disclosure required will depend on the circumstances of each case and, in particular, on the degree of control and influence over the business that is exercised by the majority.
D. Substantive Fairness
If a squeeze-out transaction meets all of the requisite procedural guidelines for fairness, a court must still determine, in the words of Austin J. in Arthur, the "substantive fairness" of the transaction (para. 131). Consideration below is given to four possible sources of substantive unfairness: differential treatment; lack of adequate consideration; improper purpose; and defeat of a shareholder’s reasonable expectations.
(i) Differential Treatment
The nature of a squeeze-out necessarily means that minority shareholders will be treated differently than majority shareholders. The minority will receive cash or preference shares, whereas the majority will receive common shares in the amalgamated corporation.
In Lornex, Ewaschuk J. found that such differential treatment "constitutes some evidence" that the interests of the minority shareholders are unfairly prejudiced. It is clear that differential treatment is not by itself sufficient to give rise to oppression. If it were, there would be an absolute prohibition on squeeze-out transactions. Some additional factor must be established in order to find that the differential treatment is discriminatory, or that it unfairly disregards the interests of the minority. In Westeel-Rosco, for instance, the minority was "treated as second-class citizens" (p. 219). And in Arthur, it was held that "discrimination between shareholders with the effect of benefiting the majority shareholder to the exclusion or to the detriment of the minority shareholder" is relevant to a finding of oppression (para. 132).
(ii) Lack of Adequate Consideration
Differential treatment, in combination with a lack of adequate consideration for the minority’s common shares, is certainly suggestive of oppression.
However, an objection grounded purely in valuation should fall within the exclusive domain of the appraisal remedy. If a shareholder feels that the consideration offered in a squeeze-out is not reflective of the fair value of its shares, the proper manner in which to contest that consideration is dissent and appraisal under s. 185. That section prescribes various requirements that the shareholder must meet in order to perfect its right of dissent (e.g., it must send a written notice of objection to the company prior to the meeting,31 and a notice of demand within 20 days of receiving notice that the resolution was adopted).32 The section also imposes certain burdens on a dissenting shareholder (e.g., that it ceases to have rights as a shareholder once it has sent a notice of demand).33
A shareholder who wishes to contest fair value should not be able to circumvent these requirements by subsequently contesting fair value by way of an oppression claim. To allow such recourse would be to subvert the legislative purpose behind the appraisal remedy. While the oppression remedy vests a court with broad remedial powers, it is submitted that these powers should be exercised in a restrictive manner when the essence of a shareholder’s complaint relates to whether fair value was received. The proper domain for such claims is s. 185.
If the value of the minority’s shares has suffered as a result of oppressive conduct, compensation for such damage can be achieved through the oppression remedy, separately from and in addition to fair value. See Ford Motor Company of Canada, Ltd. v. Ontario Municipal Employees Retirement Board, 2006 CanLII 15 (ON C.A.). The court held that the minority shareholders could not use the appraisal remedy to claim for historical oppression – such claims could only be brought under the oppression remedy. Fair value under the appraisal remedy will, however, be determined on the hypothetical basis that the oppression is alleviated going forward.
(iii) Improper Purpose
Courts have often examined whether a squeeze-out transaction has a valid corporate purpose. See, for instance, Westeel-Rosco at p. 218. It is unclear to what extent a lack of corporate purpose should be relevant to the analysis. The difference between a squeeze-out intended to realize corporate efficiencies and one that is aimed merely at complete control by the majority is not easy to discern in many cases. In fact, a squeeze-out has often been defined as a "merger effected for no valid business purpose".34
However, courts have taken this factor into account in finding oppression. As Brooke J.A. observed in impugning the squeeze-out in Imax, the purpose of the squeeze-out "was a final solution to the problem of the ex-wife shareholder" (para. 30). Similarly, in Arthur, Austin J. noted that both "lack of a valid corporate purpose for the transaction" and "a plan or design to eliminate the minority shareholder" are relevant indications of oppression (para. 132). Conversely, in Lornex, it was not disputed that the amalgamation was a "legitimate corporate objective, in the best interests of all shareholders, and would avoid substantial tax consequences for all concerned" (p. 786).
(iv) Reasonable Expectations
The concept of reasonable expectations was discussed above as it pertains to procedural protections to be accorded to a minority shareholder. It might also be arguable that in certain circumstances a minority shareholder may reasonably expect a guarantee of continued ownership in the company, instead of merely the procedural protection of minority approval. For instance, evidence might be put forth that the shareholder was induced to invest in the company on the basis of continued participation, or that the venture was undertaken on this implicit understanding. As stated in the Industry Canada Paper at para. 51:
In many private company settings, a partnership-like environment is prevalent, the expectation therefore being prolonged presence and participation. A non-consensual exit would obviously obliterate those expectations.
This argument will be heavily fact dependent, but it is certainly conceptually viable. For instance, in Imax, as noted above, the court found that the circumstances suggested that the complainant would be able to participate in the future growth of the company.
In sum, it has been argued that the oppression remedy might be used by a minority shareholder facing a squeeze-out from a private corporation to guard against both procedural and substantive unfairness. A squeeze-out transaction that is found to be oppressive should entitle the complainant to an injunction (if sought prior to the amalgamation) or damages as a supplement to its fair value claim.
Arguably, the oppression remedy has real substance in this context only if it provides some leverage for minority shareholders to resist the completion of a squeeze-out. The decision in Lornex arguably stripped the remedy of its essence by reducing the analysis to a consideration of fair value. If the majority can force out the minority so long as fair value is paid, the oppression remedy will be unable to ensure that the transaction meets basic indicia of fairness. Accordingly, this paper has sought to inject life back into the oppression remedy as a viable option for minority shareholders facing eviction from a corporation.
2 R.S.O. 1990, c. B.16.
3 As per s. 176(3) of the OBCA, the holders of a class or series of shares of an amalgamating corporation, whether or not otherwise entitled to vote, are entitled to vote as a class or series of shares if they would be so entitled under s. 170. Shareholders of a class or series of shares who face the prospect of being squeezed-out will inevitably be entitled to vote separately as a class or series of shares pursuant to s. 176(3) of the OBCA, since such amalgamation would, if contained in a proposed amendment to the company’s articles, give rise to such rights under s. 170.
4 Section 176(2).
5 Section 176(3).
6 An "offering corporation" is defined under the OBCA as a corporation that offers its securities to the public, but only where:
"(a) in respect of any of its securities a prospectus or statement of material facts has been filed under the Securities Act or any predecessor thereof, or in respect of which a prospectus has been filed under The Corporations Information Act, being chapter 72 of the Revised Statutes of Ontario, 1960, or any predecessor thereof, so long as any of such securities are outstanding or any securities into which such securities are converted are outstanding; or
(b) any of its securities have been at any time since the 1st day of May, 1967, listed and posted for trading on any stock exchange in Ontario recognized by the Commission regardless of when such listing and posting for trading commenced, except that where, upon the application of a corporation, the Commission is satisfied, in its discretion, that to do so would not be prejudicial to the public interest, the Commission may order, subject to such terms and conditions as the Commission may impose, that the corporation shall be deemed to have ceased to be offering its securities to the public." For a criticism of this definition, see P. Anisman, "‘Offering Corporations’ and Corporate Governance: A Proposal to Amend the Ontario Business Corporations Act, 1982" (1989), 15 C.B.L.J. 223.
7 As discussed below, in Re General Accident Assurance Co. of Canada v. Lornex Mining Corp. (1988), 66 O.R. 2(d) 783 (Ont. H.C.J.), it was held that these requirements did not apply to a non-offering corporation, since s. 187 of the OBCA expressly restricts Part XV, Compulsory Acquisitions, to "an offering corporation".
8 Section 190(2).
9 Section 190(3).
10 Section 190(3).
11 Section 190(7) confirms that the right of dissent is available for a going-private transaction as well.
12 Pursuant to s. 248, a "complainant", which includes security holders and former security holders, may bring an application under the oppression remedy to alleviate conduct that "is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation". To rectify the matters complained of, the court is authorized to "make any interim or final order it thinks fit". Oppressive conduct may also permit a security holder to apply to the court for an order directing an investigation to be made into the affairs of the corporation (s. 161) or for a shareholder to apply to the court for an order for the corporation to be wound up (s. 207).
13 Section 185(4).
14 Section 185(14).
16 On the latter point, see s. 185(30): "A corporation shall not make a payment to a dissenting shareholder under this section if there are reasonable grounds for believing that, (a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or (b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities."
17 The minority shareholder had previously brought a motion to prohibit the shareholders meeting at which the resolution was passed, but the motion had been denied: see (1980), 12 B.C.R. 209.
18 Brant Investments Ltd. v. Keeprite Inc. (1987), 60 O.R. (2d) 737, aff'd (1991), 3 O.R. (3d) 289 (Ont. C.A.).
19 Welling writes: "Note, however, that the shareholder still has standing as a "complainant" under the statutory definition and can pursue any of the other minority remedies: only shareholder rights are terminated. This was recognized in one of the leading cases on minority remedies, Brant Investments Ltd v. Keeprite Inc. (1987), 60 O.R. (2d) 737 (Ont. H.C.) That is an intelligent analysis consistent with the remedies approach of the reformed Canadian statutes. The standing of the complainant is perfectly clear: a judge who does not want the Action to proceed has discretion to dispose of it as he sees fit, but he must give the complainant a hearing!"
20 See also Ruskin, supra; Burdon v. Zellers Ltd. (1981), 16 B.L.R. 59 (Que. S.C.), in which an injunction was granted to restrain a proposed amalgamation squeeze-out under the CBCA; and Mason v. M.O.W. Holdings Ltd. (1983), 23 B.L.R. 255, 23 Man. R. (2d) 260, where the Manitoba Court of Queen’s Bench granted an injunction to restrain the amendment of the corporation’s articles pursuant to Manitoba’s Corporations Act, S.M. 1976, c. 40. The amendment would have permitted the buy-out of a complainant’s shares at $25,000. The court held that the valuation was arbitrary, and that an independent evaluation of the shares should be made.
21 Similarly, the CBCA has been amended to expressly permit a going-private transaction so long as the corporation complies with any applicable securities laws: see s. 193 of the Canada Business Corporations Act, R.S., 1985, c. C-44, as amended.
22 See the Discussion Paper by Industry Canada on Going Private Transactions, released August 1995, which considered similar amendments to the CBCA [hereafter the "Industry Canada Paper"].
23 OBCA, Section 190.
24 Toronto: Butterworths, 1989+.
25 See also E. Kroft, "Further Reflections on ‘Going Private’ – Towards a Rational Scheme of Regulating Minority Squeeze-Out Transactions", in Corporate Structure, Finance and Operations – Essays on the Law and Business Practice, L. Sarna, ed., vol. 2 (Toronto: Carswell, 1982), and D. Lange, "Freeze Out Amalgamations: The Federal and Ontario Positions" (1979), 27 Chitty’s L.J. 217.
26 See Industry Canada Paper, at para. 37.
27 Section 194 of the Canada Business Corporations Act, R.S., 1985, c. C-44, as amended.
28 Supra, note 5.
29 See Neil Finkelstein, "Expropriation of Minority Interests and the Appraisal Remedy", 27 B.L.R. 234.
30 Peterson’s comments are made in relation to s. 190 of the OBCA, but the principles are equally applicable to the context of the private corporation.
31 See s. 185(6).
32 See s. 185(10).
33 See s. 185(14)
34 See Black’s Law Dictionary, 5th ed. (St. Paul: West Publishing Co., 1979), as cited in Peterson, Shareholder Remedies in Canada, at para. 18.108.