Shareholders Still Cannot Sue for Wrongs to the Company
The 1843 decision Foss v. Harbottle held that shareholders cannot sue for a wrong done to the company. Some recent English case law, however, has suggested that where a company suffers a loss for which it cannot sue, shareholders are not prohibited from suing for the loss as reflected in the diminution in the value of their shareholdings. Until now, the implications of those cases in Canada have been unclear.
In its decision in Robak Industries v. Gardner, the Court of Appeal for British Columbia recently affirmed the rule in Foss v. Harbottle.
The shareholders of Getty Copper Incorporated sued one of its directors and his associates, alleging assorted misconduct in the control and management of the company. The shareholders stated that this misconduct had caused them to suffer various losses, including devaluation of their shares in the company.
Prior to trial, the director and his associates successfully applied to strike several of the shareholders’ claims on the basis that the claims disclosed no reasonable cause of action.
The plaintiffs appealed. They suggested that the ‘refinement’ to the rule in Foss v. Harbottle, seen in the English case law, was justified given that the purpose of the rule was only to prevent a company and its shareholders from recovering the same loss twice.
The Court of Appeal rejected the plaintiffs’ proposed gloss on the rule and dismissed their appeal. In a unanimous decision, the court stated that the purpose of the rule was not merely to prevent "double recovery" of the same loss, but also to prevent recovery by one or some shareholders of a loss suffered by the company at the expense of other shareholders and creditors of the company. On this basis, the court held that a wrong to a company is only actionable by a shareholder if it is also an independent wrong to the shareholder giving rise to an independent loss by the shareholder.
McCarthy Tétrault Notes:
The Court of Appeal’s refusal to depart from the rule that a shareholder may not sue for a wrong done to the company is significant in light of recent rulings elsewhere. It seems to confirm that courts in Canada, unlike in many other jurisdictions, will respect the principle that a company has an identity distinct from that of its shareholders, and continue generally to refuse to pierce the corporate veil.
The Court of Appeal’s decision also creates, in many cases, an easy exit for a party sued by an aggrieved company’s shareholders. The decision is strong authority for the proposition that such shareholders cannot sue unless they can identify both a wrong and a loss suffered independently by them. Neither a wrong to the company nor a loss merely reflective of a loss suffered by the company (such as a diminution in the value of the company’s shares) will suffice.
Please note that all decisions hyperlinked in this publication are from Canlii (Canada Legal Information Institute: http://www.canlii.org/).