Practical Steps to Prevent an Oppression Claim 1 Anticipate complainants’ discontent and give it due consideration. When a board foresees that a proposed transaction, decision or other action may generate discontent from a potential complainant (such as a major shareholder, an activist shareholder or a bondholder), the board should (i) consider the situation, the interests and the concerns of the potential complainant; (ii) demonstrate appropriate attention to the rights and legitimate expectations of the potential complainant; and (iii) if appropriate, consider possible steps that would address or alleviate these concerns. All of these actions should be clearly documented in the minutes of meetings held by the company’s board, as discussed below. Chapter 4 of our 2020 edition of Davies Governance Insights contains a detailed discussion of best practices to employ when dealing with corporate activists. 2 Ensure public disclosure is current and enables flexibility. Oppression claims against public companies can result from measures taken by the company in response to unexpected situations, such as the appearance of an activist shareholder, a takeover bid or unanticipated financial challenges. Complainants may attempt to establish that the impugned action, decision or transaction was inconsistent with prior public statements made by the company. In that regard, Ontario courts have noted, “the public pronouncements of corporations, particularly those that are publicly traded, become its commitments to shareholders within the range of reasonable expectations that are
Many oppression claims brought against public companies and their boards in Canada have been unsuccessful, partly because of the business judgment rule – according to which courts avoid second- guessing bona fide business decisions of corporate boards. Nevertheless, oppression claims – even if ultimately unsuccessful – can be time-consuming and resource-intensive, and can have significantly adverse repercussions for a company while such claims are ongoing. Oppression claims can lead to significant legal expense, cause stress and distraction for senior management and directors, overshadow positive business news and depress a company’s stock price. Facing Oppression Claims In recent years, situations giving rise to oppression claims against public companies have included the following: – transactions that dilute the interests of key shareholders and/or negatively affect the company’s credit ratings (thereby depressing the value of issued debt); – transformative commercial transactions that significantly alter the risk/return profile of the company’s business operations; – major commercial or financing transactions concluded with some (but not all) of the company’s shareholders; – actions or decisions that directly or indirectly affect an ongoing or anticipated proxy battle or takeover bid; – transactions requiring court approval (especially plans of arrangement); and – post-acquisition disputes (such as fights over earn- outs or directorships).
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Governance Insights 2022
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