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The Supreme Court Reiterates the Distinction Between a Shareholder’s Right of Action and the Corporation’s Right of Action

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Litigation and Dispute Resolution Bulletin

The Supreme Court of Canada has reiterated the distinction between a corporation's right of action and its shareholders' right of action. This nuance has an impact on the question of whether a party has sufficient interest to act, which is an essential requirement of any legal action.

Introduction

In the recent decision in Brunette v. Legault Joly Thiffault,[1] the Supreme Court of Canada pointed out that the shareholders of a corporation do not automatically possess a right of action in relation to faults committed against the corporation in which they hold shares and in relation to the injury suffered by the corporation. In so holding, the Court gave its opinion on the sufficient interest that is required in order to bring an action and on the criteria that apply to a motion to dismiss for lack of sufficient interest.[2]

The Hon. Justice Rowe, writing the reasons for the eight-judge majority of the Court, stated the opinion that the Superior Court and Court of Appeal of Quebec were correct to dismiss the plaintiff's action for lack of sufficient interest. The Hon. Justice Côté dissented.

Facts

The appellants were the trustees of Fiducie Maynard 2004 (Fiducie), which was the sole shareholder of 9143-1304 Québec inc. (9143). 9143 was a holding company that owned shares in various corporations that made up Groupe Melior. Until 2010, Groupe Melior owned, renovated and operated seniors' residences.[3]

In the late 2000s, the success of Groupe Melior "was cut short by two events".[4] It was the victim of fraud committed by a vice-president. In addition, Revenu Québec issued unexpected notices of assessment that resulted in the bankruptcy of several of the Groupe Melior corporations, of 9143 and of Mr. Maynard.[5] This caused the total loss of value of the patrimony of Fiducie since it was comprised exclusively of shares in 9143.[6]

The appellants commenced an action against the professionals, accountants and lawyers, who had participated in setting up the tax structure of Groupe Melior. They believed that the professionals had breached their duty to advise Fiducie, since the tax structure violated the law and exposed the corporations to unexpected tax liability that led to the bankruptcies.[7] The principal claim was for $55 million, calculated based on the net value of the Groupe Melior residences before the bankruptcies.[8]

Judgements Below

The respondents asked the Superior Court to dismiss the action under article 165(3) of the former Code of Civil Procedure (C.C.P.), which corresponds to article 168(3) of the present C.C.P. The respondents argued that Fiducie did not have a sufficient interest to bring a claim since the faults alleged were committed against the Group Melior corporations and not Fiducie. In their submission, the right of action belonged solely to the corporations of Groupe Melior.[9]

The Hon. Justice Danielle Mayrand of the Superior Court allowed the motion to dismiss and put an end to the action.[10] The action was based on the lost value of the assets of Groupe Melior and Fiducie had no cause of action[11] in relation to faults committed against the corporation by a third-party defendant. Shareholders only have a cause of action if a distinct legal obligation owed to them was breached and they suffered an injury distinct from those suffered by the corporation.[12] Justice Mayrand did not identify any distinct fault committed against Fiducie, or any distinct injury suffered by Fiducie, in the allegations in the Motion to Institute Proceedings.[13]

The Court of Appeal of Quebec (Morrissette, Bich and Hogue JJ.A.) unanimously agreed with Justice Mayrand.[14]

Reasons Of The Majority Of The Supreme Court

Concept of sufficient interest

Since the ground for dismissal upheld by the Superior Court was the lack of sufficient interest, the majority of the Supreme Court of Canada first considered that concept in Quebec civil procedure.[15]

The Court noted that in order for an interest to be sufficient, it must be "legal, direct, personal, acquired and existing".[16] In an action in civil liability like the one in this decision, sufficient interest is tied to the injury. Citing Bou Malhab,[17] the Court stated that "to have the necessary interest to bring an action, a person must have sustained personal injury".[18]

Sufficient interest is a necessary condition of the admissibility of an action, and that interest must be established by the claimant, by a precise statement of facts.[19] Article 165(3) C.C.P. (now 168(3)) provides the procedural basis for the defendant to move for dismissal of the claim at the stage of preliminary motions.[20]

The Court stated that in an action for liability, a challenge to sufficient interest must be disposed of before considering the claim on its merits.[21] The consequences of a dismissal at the preliminary stage are serious and care must be taken.[22] An exception to dismiss will only succeed where the plaintiff "clearly has no interest".[23] Nonetheless, the existence of that interest must be capable of being established before going further.[24]

The Court also noted that the facts alleged in the Motion to Institute Proceedings need not be assumed to be true when the lack of sufficient interest is argued as a ground for dismissal. Evidence may be introduced on that issue.[25]

In Brunette, the question of whether there was sufficient interest was analyzed from the perspective of corporate law and the distinction between the rights of the corporation itself and those of its shareholders.

Shareholders' right of action versus the corporation's right of action

At the outset, the majority of the Supreme Court stressed the principle of the corporation's distinct legal personality.

That principle, which was stated in the well-known English case Foss v. Harbottle,[26] applies fully in Quebec civil law and the Supreme Court explained this by pointing out that a shareholder who chooses the vehicle of a corporation may not have their cake and eat it too. The Court stated:

[27] The benefits of incorporation come with a corresponding limit on the rights of shareholders: Houle, at p. 178. It would be incoherent — and indeed, unjust — for shareholders to benefit from limited liability while at the same time gaining a right of action in relation to faults committed against the corporation in which they hold shares: Martel, at para. 1-28; see also Silverman v. Heaps, at p. 539. The corporate veil is impermeable on both sides; just as shareholders cannot be liable for faults committed by the corporation, so too are they barred from seeking damages for faults committed against it: Houle, at pp. 177-80; see also F. Pérodeau, "Le sort réservé à la réclamation d'un actionnaire pour la perte de valeur de ses actions : une revue de la jurisprudence québécoise" in Barreau du Québec, vol. 255, Les dommages en matière civile et commerciale (2006), at pp. 5-6.[27]

In Houle v. Canadian National Bank,[28] (Houle), the Supreme Court of Canada held that shareholders may possess their "own right of action against the same defendant" where "(1) ... the defendant breached a distinct obligation owed to the shareholders, and (2) ... this breach resulted in a direct injury suffered by the shareholders, independent from that suffered by the corporation".[29] 

In Brunette, the Court made a point of saying that the principles stated in Houle do not create an exception to the general rule barring a shareholder from obtaining compensation for faults committed against the corporation.[30] The decision in Houle is simply an application of the general principles of civil liability in Quebec law.[31] If a fault was genuinely committed against the shareholders themselves and they have suffered their own injury, a cause of action may lie, in particular under article 1457 or 1458 of the Civil Code of Québec. However, the corporation's cause of action is not its shareholders' cause of action.

The Court then applied these principles to the case at hand. On the issue of fault, the appellants argued that the respondent professionals had maintained contractual relationships with both the corporations of Groupe Melior and Fiducie.[32] In their submission, the respondents had committed faults against Fiducie as well.

That argument did not persuade the Court, which rejected it, noting that the allegations in the Motion to Institute Proceedings "do not disclose the breach of an independent legal obligation owed to Fiducie".[33] In the Court's opinion, it is clear from the allegations in the Motion to Institute Proceedings that there was confusion between the rights of the Groupe Melior corporations and the rights of Fiducie and between the obligations owed to each of them.[34]

On the issue of injury, the Supreme Court was of the opinion that the injury was suffered by the Groupe Melior corporations and not by Fiducie. The $55 million claimed corresponded to the net value of the seniors' residences owned by Groupe Melior before its bankruptcy.[35] However, these were assets of the Groupe Melior corporation and not of Fiducie. The appellants argued that the injury to Fiducie was "the total loss of value of the trust patrimony".[36] Following the reasoning described above, the majority of the Supreme Court was of the opinion that this was an indirect injury for which compensation was not available under article 1607 of the Civil Code of Québec.[37]

The Court therefore concluded that Fiducie did not have a sufficient interest to have standing and that the judgment at trial and the decision of the Court of Appeal were correct. It added that there are remedies available if the corporation suffers an injury such as the one suffered by the Groupe Melior corporations. The Court cited the derivative action in legislation concerning corporations or the right of a creditor to bring an action based on a corporation's right of action under the Bankruptcy and Insolvency Act.[38] However, that does not give a shareholder a direct right of action.

Dissenting Opinion Of Justice Côté

Justice Côté set the tone in the first sentence of her dissent, noting that "there is nothing trivial about dismissing an action before the plaintiff has even had an opportunity to be heard on the merits".[39] In fact, Justice Côté devoted a large part of her reasons to the importance of exercising caution at the dismissal stage. She stressed the meaning to be given to the "clear" ["manifeste"] lack of sufficient interest. For the lack of interest to be "clear", it must be "plainly seen" or be "very apparent, discernible simply from seeing or reading a document, record or judgment".[40]

In the opinion of Justice Côté, the lower courts and the majority of the Court of Appeal were wrong to find that the appellants "clearly" did not have a sufficient interest. When she applied corporate law to the issue in this case, Justice Côté stated that she agreed with the majority on a number of issues but disagreed on a crucial point. In her opinion, while the Court had to find that a breach of a distinct obligation to the shareholder was alleged, the Court should not look for "distinct" damage to the shareholder that is unrelated to that of the corporation. Under Quebec civil law, the Court must simply ask whether the circumstances show that a direct personal damage was suffered by the shareholders.[41] Justice Côté wrote:

[79] However, I respectfully believe that my colleague departs from those very principles by emphasizing the "distinct" nature of the damage and by reading Houle too narrowly (paras. 29‑31, 33 and 41). His reasons, like those of the courts below, suggest that the shareholder's damage must be unrelated to that of the corporation. But that is not the case. In Houle, the plaintiffs' damage — a drop in the value of their shares — resulted from the liquidation of the corporation's assets. It was not entirely "distinct" damage. What is more, L'Heureux‑Dubé J. at no time used the word "distinct" to describe the damage in question, as she did to describe the obligation owed to the shareholder.

[80] In my opinion, Houle requires no more than does the Civil Code of Québec, namely that the damage be direct and personal (arts. 1607 and 1611 C.C.Q.): … [42]

Justice Côté added that in Houle, the shareholders' damage resulted from the loss of value of their shares, as was the case for Fiducie. In Houle, special circumstances that gave the shareholders a right of action were identified.[43]

After making that point, Justice Côté found that the issue of whether the damage was direct or not should have been left for the trial judge to determine, since it calls for an analysis of all of the circumstances of the case.[44] Justice Côté was of the opinion that Fiducie had made sufficient allegations to support an argument that a breach of a distinct obligation owed to Fiducie caused it damage that was direct and personal.[45]

Justice Côté noted that the professionals were subject to contracts of mandate with Fiducie that gave rise to general duties to inform and advise it. On that point, she wrote:

[98] Unlike my colleague (paras. 35‑40), I am of the view that it would be possible for the trial judge to find on the basis of the alleged facts — after considering the evidence — that the respondents breached obligations that were distinct from the ones they owed to the Groupe Melior corporations. It is true that the MIP contains few specific allegations concerning the mandates given by Fiducie and their connection with the alleged breaches. However, the respondents' duties to provide information and advice were not strictly circumscribed by the object of those mandates (see Côté v. Rancourt, 2004 SCC 58 (CanLII), [2004] 3 S.C.R. 248, at para. 6). For example, the circumstances could in themselves have required the respondents to inform Fiducie directly and in a timely manner. It was clearly in Fiducie's interest to be aware of the situation, since it might have been in the best position to ensure that the necessary action was taken by the various entities of Groupe Melior and by their partners (see, inter alia, MIP, at paras. 181, 229 and 256). In my opinion, these are questions of mixed fact and law that cannot be decided at this stage of the proceedings without considering the relevant evidence.[46]

On the question of damage, Justice Côté added that the facts alleged could allow the trial judge to conclude that the respondents' breaches were the direct cause of the appellants' damage, that is, the destruction of the trust patrimony, in light, among other things, of the respondents' alleged failure to inform Fiducie in a timely manner, in breach of their obligations under the contracts of mandate with Fiducie. With respect to the use, by the appellants, of the value of the properties to estimate the value of their shares before the collapse of Groupe Melior, Justice Côté was of the opinion that this issue related solely to the quantum of damages, and not to the very existence of the damage.[47]

In the opinion of Justice Côté, to the extent that there was ambiguity in the allegations with regard to the amount of the damages being claimed, the solution lay in an amendment of the MIP and in the expert evidence that would be presented at trial, not in the death sentence represented by dismissal of the action at the preliminary stage.[48]

For these reasons, Justice Côté would therefore have allowed the appeal.

Comments And Conclusion

This decision provides important reminders and instructions regarding both Quebec civil procedure and corporate law.

First, on the issue of motions to dismiss and inadmissibility, caution must not be synonymous with an attitude of wait-and-see, to borrow an expression used by Chief Justice Wagner when he sat on the Court of Appeal of Quebec.[49] When the evidence used to make out a cause of action or a sufficient interest is not disclosed by the allegations in the pleading, the Court must intervene at the inadmissibility stage, in the interests of justice.

In addition, being a shareholder of a corporation does not mean having the corporation's right of action. The rule that a corporation has distinct personality dates back several centuries and there is nothing novel about it. Nonetheless, there are some situations in which the existence of a shareholder's direct right of action, as opposed to the corporation's right of action, is still debated. Consider, for example, the hesitation of a minority shareholder between initiating a direct action in oppression versus a derivative action brought on behalf of the corporation, with authorization from the Court. Is the shareholder really a direct victim of the conduct at issue (for example, that of the directors), or is it only the corporation that suffers an injury?

Justice Côté's dissent accounts for this type of incertitude in some cases. She believes that,where there is a breach of a distinct duty owed to shareholders, courts should not focus on whether the damage suffered by the shareholders is completely distinct or independent from the damage suffered by the corporation. According to Justice Côté, doing so would mean ignoring the real question in Quebec civil law, i.e., whether there are exceptional circumstances that make the shareholders' damage, such as the loss of value of their shares, direct damage, as required by article 1607 C.C.Q.[50].

In any event, these are fundamental questions that are central to Canadian corporate law. While choosing the vehicle of a corporation has many advantages, the distinct personality of the corporation also has certain consequences that must not be forgotten.


[1]       2018 SCC 55 (Decision). 

[2]       Article 165(3) of the former Code of Civil Procedure which corresponds to article 168(3) of the present Code of Civil Procedure.

[3]       Decision of the SCC, para. 2.

[4]       Id., para 3.

[5]       Ibid.

[6]       Ibid.

[7]       Ibid.

[8]       Ibid.

[9]       Ibid., para. 5.

[10]     2015 QCCS 3482.

[11]     Decision, para. 6.

[12]     Id.

[13]     Ibid., para. 7.

[14]     2017 QCCA 391.

[15]     Decision, paras. 8 and 9.

[16]     Id., para. 13.

[17]     Bou Malhab v. Diffusion Métromédia CMR inc., [2011] 1 S.C.R. 214.

[18]     Decision, para. 14.

[19]     Id., para. 16.

[20]     Ibid., para. 17.

[21]     Ibid., para. 19.

[22]     Ibid. para. 18.

[23]     Ibid. par 18.

[24]     Ibid, para. 19.

[25]     Ibid., para. 20.

[26]     Foss v. Harbottle, (1843), 2 Hare 461, 67 E.R. 189.

[27]     Decision, para. 27.

[28]     Houle v. Canadian National Bank, [1990] 3 S.C.R. 122

[29]     Decision, para. 29.

[30]     Id., para. 30.

[31]     Ibid.

[32]     Ibid., para. 34.

[33]     Ibid., para. 35.

[34]     Ibid, para. 37.

[35]     Ibid., para. 41.

[36]     Ibid.

[37]     Ibid., para. 44.

[38]     Ibid., para. 53.

[39]     Ibid., para. 55.

[40]    Ibid., para. 63.

[41]     Ibid., para. 78

[42]     Ibid., para. 79-80.

[43]     Ibid., para. 79.

[44]     Ibid., paras. 85-93

[45]     Ibid., para. 94.

[46]     Ibid., para. 98.

[47]     Ibid., para. 100.

[48]     Ibid., para. 100.

[49]     Beaulieu v. Laflamme, 2011 QCCA 1909, para. 9.

[50]     Art. 1607 codifies the creditor's right to damages to remedy the injury, whether moral or material, that is caused to the creditor by the debtor's default and is an immediate and direct consequence of it.

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