Oppression: Divisional Court Upholds Liquidation to Resolve Shareholder Dispute

 In Commercial Litigation

Basegmez v. Akman, 2018 ONSC 812

Recently, the Divisional Court upheld a decision by Lederman J., whereby the court ordered the liquidation of a closely held corporation after finding that one of the shareholders acted oppressively;  in other words, in a manner that was unfairly prejudicial to the other shareholders.

Tarn Financial Corporation was founded by three investing shareholders, Akman, Kocturk and Basemez, for the purpose of investing in an operating hotel and condominium development project. Lederman J. found that soon after receiving the investment funds, the managing shareholder, Akman, altered the capital structure of the corporation to give himself voting control and engaged in self-dealing, thereby diverting millions in corporate funds for his personal benefit. Lederman J. found Akman’s conduct to indicate an intention to operate the company without any regard to the interests of the other shareholders or his statutory obligations.

Importantly, Lederman J. was presented only with a request for winding up as no other remedy had been sought by any party. Although Lederman J. provided the parties with an opportunity to discuss alternatives to winding up, no agreement was reached and Lederman J. was of the view that there would be no way for the oppressed shareholders to fairly assess the value of the company given that they had no access to the requisite financial information of the corporation.

Lederman J. recognized that winding up is a drastic remedy but found it appropriate given that i) there was a complete breakdown in trust and confidence between Akman and the other shareholders, ii) the oppressed shareholders were not in a position to properly value the company in light of Akman’s failure to provide financial disclosure, and iii) the oppressed shareholders had no desire to take over management of the company.  Lederman J. found that there was no less disruptive order appropriate in the circumstances, and ordered the winding up of the company.

On appeal to the Divisional Court, the court upheld Lederman J.’s findings. Speaking for the court, Myers J. noted that it was appropriate for Lederman J. to have removed Akman from management and control of the business pending the separation of the parties, given Lederman J.’s finding that Akman intended to continue to ignore the rights and interests of the oppressed shareholders.

Myers J. also highlighted the fact that no party had put forward an alternative remedial option and that Lederman J. was left with maintaining the status quo (which was clearly not appropriate in the circumstances) or ordering the winding up of the company.  On that basis, the Divisional Court found Lederman J.’s decision to be sound.

There are a number of important takeaways from this decision.  First, if a party to an oppression claim prefers one remedial option over another (i.e. forced buyout, independent valuation, etc.) then the preferred remedial option should be formally requested.  This is particularly so if, like Akman, the party is on the wrong side of the equities.

Second, at paragraph 25 of Myers J.’s decision, the Divisional Court noted that “A compulsory sale can only ensure that fair market value is realized where there is confidence in the underlying financial statements. This requires that a third party review the current financial statements and conduct an investigation to reconcile the various inter-corporate transfers and loans implemented by Mr. Akman.”  This should be a warning to any oppressing shareholder that courts are prepared to take drastic steps to ensure that a fair result is available to oppressed shareholders.

Finally,  the Divisional Court recognized once again that “a closely held corporation can often be analogized to a partnership that requires trust and confidence among the investors.

Superior Court – Basegmez v. Akman, 2017 ONSC 5370 (CanLII)

Divisional Court – Basegmez v. Akman, 2018 ONSC 812 (CanLII)

This blog post was written by Chris McLeod, head of the Litigation team.  He can be reached at 613-367-0372 or at christopher.mcleod@mannlawyers.com.

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