Can a Director be Terminated Without a Shareholder Meeting? In short, No

Can a director be terminated without a shareholder meeting being called for this purpose? In short, no. This sort of situation involves the intersection between wrongful dismissal and the oppression remedy.

The oppression remedy is set out in the Canada Business Corporations Act (R.S.C., 1985, c. C-44) where a company has been federally incorporated (“CBCA”), or under Ontario’s Business Corporations Act, R.S.O. 1990, c. B. 16 where the company has been provincially incorporated in Ontario (“OBCA”). In the remainder of this article, we will refer to CBCA.

The oppression remedy is designed to protect shareholders and stakeholders of a corporation against wrongful conduct. Stakeholders includes shareholders, directors, officers, or creditors.

Section 109(1) of CBCA provides that a director of a corporation may be removed by an ordinary resolution of the shareholders passed at a special meeting of shareholders called for that purpose. A director may not be removed by a resolution in writing, and only the shareholders can remove a director, as has been upheld by Canadian courts. Importantly, the board of directors cannot remove a director, nor can a board of directors of a holding company remove a director of a subsidiary.

In particular, a director of a corporation is entitled to:

· Receive notice of, attend and be heard at every meeting of shareholders,

including a meeting wherein the director’s removal is sought. Failure to give such

notice has been found to amount to oppression (see Margarita Castillo v. Xela

Enterprises Ltd, et al 2015 ONSC 6671).

· A director is also entitled to submit to the corporation a written statement

outlining his or her reasons for opposing any proposed action or resolution, and the

corporation is then obligated to send a copy of such statement to every shareholder

entitled to receive notice of any meeting of shareholders. If the proper corporate

procedure is not followed, the attempted removal will fail. In Kaiser v. Borilla Holdings

(2007) 157 ACWS (3d) 537 ON SCJ, the court stated at para 8:

“Sections 122 and 123 of the Business Corporations Act set out the manner in

which a director can be removed from office. Notice must be given to the

director of the shareholder meeting at which the removal is to be proposed and

the director must be given an opportunity to submit to the corporation a written

statement giving the reasons why s/he opposes the removal.”

· In addition, one might enjoy special rights against oppression where one is

a shareholder (Luebke v. Manluk Industries Inc. 2017 ABQB 243 (CanLII)), as well

as a creditor (Walls v. Lewis 2009 CanLII 31983 (ON SC)).

In Hawkes v. Levelton Holdings Ltd. (2012) BCSC 1219 (CanLII), the plaintiff was terminated as an employee who was also a shareholder of the corporate defendant. The court found that the plaintiff had been wrongfully terminated, and that the actions of the corporate defendant were oppressive in their conduct towards the plaintiff. Accordingly, oppression can be claimed in addition to wrongful dismissal. This is also confirmed in Walls v. Lewis (2009) CanLII 31983 (ON SC), where the court stated at para 41:

Wrongful dismissal…standing alone, does not justify a finding of oppression. It is only

where the interests of the employee are closely intertwined with his interests as a

shareholder where the dismissal is part of a pattern of conduct to exclude the

complainant from participation in the corporation that the dismissal can be found to

act as oppression: Krynen v. Bugg.

The board of directors of a corporation can be individually jointly and severally liable under CBCA insofar as oppression matters are concerned. For example, in Walls v. Lewis, the court noted at para. 60 that the claim against Lewis and McKee ‘personally’ for the deferred compensation and “moneys owing on the two promissory notes is allowed”.

Assuming the director seeks severance for the wrongful dismissal and oppression, but while there were issues that ran afoul of proper corporate procedure under CBCA in terms of how the director was terminated, the director was not given “differential” treatment as a shareholder. There may be some perceived risk that with the director out, if the company is a small to medium company, that the director now outside will suffer some form of prejudice as a shareholder, such as being excluded from matters concerning the financial health of the company.

In this case, the director is advised to contact counsel with experience advising on wrongful dismissal and oppression matters. It might be that the recitals in the minutes of settlement should specify that the terminated director’s (who remains a shareholder) legitimate expectation that notwithstanding the termination he or she will continue to participate in the decision-making process in connection with matters affecting the financial health of the company, including its ability to pay dividends on its shares. It may also be necessary to have an express carve-out within any release in connection with matters falling outside of the severance settlement, to mitigate the risk that if the individual is subsequently mistreated as a shareholder, he or she will not be barred from bringing an oppression claim by having signed a release that was excessively wide and general in scope.

This blog has summarized some aspects of oppression remedy and wrongful dismissal but does not constitute legal advice and is not intended to be a summary of the law relating to the oppression remedy. If you are seeking assistance with reviewing a severance offer or have a wrongful dismissal matter, please do not hesitate to contact us for a consultation: info@cuttresslaw.com