Last fall, I wrote about the Court of Appeal for Ontario’s refreshing affirmation of a “common sense” approach to adjudicating corporate oppression claims in Justein v. DeFi Technologies Inc., 2023 ONCA 615. In DeFi Technologies, the Court of Appeal for Ontario refused to overturn an application judge’s “common sense” finding of oppression despite multiple issues being raised (including jurisdictional, factual, and on remedy). DeFi reminds us of the importance of not losing the forest for the trees, especially in the context of oppression claims that are meant to be both efficient and equity-driven.
Less than a month later, the Court of Appeal for Ontario released another corporate oppression decision in Pereira v. TYLT Technologies Inc. (TYLTGO), 2023 ONCA 682, (“TYLTGO”), this time overturning an application judge’s decision for not having engaged broadly enough with the notoriously malleable oppression test.
The court’s decision in TYLTGO, however, goes further than just reaffirming that no one fact (even signed agreements) will be determinative in oppression claims. It also tugs on the loosening thread of whether oppression claims – with all of their context and equity sensitivities – can still be effectively adjudicated as applications. By allowing this appeal and ordering the matter to a full trial, the Court of Appeal for Ontario calls into question what sorts of oppression cases will still be well suited to proceeding on a written record alone.
QUICK FACTS
In January 2019, Mr. Pereira dropped out of university to work full-time for the start-up business he had founded a year earlier (TYLT Innovations Inc.). In July 2019, he brought Mr. Paul into the business as a partner. Mr. Pereira retained 57.5% of the shares and remained the “face” of the company, with Mr. Paul taking the remaining 42.5% and bringing more technical experience to the business. In 2020, the two entered into a shareholders agreement they found online, which provided that their shares would vest over time until August 1, 2020, provided that both of them continued to be employed by the corporation.
In May 2020, the partners were accepted into a Silicon Valley investment accelerator program designed to pair American investors with new tech start-ups. As a condition of the program, the partners were required to seek restructuring advice from a lawyer to ensure the business would be attractive to investors. They did so, and around May 26, 2020, they signed a series of restructuring documents for the new federally incorporated “TYLTGO,” complete with a new shareholders agreement and a stock restriction agreement with new vesting terms that deferred the full vesting of their transferred ownership interests in the new company to July 2023. In September 2020, also with the benefit of legal advice, the partners signed formal employment agreements with TYLTGO.
Later, in the fall of 2020, TYLTGO received a one million dollar investment from an entrepreneur through the accelerator program. As part of the deal, their investor was given a seat on TYLTGO’s board alongside Mr. Pereira and Mr. Paul.
Within one year of this investment, Mr. Pereira’s employment was terminated, and he was removed from TYLTGO’s board. As part of this termination, TYLTGO also sought to purchase Mr. Pereira’s remaining unvested shares at “a fraction of their true value,” all pursuant to the terms of agreements Mr. Pereira had signed as part of the company restructuring.
APPLICATION JUDGE’S DECISION
Mr. Pereira brought an oppression application under s. 241 of the CBCA, asserting that he had a reasonable expectation as the original founder of the business that he would continue to be employed and that his ownership interest would be permitted to fully vest – regardless of what he agreed to in the new stock restriction agreement and employment contract he had signed. As part of his application, Mr. Pereira asserted that his former partner, Mr. Paul, had given him verbal assurances at the time of their restructuring that these corporate changes were simply to assist with attracting external investors but that things would not change internally. Mr. Pereira believed that Mr. Paul still “had his back.”
At the Superior Court, Justice Valente dismissed Mr. Pereira’s application and found no oppression. In doing so, he refused to accept Mr. Pereira’s “naïve” belief that his oral agreement with Mr. Paul would trump the new stock restriction agreement he later entered into voluntarily and with the benefit of legal advice – especially since this agreement included a standard “entire agreement” covenant. Justice Valente stressed that, while this outcome was “stinging” for Mr. Pereira, he and Mr. Paul had taken on the risks of this restructuring “bargain” voluntarily in order to attract new investors.
In dismissing the application, Justice Valente went out of his way to note that while the oppression test is context-sensitive, a finding of oppression in this case could create worrying commercial uncertainty by suggesting that private oral agreements could trump explicit written contracts signed by the parties and relied upon by third-party investors.
COURT OF APPEAL ORDERS FULL TRIAL
Despite Justice Valente’s reluctance to unwind voluntarily signed agreements, the Court of Appeal for Ontario overturned this decision and remitted the matter to a full trial.
In doing so, the Court of Appeal for Ontario criticized the application judge for focusing too narrowly on the signed agreements and failing to adequately consider all of the broader factors set out in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (CanLII), [2008] 3 SCR 560 for establishing “reasonable expectations.” In particular, the court felt that Justice Valente failed to give adequate weight to Mr. Pereira’s role as a founder and the nature and history of the small company leading up to those agreements. The court also criticized the application judge for unfairly characterizing Mr. Pereira’s “reasonable expectation” at issue as being a right to remain with the company “indefinitely.” While the court accepted that so broad a right could be “unreasonable,” it maintained that it was possible for a lesser expectation – for example, that Mr. Pereira would at least remain with the company until his shares fully vested – could be found “reasonable” in the circumstances.
In allowing the appeal and remitting the matter back to the Superior Court for a full trial, the Court of Appeal for Ontario gave only a passing reference to the test for conversion and the need to assess “credibility” in the circumstances. While neither party on the appeal asked for the matter to be converted to a trial, the court obtained their consent at the appeal hearing.
RECONCILING OPPRESSION APPLICATIONS WITH THE OPPRESSION TEST
The outcome of this appeal is a bit troubling, but not necessarily for the reasons raised by the application judge. The law hasn’t changed here: the oppression test has always been driven by context and equity, and “signed agreements” have never been a trump card on reasonable expectations (though they are generally viewed as pretty strong evidence). What TYLTGO leaves teetering is whether oppression claims can still be properly adjudicated as applications.
Here was a case with only three players, clear signed agreements, and a new business with a very short history. As with every oppression fight, there were claims of oral representations and personal evidence about expectations. If even a case like this one requires a full viva voce trial in order to properly plumb the sensitive contexts and equities of the oppression test, adjudicators of first instance may be less inclined to deal with these claims based on written application records alone. For litigants, that means losing confidence in the more expedient option to resolving these disputes and having to face the scheduling nightmare of Ontario’s current civil trial backlog.
