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The Rule in Foss v. Harbottle is Alive and Well in Ontario

4 minute read

The Court of Appeal for Ontario has confirmed in its recent decision, Tran v. Bloorston Farms Ltd., 2020 ONCA 440, the rule in Foss v. Harbottle is alive and well in Ontario.  Justice Zarnett, writing for the court, provides a very helpful review of the rule and outlines its scope in a modern commercial context.

The rule in Foss v. Harbottle, a nineteenth century English case, provides that a shareholder of a corporation—even a controlling or sole shareholder—does not have a personal cause of action for a wrong done to the corporation. This rule was most recently reaffirmed by the Supreme Court of Canada in 1997 in Hercules Management v. Ernst & Young, [1997] 2 S.C.R. 165.

As Zarnett J.A. explains in Tran v. Bloorston, there are two reasons for the rule:

(1)  A corporation is a distinct legal entity. The corporation, and not the shareholders, are liable for its acts and defaults; similarly, the corporation acquires causes of action when wrongs are committed against it.

(2) The rule avoids a multiplicity of actions.  Without the rule, shareholders would be able to sue on the basis of a wrong done to the corporation which causes harm to the corporation and only indirectly harms the shareholder.

The issue in Tran v. Bloorston was whether the rule in Foss v. Harbottle precluded the claim of the sole shareholder, Tran, for diminution in the value of the shares of a numbered company.  Tran’s numbered company operated a restaurant in a building which Tran had personally leased from the appellant, Bloorston. When Bloorston terminated the lease, Tran claimed that the termination was wrongful and that her shares in the company lost value because the company was unable to carry on its restaurant business.

The motion judge granted summary judgment to Tran, finding that Bloorston wrongfully terminated the lease and that she could recover damages for the loss of value of her shares.  The motion judge rejected Bloorston’s argument that Tran was not entitled to damages for this loss based on the rule in Foss v. Harbottle.

The Court of Appeal dismissed Bloorston’s appeal, holding that the rule in Foss v. Harbottle does not apply when only the shareholder has a cause of action.  This case did not involve a shareholder suing for wrong done to the corporation for which the corporation could sue.  Here, the corporation had no cause of action whatsoever, because Tran was the only tenant under the lease.

Justice Zarnett undertook a careful analysis of the rule in Foss v. Harbottle and considered various exceptions and limits to the rule.  He held that where the wrong was not committed against the corporation and the corporation has no cause of action, the rule in Foss v. Harbottle does not prevent its shareholder, who has her own cause of action, from suing for any damages properly recoverable under that cause of action. This can include, in appropriate cases, damages for loss or diminution of share value (para. 41).

The court noted that when a shareholder sues because of a wrong done to her, and in the absence of a wrong to the corporation which gives the corporation a cause of action, allowing the shareholder’s action for any properly recoverable damages respects the separate legal entity of the corporation (para. 65).  Here, Tran was pursuing her own cause of action and not a cause of action that belonged to the corporation.  Shares in a corporation are the property of the shareholder and not the corporation. The claim for loss of share value is therefore a claim for damages to the shareholder’s property, and not a claim for anything that belongs to the corporation (paras. 65-67).

The court went on to caution that not every case for diminution in share value should be allowed.  Damages claimed are subject to all of the usual requirements of proof, causation, foreseeability and quantification (para. 69).

Many cases remain where disputes arise as to whether particular claims can be advanced by shareholders or whether they must be brought by the corporation. Tran v. Bloorston provides helpful and clear guidance regarding the proper interpretation and application of the rule in Foss v. Harbottle in these situations.

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Peter W. Kryworuk

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