Québec Court of Appeal enjoins the transfer of shares until trial of an action alleging improper exercise of right of first refusal

La version française de cette communication est publiée ici.

The Québec Court of Appeal recently issued an interlocutory injunction preventing the transfer of shares of the impleaded company, Almaviva Santé Canada Inc. (the Company), effective until a decision is rendered on the merits of the oppression remedy brought against the other shareholders of the Company¹. The controlling shareholder alleged that another shareholder had exercised its right of first refusal to take control of the Company without giving notice of its intention to do so, as it had undertaken to do.

Overturning the first instance decision, which denied the interlocutory injunction², the province’s highest Court opened the door to wider use of these exceptional measures in the context of conflicts among shareholders to preserve the parties’ rights until trial, and also noted that the use of the oppression remedy to address the actions of a shareholder is a legal issue that requires a trial to resolve.

What you need to know

• Courts will issue an interlocutory injunction in favour of the controlling shareholder of a company so as to preserve the status quo and prevent the sale of a block of shares that could change the control of the company, effective until the trial on the merits, if there is a factual basis that demonstrates that the plaintiff appears to have a valid oppression claim.
• The Court of Appeal noted that the “appearance of right” element of the injunction test is not generally considered to be a stringent standard.
• The transfer of control of the company while proceedings are pending is likely to cause irreparable prejudice to the plaintiff, who is the controlling shareholder, because the purchaser would be in a position to make decisions or take irreparable actions to the plaintiff’s detriment. This harm to the plaintiff is more significant than the damage caused to the parties to the putative share transaction by delaying the sale of the shares.
• According to the Court of Appeal, the determination of the oppressive nature of the conduct of one shareholder toward another is a question of law which must be decided on its merits and only in light of complete evidence. In the event that the trial judge should come to the conclusion that the conduct constitutes an oppressive act, the law provides for awarding damages as well as a range of other remedies, including the specific performance of the rights to purchase shares.
• Parties contemplating the sale of shares of a private company, especially where control may be transferred, should consider the risks associated with non-compliance with shareholder agreements.

Background

The Société de gestion Infomédic Inc. (Infomédic) sought an interlocutory injunction to prevent the sale of a block of the Company’s shares and the resulting transfer of control of the Company, until the hearing of its oppression claim. Infomédic wanted to exercise its right to purchase its pro rata portion of the sellers’ shares under the right of first refusal (ROFR) provided for in the shareholders’ agreement, but only if it was necessary to preserve its control of the Company. Infomédic alleged that another shareholder had exercised its ROFR to acquire control of the Company without informing Infomédic of its intention to do so, as it had undertaken to do.

Infomédic was the controlling shareholder of the Company, with four of the seven directors under the shareholders’ agreement, despite the fact that it held only 24% of the voting shares. Almaviva Santé SAS (SAS) held 33% of the voting shares, Fiducie des employés et partenaires Almaviva held 17%, and other shareholders (the Sellers) held 25%.

On January 8,2020, Kensington Capital Partners, a competitor, offered to buy the Sellers’ shares. According to the shareholders’ agreement, the shareholder who receives a purchase offer must notify the other shareholders, who then have thirty (30) days to exercise their option to purchase the shares for sale on the same terms and conditions provided in the purchase offer, on a pro rata basis. In the event that only certain shareholders exercise their ROFR, the agreement authorizes them to purchase, on a pro rata basis, any other shares offered for sale on which a purchase option has not been exercised.

A notice from the Sellers was sent to all of the shareholders on January 13, 2020. Infomédic then asked SAS if it intended to exercise its ROFR, and SAS undertook to keep Infomédic informed of its decision. As the deadline for exercising the ROFR approached, SAS cancelled a meeting planned with Infomédic and avoided further communications. According to the Court, email exchanges entered as evidence indicate that SAS did not want to discuss its intentions with Infomédic.

On February 11, 2020, Infomédic communicated its intention to exercise its ROFR only in the event that SAS did the same.

On February 12, 2020, SAS exercised its ROFR without informing Infomédic, who would only learn about it after the deadline. The Sellers accepted SAS’s notification as being the only valid exercise of the ROFR and invited SAS to purchase all of the shares the Sellers were offering for sale.

Infomédic commenced an action in oppression under the provisions of the Canada Business Corporations Act (CBCA), in which it requested a declaration that it was entitled to purchase all of the shares offered for sale. By the same procedure, it sought an interlocutory injunction under section 241 of the CBCA to suspend any sale of shares, effective until a final decision is rendered on the merits of the dispute.

Limiting her analysis to the criterion of “appearance of right”, the first instance judge rejected Infomédic’s request for an interlocutory injunction. In addition to dismissing Infomédic’s arguments regarding the invalidity of SAS’s offer, the Court concluded that even if it were to be found after trial that SAS had committed an oppressive act under the CBCA by not respecting its alleged undertaking to inform Infomédic of its intentions, that would not serve as a basis for blocking the sale of the shares, since the only recourse available would be an action for damages.

Analysis

In its decision, the Court of Appeal considered the application of the interlocutory injunction test in the context of oppression remedy cases, and considered the application of the oppression remedy beyond the acts of the corporation or its directors to the acts of shareholders and their impact on other shareholders.

The Court of Appeal first notes that interlocutory injunctions are a safeguard measure intended to protect the plaintiff’s rights during the proceedings, and that the same criteria must be applied when analyzing a request for an interlocutory injunction under the provisions of the CBCA as under the Québec law.

The plaintiff must establish: 1) that it appears to have a right to the remedy sought, and 2) that the interlocutory injunction is necessary to prevent serious prejudice or to avoid creating a factual or legal situation that would render the judgment on the merits ineffective. Furthermore, referring to the criterion of “balance of convenience”, the Court noted that the potential prejudice to the other party if the request were granted must also be evaluated.

Further analyzing the underlying judgment, the Court of Appeal indicated that the first instance judge exceeded the limits of her role by carrying out a detailed analysis of the validity of the offers made by SAS and Infomédic. In fact, her analysis should have been limited to examining the arguments presented by Infomédic and determining whether they gave rise to an “appearance of right”.

The Court of Appeal noted that this first criterion is not generally considered to be stringent—it is sufficient that the question to be decided or the position put forward by the plaintiff not be frivolous or vexatious. The Court confirms its recent case law that held that it is neither necessary nor desirable to proceed with a review of the merits of the lawsuit, except in exceptional circumstances³. In fact, it should be kept in mind that regardless of the outcome of a request for an injunction at the interlocutory stage, the case will continue and will be heard on its merits by the trial judge who alone will ultimately determine the respective rights of the parties. The Court of Appeal thus emphasized the preliminary nature of the request for an interlocutory injunction.

Considering the arguments put forward by Infomédic at first instance, the Court of Appeal held that the judge erred in concluding that there was no “appearance of right”. Limiting its analysis to the question of SAS’s failure to inform Infomédic of its intention to exercise its ROFR, the Court indicated that there is a factual basis to support Infomédic’s allegations with respect to the oppressive nature of SAS’s conduct in the exercise of its ROFR. The determination of the oppressive nature of the action of one shareholder against another shareholder is a question of law that warrants a trial and the evaluation of complete evidence, which is vested in the trial judge. In this regard, the Court noted that Infomédic’s position is supported by the judgment of the Ontario Court of Justice (General Division) in GATX Corp. v. Hawker Siddeley Canada Inc., a decision on the merits of an oppression remedy in which it was held that an offeror had structured its offer to avoid the terms of a ROFR⁴.

The Court also disagreed with the position of the first instance judge that the only remedy available to Infomédic is damages. In fact, in the event that the trial judge concludes that SAS’s conduct was oppressive, the CBCA provides for a range of remedies in addition to awarding damages.

As for the second criterion, the Court finds that the transfer of control of the Company by SAS while the proceedings are pending is likely to cause irreparable harm to Infomédic, since SAS would then be able to make irreversible decisions or take actions to the irreparable detriment of Infomédic.

As to the “balance of convenience”, even though the Court acknowledged that the granting of the injunction would delay the sale of shares and would be detrimental to the Sellers, it nonetheless held that the prejudice likely to be caused to SAS should not be qualified as serious. Whereas the prejudice to the Sellers caused by a delay in the sale of their shares could be compensated in damages, the potential prejudice to Infomédic—the loss of control—warranted the extraordinary measure of an interlocutory injunction.

Conclusion

In Société de gestion Infomédic inc. c. Almaviva Santé, the Court of Appeal emphasized that the rights of minority shareholders of a company to seek an oppression remedy would often prove ineffective if it were not possible to preserve the status quo during the proceedings. Orders such as interlocutory injunctions are intended precisely to avoid creating a factual situation that would render the debate on the merits pointless. Even though each case depends upon its specific facts, the decision rendered in this matter will certainly provide a solid footing for minority shareholders seeking an interlocutory order in connection with their oppression claim.

For companies and their other shareholders, the Court of Appeal’s openness to interlocutory injunctions carries the risk of prolonging the uncertainty inherent in conflicts among shareholders. In this matter, the interlocutory injunction preserves Infomédic’s control of the Company until the trial, likely to occur only after several months of pre-trial procedures. It is far from certain that the parties to such a transaction would still be willing to pay the agreed price or complete the planned purchase after the proceedings have concluded. The parties to any purchase transaction must therefore consider the threat of an interlocutory injunction that could last until trial of the allegations of the oppressive conduct of one shareholder against another. It is therefore even more important to contemplate the reasonable effects on other transaction participants who may have rights such as a ROFR under shareholders’ agreements or under the CBCA generally. Non-compliance with the terms of a shareholders’ agreement may expose a purchaser and a seller of shares of a private company to the risk of oppression remedy litigation and extraordinary measures.

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¹Société de gestion Infomédic inc. c. Almaviva Santé, 2021 QCCA 733 (available in French only).

²Société de gestion Infomédic inc. c. Almaviva Santé, 2020 QCCS 2733 (available in French only).

³Ville de Montréal c. Constructions Fédérales inc., 2020 QCCA 650; Groupe CRH Canada inc. c. Beauregard, 2018 QCCA 1063 (available in French only).

⁴ 1996 CanLII 8286, 27 B.L.R. (2d) 251, Blair J., cited with the approval by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69.