Background
The rule in Foss v Harbottle, (1843), 67 ER 189 (UKHL) states that a shareholder of a company does not have a personal cause of action for a wrong done to the corporation, including actions for diminution of share-value. The rule has been well established and applied in Canadian Jurisprudence, but it does have some exceptions. In the recent case of Tran v Bloorston Farms Ltd., 2020 ONCA 440, the Ontario Court of Appeal clarified the rule and its exceptions, and found that a shareholder has the right to sue for diminution of share-value in situations where a corporation has no cause of action.
In Tran v Bloorston, Sang Thi Tran (“Sang”) was the sole shareholder of 1835068 Ontario Ltd. (“183”). Sang leased a space in which 183 operated a restaurant for a number of years. In 2014, Bloorston Farms Ltd. (“Bloorston”) bought the premises and demanded increased rent. When Sang refused to pay the increased amount, Bloorston terminated the lease and the restaurant could no longer operate as a result. Sang commenced an action against Bloorston seeking damages arising from the breach of the lease and for diminution in the value of her shares in 183. Sang was unable to add 183 as a plaintiff in the action because 183 was not a tenant under the lease and therefore had no cause of action against Bloorston.
Sang was granted summary judgment by the Ontario Superior Court and Bloorston appealed.
Court of Appeal
On appeal, Bloorston argued that the rule in Foss v Harbottle precluded Sang from claiming a loss in share-value and that any exceptions to the rule had been rejected in previous case law.
The Court of Appeal discussed the rationale for the rule in Foss v Harbottle and found that it was intended to respect the separate legal identity of corporations and avoid a multiplicity of actions. Under the rule, shareholders are not precluded from suing for wrongs done directly to them. However, when both the corporation and shareholders have a cause of action against a wrongdoer, the shareholders can only claim damages that are not attributable to wrongs done to the corporation.
The Court found that certain exceptions to the rule exist. In particular, the Court looked to the three propositions set out in Johnson v Gore Wood & Co. (No. 1) (2000), [2001] BCC 820 (UKHL) (“Johnson”) for when a claim for diminution of share value can be made , which had been quoted by the Motion Judge. These three circumstances were outlined as follows:
1. Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss.
2. Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding.
3. Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.
Bloorston argued that Johnson had been rejected in Canadian law, but the Court rejected this argument. It then considered these three propositions in the context of Canadian jurisprudence, and found that the 1st and 3rd propositions are consistent with Canadian jurisprudence. The Court then considered the 2nd proposition and, looking to previous case law, including the BC Court of Appeal Case, Robak Industries Ltd. v. Gardner, 2007 BCCA 61, the Court found that the 2nd proposition had not been rejected in Canada.
In the result, the Court determined that the 2nd proposition in Johnson should be accepted into Ontario law. It held that this proposition follows the rule in Foss v Harbottle because a claim for damage to the shareholder’s property is a not a claim that belongs to the corporation, and there is no risk of multiplicity when the corporation has no cause of action. Sang’s claim for diminution of share-value in this case is not a loss that can be remedied through an action by the corporation. Her loss arises out of a relationship between her and Bloorston that is separate from Bloorston’s relationship to 183.
Accordingly, the Court dismissed the appeal and upheld the finding that the lease was breached by Bloorston, and Sang was entitled to damages for the return of her deposit and the diminution of her share-value in 183.
Takeaways
This decision provides some relief from the strict application of the rule in Foss v Harbottle for shareholders seeking damages for a loss of share-value. When a shareholder wishes to sue for a diminution of share-value, plaintiffs and counsel should be clear on whether the loss has resulted from a wrong done to corporation, or from a wrong done to the shareholder directly. If the corporation does not have a cause of action against the alleged wrongdoer, then the shareholder can claim for diminution of share-value as per the second proposition in Johnson.
For more information about this decision or any of your corporate dispute questions, please contact Jordanna Cytrynbaum, John Fiddick or Joseph Romanoski.
For a copy of the decision, please see here.
Written by Joseph Romanoski with contribution from articling student Lauren Gnanasihamany.