When Business Relationships Change, Temptations and Tensions Rise
Small corporations, where two or three family members and/or friends incorporate a company and go into business together, are the bread and butter of our community’s vibrant and diverse business community. Unfortunately, sometimes the relationships between shareholders and their contributions to a business (or lack thereof) can change over the years, often in ways that the founders of a company didn’t foresee when they went into business together. These changing roles can lead to breakdowns in communication and can often be at the heart of serious disputes between shareholders.
The recently decided case of Moon Dancer Fishing v. Tryon, is demonstrative of what can occur when shareholders don’t periodically take the time to measure their roles in a small corporation and to discuss fairly dealing with how those roles may have changed over time.
Moon Dancer concerned two gentlemen, “Mr. M” and “Mr. T”, who were friends for over 35 years. In 2000 Mr. M and Mr. T decided to go into the clam and mussel culturing business together and incorporated a company. The company was jointly owned by a holding company solely owned and operated by Mr. M on the one hand and a second holding company solely owned and operated by Mr. T. In effect, Mr. M and Mr. T were equal owners of their shared company. The terms by which the parties went into business together were part of a “handshake deal” the terms of which became central issues before the Court.
For many years, Mr. M and Mr. T both equally contributed to and reaped the benefits of their company; however, as their roles in the company began to change and unbeknownst to Mr. M, Mr. T began to raise loans for the company from non-arm’s length entities which caused significant interest to accrue. Mr. T also began to make a number of secret draws from the company to the tune of $119,400.
Mr. M asserted to the Court that his handshake agreement with Mr. T was that all decisions affecting the business would be made jointly by both Mr. M and Mr. T, that neither would be paid any salary, that all distributions from the business would require the consent both Mr. M and Mr. T and that their company would hire Mr. T’s son to manage the company’s day to day operations.
Mr. T’s position was that the handshake deal contained no such agreements and that the draws made from the company were to reflect the “sweat equity” put into the company. Since Mr. M began to withdraw from the business which, in turn, required Mr. T to put more effort into running the company, Mr. T reasoned that he was at liberty to receive a stipend for his disproportionate contributions to the company. Mr. T conceded that the loans were not properly made and that he was obligated to the company for the resulting accrual of interest.
The Court determined the matter on the basis of the oppression remedy found under BC’s Business Corporations Act. Put briefly, the oppression remedy grants the Court broad, remedial power to address complaints by a shareholder that the business of a company is being operated in a manner oppressive to that shareholder. The oppression remedy requires the Court to determine whether the impugned conduct was in violation of Mr. M’s reasonable expectations as a shareholder and, if so, what remedy was appropriate.
The Court found that Mr. T was not acting dishonestly in paying himself for his hard work, but that he did so without authorization and in the face of a long history of neither Mr. M nor Mr. T being entitled to such payments. As such, the Court found Mr. T’s conduct to be oppressive. The Court granted the somewhat odd relief being sought; namely, that Mr. T was ordered to pay Mr. M half of the loan interest and half of the payments made to Mr. T from Mr. T’s 50% share of proceeds of the sale of the company (which were being held pending the outcome of litigation).
Moon Dancer reflects a common theme seen in many litigated business disputes of the founders of an organization not recording their business arrangements into a properly drafted contractual form. Moon Dancer also demonstrates the tension experienced by business partners where one partner finds themselves disproportionately bearing the load in the partnership without receiving what would appear to be fair compensation. In order to avoid the temptation for one partner to put their hand in the cookie jar when they find themselves doing most of the work, it is always prudent for business partners in small companies to periodically review what contributions they have and are continuing to make to the business and to reflect on whether there needs to be adjustments to how each of the partners contributes to or receives benefits from the shared company.
If you’d like assistance in establishing your business and drafting reliable contractual documents to do so, please feel free to contact any of our many solicitors practicing in the area of business law. If you’ve become involved in a business dispute or are a shareholder and feel that the company you hold shares in is being operated in a manner which is unfair or oppressive to you as a shareholder, please feel free to contact any of our commercial litigation lawyers. You may also contact our general line in a confidential manner toll free at 1-800-558-1155 or reach out to myself at email@example.com.
Jeremy Burgess is a litigation associate at Pushor Mitchell and is able to assist you with your commercial litigation inquiries.
The foregoing is for informational purposes only and is not legal advice, nor should be construed as such.