Haack v Secure Energy (Drilling Services) Inc., 2021 ABQB 82
The duty of honest contractual performance and the oppression remedy are two key risk areas facing businesses, particularly closely held corporations. The decisions in Haack v. Secure Energy (Drilling) Inc. 2021 ABQB 82, and 2021 ABQB 342, in which Dentons was counsel to the plaintiff, show how a corporation and its directors can run afoul of its unanimous shareholders’ agreement, employment contracts and the reasonable expectations of shareholders, resulting in significant liability for damages and solicitor client costs.
This case has key takeaways for corporations and directors on how to handle relationships with minority shareholders and employees and how conduct before and during litigation can result in an award of solicitor client costs:
- Unanimous shareholders agreements (USA) can create reasonable expectations for how departing shareholders will be treated. When drafting shareholder withdrawal clauses corporations must carefully detail the process for determining share valuation. Breach of those reasonable expectations can result not only in breach of the USA, but also findings of oppression and breach of the duty of honest contractual performance
- How an employee-shareholder is terminated can support a claim for oppression
- The business judgment rule does not apply where directors fail to act prudently and in good faith, and instead abdicate their responsibilities
- Directors that act with careless disregard for the truth and accuracy of the information used in decision making can be found personally liable for the consequences
- Employers must take steps to verify the accuracy of the information on the grounds for termination, which may include an investigation
- Making false and misleading statements about an employee or shareholder in order to exercise a contractual provision and to ground recommendations to shareholders under a USA, where careless and indifferent to the truth of those statements, may ground a finding of breach of the duty of honest contractual performance
- Solicitor-client costs may be awarded against defendants for bad faith conduct towards an employee and actions taken in the lawsuit that unnecessarily complicate and delay the resolution of the proceedings
The predecessor to the corporate defendant, Marquis Alliance Energy Group Inc. (Marquis Alliance), terminated the employment of its Vice President Finance and Accounting (the Vice President), claiming cause. The Vice President was also a minority shareholder and party to a USA. Claiming to have grounds under the shareholder withdrawal provisions of the USA, the directors of Marquis Alliance orchestrated a putative buy-back of the Vice President’s shares for CA$1.00.
The Court found that not only was there no cause to terminate the Vice President, Marquis Alliance had done so on the basis of false and misleading allegations of employee misconduct. Moreover, Marquis Alliance failed to take any steps to ensure the veracity of the allegations. As the allegations of misconduct were also relied on by Marquis Alliance to authorize the punitive re-purchase of the Vice President’s shares, the Court determined that this conduct was a breach of Marquis Alliance’s duties of good faith and honest contractual performance with respect to both the Vice President’s employment contract and the USA. The false and misleading statements Marquis Alliance and the directors made and relied upon formed part of their justification for terminating the Vice President and for recommending to the Marquis Alliance shareholders to vote in favour of a resolution evoking the penalty clause in the USA to buy back his shares for CA$1.00.
On oppression, the Court found both Marquis Alliance and its directors personally liable. Both the company and its directors made false and misleading statements, and were careless and indifferent to the truth of the statements about the Vice President. These actions led to the taking of the Vice President’s shares under the USA, which was abusive and in bad faith. The Vice President reasonably expected that Marquis Alliance and the directors would act in accordance with the USA and that wrongful termination of his employment would not be used as a tool to invoke the punitive share buyback clause in the USA. The business judgment rule, which often causes a court to defer to the judgment of a business, did not assist Marquis Alliance and the directors. The directors abdicated their responsibilities of responsible decision-making by making the decision in bad faith, with no effort to ensure the truth or reliability of the information used to make the recommendation to the shareholders to vote in favour of the resolution to repurchase the Vice President’s shares.
Damages and costs
Compensatory damages were awarded to the Vice President for both the wrongful termination of his employment and for the fair value of his shares, amounting to approximately CA$1.1 million, including prejudgment interest.
The Court also awarded solicitor-client costs of approximately CA$750,000 to the Vice President on the basis of the same conduct that resulted in the findings of oppression and breach of the duty of good faith, as well as for the Defendants’ conduct during the course of litigation. Critically, the Defendants maintained bare allegations of employment misconduct against the Vice President through to trial for which they offered no evidence, resulting in additional complexity to the action and a longer trial than needed. The Defendants also failed to make timely or complete disclosure of records relevant and material to the claims, took unnecessary steps in the action, created delay, undermined the ability of the parties to achieve settlement and adduced evidence from two key witnesses, including one of the directors, who were dishonest in their testimony.