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Commercial Litigation

Family businesses ripe for oppressive conduct claims

The unique nature of family-run businesses makes them particularly prone to oppressive conduct actions, Toronto commercial litigator Kevin Fisher tells AdvocateDaily.com.

Fisher, a partner with Gardiner Roberts LLP, has several ongoing cases involving allegations of oppressive conduct, all of which arose in businesses controlled by members of the same family. 

“Companies often start small and become more successful,” he explains. “As they grow, one person may begin to take advantage of some of the other family members with an interest in the business.”

In situations where one person takes the lead in the day-to-day operation of a company, Fisher says it’s easy for them to feel justified in their actions.

“They may feel like they deserve more because they’re contributing more,” he says. “When you’re dealing with family members, there’s not always the same level of control or oversight that you might see in an ordinary corporate entity, with regular meetings and documented resolutions. Rather than getting together for an official board of directors' meeting, family run businesses often operate on an ad hoc basis.

“People tend to be more trusting of their family members, but that can also leave more room to be taken advantage of,” Fisher adds.

The informality of corporate arrangements in family businesses can also prolong the wait before things inevitably come to a head.

“Classic cases often involve years of abuse before the party that’s been taken advantage of learns more about the situation and it comes to a boiling point,” Fisher says. “Usually the catalyst for starting litigation is when one party tries to terminate another from the business.”

Fisher says an intergenerational transfer of a family company is a typical flashpoint, with the combination of conflicting business interests and underlying familial tensions making for a frequently explosive mix.

“Long-simmering sibling rivalries can come to the fore, acting as a barrier to moving forward in a manner that is in the best interests of the company and everyone involved,” Fisher says.  

In one high-profile example, the heiress to a Canadian food company fortune sued her brothers under the oppression remedy of Ontario’s Business Corporations Act, arguing they left her destitute and unable to access the value of her 20-per-cent stake in the company by refusing to buy her out. In evidence, she revealed the three siblings had not spoken in three decades.

In that case, a judge dismissed her claim, ruling that the brothers had not engaged in any mismanagement or unfair business practices. By contrast, the judge wrote, she had put “her own interests ahead of those of the corporation.”

“The court has very broad remedies,” Fisher says. “It can set aside transactions, reinstate employment or cede control to a person that was frozen out, appoint a receiver or many other things that it sees as in the best interests of the overall entity and people involved."

Fisher says some businesses can struggle to operate normally with oppressive conduct disputes hanging over them.

“You hope that rational people will come to a compromise, but experience shows that it takes a certain amount of time in litigation before that happens,” he says. “Unfortunately, if they can’t get back to normal, the ultimate decision of the court may be to wind up the company or sell it, which may not be in the best interests of everyone involved. For smaller or closely held companies, it can be very hard to get full value.”

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