Convicting business group leaders for not reporting the sale to shareholders violates contractual good faith, the Supreme Court of Canada rules.

The Supreme Court of Canada has rejected an appeal by the heads of a group of companies who were found guilty of violating the contractual good faith they had to show towards their shareholders. They were awarded compensation for the damages they sustained.

In 2002, two men became presidents of three insurance companies grouped together under that name “Groupe Excellence” They have signed a “Chairman’s Agreement” with the majority shareholders, giving them significant benefits, including incentive pay, for which they have committed to working towards the common goal of ensuring the success of Groupe Excellence, with a view to a possible sale.

However, the bosses learned that a third party was interested in acquiring the companies, and instead of disclosing this to shareholders, they decided to buy out their entire holdings themselves and then resell them to the third party. This earned them a huge profit. Therefore, the shareholders sued the bosses to deprive them of that business opportunity.

They argued that they violated their obligation to implement the agreement in accordance with the good faith requirement. Presidents responded that contractual loyalty did not require them to subordinate their interests to those of shareholders. The court of first instance upheld the lawsuit and ordered the defendants to pay $12 million to shareholders. The presidents appealed the ruling to the Supreme Court.

In its substantive analysis, the Court noted that “(…) the Chairman’s Agreement contains an implicit reporting obligation that requires the Chairman to provide shareholders with all relevant information to make an informed decision about the sale of their shares. This implied obligation derives from the nature of said agreement, which reflects the presumed intention of the parties. The presidents were also obligated to implement the agreement in accordance with good faith requirements.

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It notes that “(…) the obligation of maximum loyalty derived from the exercise of powers on behalf of another person, such as that towards a manager of others’ assets or towards an agent, is not addressed in this case. Principals are not agents of shareholders or managers of others’ assets, so neither They can be subject to the obligation of loyalty.Furthermore, the non-contractual obligation to report relating to good faith in the formation of contracts has only theoretical significance in this case given the contractual relationship that the parties have chosen to establish between themselves.

He asserts that “(…) the nature of the superiors’ agreement leads to the conclusion that he had an implicit obligation to report. The Chairman’s Agreement was the cornerstone of the business relationship between the Chairman and the shareholders. The role of each party in this relationship was clear. The Presidents’ Agreement was a long-term agreement that formalized a mutually beneficial business relationship between presidents and shareholders, and required mutual contractual loyalty.

The Court concluded that “(…) the interest expressed by the purchasing company satisfies, in the context of the Heads of Agreement, each of the three criteria established for determining whether certain information falls within the duty to report: (1) knowledge of the information, whether true or Assumed, by the debtor of the reporting obligation; (2) the fact that the information in question is of decisive importance; (3) the impossibility of the reporting obligor informing himself, or the impossibility of the creditor trusting the debtor to comply with the obligation legally.

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Based on the above, the court ruled to reject the appeal and upheld the appealed ruling.

See Supreme Court of Canada ruling 2023 SCC 25.

Aileen Morales

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