Legal Updates

A shareholder who embezzled can be removed from the company and this does not constitute minority oppression

October 25, 2021

A 25% shareholder in a company that owns a store ran the store until he took money from the company due to a gambling debt. He informed the other shareholders of this and undertook to repay the funds but they immediately terminated his employment as the store manager and as a director of the company and took further action against him. The company also financed the defense costs in the legal proceedings that were initiated.

The Court held that the retaliatory actions taken upon discovery of the embezzlement did not constitute discrimination but the company was not entitled to finance the legal costs in the oppression claim. Oppression is any situation of harm to a well-founded interest or legitimate expectation of a shareholder in a company; The failed management of a company; Ongoing damage to the legitimate expectations of the minority to participate in its day-to-day management; or an acute crisis of trust between the shareholders of a private company which is managed as a kind of partnership. Here the minority shareholder expected to manage the company and upon learning of the taking of the funds by the minority shareholder the partners took retaliatory measures including: cancellation of the credit card, disconnection of the car fueling card, removal from the company's WhatsApp group, dismissal from the store management etc. These actions negate the legitimate expectation of the minority shareholder to continue to run the store, but because they were made as a direct and immediate response to the embezzlement, they do not amount to oppression of the minority. In general, a company that manages legal proceedings against it must bear the legal expenses in respect of these proceedings, but this is not the case with regard to a claim for oppression of the minority. In a shareholder dispute there is place to add the company as a party to the proceeding, but the company can not fund the proceeding for one of the parties. Such financing constitutes an unfair distribution of the company's resources among the shareholders and therefore amounts to oppression of the minority. Therefore, in order to remove the oppression, the costs incurred by the company for conducting the proceedings must be reimbursed. In addition, becuase there is no doubt that the trust between the parties has been lost, a separation must be made by way of the purchase of the minority shares by the majority based on a valuation of a company to be made.