By Xiuyuan Feng – Supervised by Professor Maharaj
In Callahan v Callahan, 2022 BCSC 87, the Supreme Court of British Columbia considered a petition from one of four brothers of the Callahan family with respect to a company in which the petitioner (“Ted”) and his siblings (Bob, Bruce, and Doug; “the Brothers”) were equal shareholders. (1) The corporation in question (referred to as “Shasta”) was established by the parties’ late father (“Lloyd”), and the petition sought a declaration that the affairs of Shasta had been conducted in a manner that was oppressive to Ted pursuant to s. 227 of the Business Corporations Act, S.B.C. 2002, c. 57 (equivalent to The Corporations Act, C.C.S.M. c.C225, s 234). (2) The act or acts alleged to be oppressive by Ted was the conduct of an AGM at which the brothers passed a series of resolutions (the “AGM Resolutions”), including most importantly a resolution to liquidate the corporation. (3) Ordinarily, such decisions might not attract significant concern; however, in the context of the parties family relationship and history, the Court found the conduct of the brothers/majority shareholders was unfairly prejudicial to Ted, and warranted a remedy restoring the parties to the status quo ante in line with Ted’s expectations. (4)
The background to the parties’ dispute goes back some decades beginning in the 1960s with Lloyd’s acquisition of an 18-acre piece of land (made up of five contiguous parcels) immediately adjacent to Rotary Beach, a popular public beach in Kelowna on the shores of Lake Okanagan. (5) The land in question was regarded by all the parties as the “Crown Jewel” of the Callahan family’s property holdings for several reasons. These included the more obvious, such as its location and commercial value as a mobile home park generating significant cashflow with minimal input, its future development value, but also perhaps less obviously because of the
sentimental attachment each of the Callahan brothers felt towards it because of having been involved with the land since they were children. (6) Shasta was incorporated in 1968 to hold various properties acquired by Lloyd, including the Crown Jewel. (7) Shares in Shasta had been held on trust for each of the four Callahan brothers since they were children, and each of the brothers regarded maintaining ownership of such property as more important than obtaining its cash value because of a long-held family belief that “land is king”. (8) Unfortunately, a belief in the importance of land was one of the few things the Callahan brothers could agree on. The parties had otherwise been in litigation or at loggerheads amidst claims of self-dealing and breach of trust in relation to various family businesses since at least the early 2000s with the Brothers and their father on one side and Ted on the other. (9)
With acrimony besetting the relationship between the Brothers and Ted it appears that the decision to liquidate Shasta and divest of its assets through an auction was an attempt on the Brothers part to avoid having to deal with Ted further. The effect of this effort on Ted, to which he objected, was to exclude him from the future development of the Crown Jewel and from sharing in the benefits thereof. (10) The mutual animosity and distrust between the parties in some respects suggests that liquidation of the corporation and a dissolution of the parties’ commercial relationship would be the most sensible course to pursue. As mentioned at the outset though, the Court ruled against this outcome on the basis that the test for the oppression remedy in s.227 had been satisfied, and that liquidation ran counter to Ted’s reasonable expectations.
The Court reached its conclusion with respect to Ted’s oppression claim by conducting a two-step analysis following the direction of the Supreme Court in BCE Inc. v 1976 Debentureholders, 2008 SCC 69. (11) The first step of the analysis required the Court to consider whether Ted’s reasonable expectations had been breached, and specifically whether Ted’s expectation that Shasta would continue to hold and develop its assets for the benefit of the Callahan family, and that he would be able to participate in the financial upside of that development, was reasonable. (12) The second step required the Court to consider whether any reasonable expectation on Ted’s part had been unfairly prejudiced, and specifically whether Ted’s reasonable expectations had been unfairly prejudiced by the liquidation aspect of the AGM resolutions. (13) The Court’s conclusion on the first step in light of Ted’s familial connection to both Shasta and the Crown Jewel, was that his expectation that Shasta would retain the Crown Jewel and that he would be able to participate in the fruits of its developments along with his brothers was in fact reasonable. (14) And in light of that conclusion, it followed almost inevitably that the liquidation resolution was unfairly prejudicial to Ted because it would likely lead to his brothers collectively outbidding him in an auction for Shasta’s assets leaving him with only cash in lieu of an interest in the Crown Jewel itself; a state of affairs most unacceptable in light of the Callahan creed that “land is king”. (15) With these conclusions in mind, the Court granted an order to set aside the AGM Resolutions including the resolution to liquidate Shasta, and to thereby restore the parties to the statute quo from before the AGM. (16)
This case demonstrates a key difference between family businesses and other types of commercial entities when determining the appropriate balance to be struck between minority interests and the right of a majority to rule. As the Court here observes, “[f]amily companies involve different expectations than commercial entities, and it is appropriate to take a more liberal approach to reasonable expectations in a family company…” (17) This may mean that sentimental value will play a role in determining which outcomes are appropriate in a corporation’s internal governance even if these may run contrary to the commercial calculations that we might expect to count most. But some difficulties of the sort encountered in this case may be avoided if interested parties remember that in the context of family firms, ‘not everything that counts matters, and not everything that matters counts.’
1 Callahan v Callahan, 2022 BCSC 87 at paras 1-4, 13.
2 Ibid at paras 2 & 6.
3 Ibid at para 4.
4 Ibid at paras 125 & 134.
5 Ibid at para 15.
6 Ibid at paras 15-25.
7 Ibid at para 14.
8 Ibid at para 38.
9 Ibid at para 34.
10 Ibid at para 115.
11 Ibid at paras 75 & 80.
12 Ibid at paras 80 & 84.
13 Ibid at paras 80 & 103.
14 Ibid at para 102.
15 Ibid at paras 119-125.
16 Ibid at para 134.
17 Ibid at para 101.