In a recent unanimous decision, the Québec Court of Appeal warned courts seized with requests for oppression remedies under the Canada Business Corporations Act (the CBCA) of the dangers of holding venture capital funds solely responsible for the risks associated with their investments in start-up companies.
In the case at hand, Garage Technology Ventures Cannda, S.E.C. et al. v.Légeret al., 2012 QCCA 1901, the founder of a debt-ridden company in need of venture capital financing to survive, signed a contract to carry on business under a new corporate structure, financed by a majority shareholder venture capital fund whose representatives also acted as directors of the company. Osler was successful in convincing the Québec Court of Appeal that the founder could not successfully seek an oppression remedy simply because, despite their best efforts to redress the company and the sums invested by the fund, the directors and officers of the company were unable to make it succeed. This was especially true in this case where, when the company was closed, the fund had paid off all debts for which the founder was personally liable and had offered to the founder to take back the intellectual property that the company had developed in the course of its operations. The fact that the company was closed after only a few months of operations was not considered as evidence of oppression by the court, but simply as an exercise of business judgment in the particular context of a start-up company.
The standard of care to which directors and officers of start-up companies are held must be analyzed in the specific context of venture capital investments, where the company’s survival may depend on important additional injections of capitals. Directors and officers must strive to make their business succeed, in the short term, but they cannot be expected to act as they would in a financially sound and mature company. The Court of Appeal stated that the first instance judge should have taken into account that venture capital funds are not traditional financing institutions, which often commit to longer term investments. Courts must determine in concreto whether the directors and officers acted reasonably in the course of their mandate, in light of the speculative nature of start-up companies.
According to the court, to conclude otherwise would amount to imposing disproportionate obligations on the shoulders of directors and officers of start-up companies, and would run against the principles of equity that must govern oppression remedies under the CBCA, by creating a new injustice.
Interestingly, the Québec Court of Appeal did however uphold the first instance judge’s conclusion that the founder was a “complainant” under the CBCA, despite the fact that she had not exercised her options to become a shareholder of the company. This was explained by the fact that the parties had always intended for the founder to be a minority shareholder, and that the option structure was put in place merely to avoid frightening potential future investors who may have been reluctant to invest in a company owned in part by someone having historically managed businesses in deficit. In such circumstances, the court ruled that the founder was the beneficial owner of shares of the company.