Shareholders of corporations, particularly private corporations, may have limited visibility on how the directors and officers conduct the business of the corporation. Due to this limited visibility, improper financial transactions by those who control the day-to-day affairs of the corporation may go undetected for significant periods of time.
Under the Limitations Act in Alberta, a claim must be filed within 2 years of the day on which the claimant first knew, or ought to have known, that the injury for which the claimant seeks a remedial order had occurred.[1] This limitation period is triggered when the claimant, exercising reasonable diligence, should have discovered the facts on which the claim is based (also known as the “discoverability principle”).[2] In the context of a shareholder claim, the limitation period may commence when the shareholder received or ought to have received the corporation’s financial documents, or any notices that revealed financial wrongdoing.
However, section 118 of the Alberta Business Corporations Act (the “ABCA”) may also apply in these situations, potentially to the exclusion of the Limitations Act. Section 118 of the ABCA allows shareholders to make a claim related to wrongful corporate payments;[3] however, they must do so within two years of the date of the directors’ resolution that authorized the payment. Notably, Section 118 of the ABCA does not contain a provision to delay the commencement of the limitation period where a shareholder did not know, or could not have known, about the wrongful payment, nor has this provision been considered by the courts. It remains unclear whether the discoverability principle from the Limitations Act would apply in this context.
In some jurisdictions in the United States, the courts have adopted a doctrine of “adverse domination” to relieve potential unfairness caused by the application of limitation periods in circumstances where a corporation is controlled by a majority shareholder or shareholders who engage in wrongdoing. Under this doctrine, the limitation period is suspended while the corporation is under the control of the wrongdoers,[4] and it is only when the majority of the wrongdoers are no longer in control that the corporation notionally “discovers” the injury for the purpose of the limitation period. However, the theory of adverse domination has yet to be adopted in Canada.
TAKEAWAYS
Since there is a lack of parity of information between those running the business of a corporation and the shareholders of that corporation, it is important for shareholders to keep up to date on the affairs of the corporation despite not being directly involved. If a wrongful financial transaction is properly disclosed to all interested parties, the limitation period may begin to run, whether under section 118 of the ABCA or under the Limitations Act. If there is a potential claim arising from improper payments by the corporation, shareholders should bring forward a claim as soon as possible to avoid the expiration of the applicable limitation period.
Miller Thomson LLP is here to help with all of your business needs. If you have questions about shareholder rights or other corporate law matter, please contact a member of our Commercial Litigation team.
[1] Limitations Act, RSA 2000, c L-12, s 3(1).
[2] Kamloops (City) v Nielsens 1984 CanLII 21 (SCC), paras 36–37.
[3] Business Corporations Act R.S.A. 2000, c. B-9, s. 118
[4] Robert W Thompson, Scott T Jeffers and Codie L Chisholm, The Limits of Derivative Actions: The Application of Limitation Periods to Derivative Actions, 2012 49-3 Alberta Law Review 603, 2012 CanLIIDocs 171, https://canlii.ca/t/292k.
