Executive Summary: Key Legal and Evidentiary Issues

• Whether the issuance of common shares to Blossom below market value constituted oppressive or unfairly prejudicial conduct

• Whether the applicant had a reasonable expectation that its shareholding would not be diluted below one-third

• The extent to which statutory voting rights under the OBCA can ground reasonable shareholder expectations

• The evidentiary burden on an applicant to prove reasonable expectations in oppression claims

• Whether the issuance of shares as part of a financing transaction to avoid insolvency was improper

• The appropriateness of an oppression remedy under section 248 of the OBCA based on the applicant’s shifting legal positions

Background of the dispute

E. Automotive Inc. held approximately 50 percent of the shares in Autocorp. AI Inc. Autocorp, a software company, was in significant financial distress. To avoid insolvency, it arranged for a $5 million investment from Blossom Street Ventures in exchange for preferred shares. The original version of the deal required amending Autocorp’s articles of incorporation, which would have needed two-thirds shareholder approval under section 168 of the Ontario Business Corporations Act (OBCA). E. Automotive, as a 50 percent shareholder opposed to the transaction, could block the approval.

To circumvent this obstacle, Autocorp’s sole director, Andrew Lemoine, modified the transaction structure. In December 2023, Autocorp issued 80,000 common shares to Blossom via warrants at a nominal price of $0.01 per share, diluting E. Automotive’s shareholding to 25 percent. This allowed the resolutions needed to approve the Blossom deal to pass in January 2024 despite E. Automotive’s opposition.

The applicant’s claim

E. Automotive brought an oppression application under section 248 of the OBCA, arguing that the share issuance was a deliberate and improper attempt to strip it of its voting power. It claimed that this action violated its reasonable expectations as a shareholder and sought to unwind the transaction.

The respondents’ position

Autocorp and Lemoine argued that the dilution was commercially necessary to save the company. They maintained that both founding shareholders, including E. Automotive, had always expected dilution would occur to attract investment. They also pointed out that the issued shares were part of a broader deal providing needed capital, not an isolated act to manipulate votes.

Court’s findings

The court applied the two-part test for oppression set out by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders. It found that E. Automotive failed to establish any clear or reasonable expectation that its shareholding would not be diluted below one-third. No shareholder agreement or evidence supported such an expectation. Further, while dilution of shareholder interest can constitute oppression in some contexts, in this case the transaction was part of an effort to save the business.

The court also rejected the argument that issuing shares below market value, on its own, constituted oppressive conduct. The evidence showed that the issuance was part of a legitimate financing transaction and not merely an attempt to rig a vote. The court noted that E. Automotive’s legal position shifted over time and that no consistent, credible expectation was established.

Conclusion

The court dismissed E. Automotive’s oppression application. It held that the dilution was neither oppressive nor unfairly prejudicial in light of the company’s financial circumstances and the absence of any proven shareholder expectation. The parties were encouraged to agree on costs; if not, the court would accept written submissions.