Executive Summary: Key Legal and Evidentiary Issues

• E. Automotive Inc. appealed the dismissal of its oppression application under s. 248 of the Ontario Business Corporations Act (OBCA), alleging that its shareholder interests were unlawfully undermined.
• Central to the dispute was Autocorp's issuance of warrants to Blossom Street Ventures, which diluted E. Automotive's shareholding to just below one-third without notice.
• The dilution was deliberately structured to give Lemoine and Blossom the two-thirds majority needed to pass a special resolution that E. Automotive had opposed.
• At issue was whether the application judge erred in law by requiring direct testimony of the appellant's reasonable expectations rather than allowing those expectations to be inferred from the evidentiary record.
• Statutory protections for minority shareholders under s. 168 of the OBCA — requiring a two-thirds special resolution for fundamental corporate changes — were found capable of grounding reasonable expectations.
• The Divisional Court found oppression, holding that secretly rigging a shareholder vote, even where the company needs financing, falls short of a director's duty to act fairly toward all stakeholders.

Facts of the case

Autocorp AI. Inc. is a software company incorporated in 2019, initially with two equal shareholders: E. Automotive Inc. and Andrew Lemoine, each holding 50,000 of Autocorp's 100,000 common shares. Lemoine also served as CEO and one of two directors. By 2023, Autocorp was in financial difficulty. In July 2023, the Canada Revenue Agency (CRA) moved to enforce a tax debt of approximately $1.6 million arising from Autocorp's unpaid payroll remittances, taking the position that both directors were personally liable. The other director resigned, leaving Lemoine as the sole director, and E. Automotive agreed to reduce the board to one director.

Lemoine advised E. Automotive that he was seeking additional financing and was concerned about his personal tax exposure. In August 2023, he presented the only available deal: a proposed investment by Blossom Street Ventures of $5 million in exchange for preferred shares at $7.21 per share, with a liquidity preference and the right to convert preferred shares to common shares on a 1:1 basis — terms that would have diluted both existing shareholders' proportional holdings. Because Autocorp's articles of incorporation did not contemplate preferred shares, an amendment was required, and under s. 168(5) of the OBCA, that amendment needed approval by shareholders holding at least two-thirds of the shares. E. Automotive opposed the transaction but signalled openness to a buyout.

Without notifying E. Automotive, Lemoine arranged for Autocorp to issue warrants to Blossom to acquire 80,000 common shares for one cent per share — a step that did not require a special resolution. Blossom exercised the warrants promptly, pushing E. Automotive's shareholding just below one-third. Together, Lemoine and Blossom now held the two-thirds interest required to pass a special resolution. E. Automotive was not informed of this newly structured transaction until Autocorp was required to give notice of a shareholders' meeting. In January 2024, Lemoine and Blossom passed the resolutions for the new Blossom transaction over E. Automotive's objection. It also came to light that the transaction permitted Autocorp to repurchase the 80,000 shares for the same nominal consideration once the $5 million was repaid or Blossom exercised its conversion rights, meaning Blossom was not entitled to retain those shares.

Statutory provisions and corporate governance at issue

The key provision was s. 168(5) of the OBCA, which requires shareholder approval by special resolution — that is, at least two-thirds of the voting shares — for amendments to a corporation's articles of incorporation. Section 168 falls within Part XIV of the OBCA, titled Fundamental Changes, a Part designed to protect non-majority shareholders. The two-part test for oppression under s. 248 of the OBCA, as established by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, requires a claimant to: (1) identify the expectations said to have been violated and establish that they were reasonably held; and (2) show that those reasonable expectations were violated by conduct that was oppressive, unfairly prejudicial to, or that unfairly disregarded the interests of the shareholder. Also relevant was s. 108 of the OBCA, relied upon by the respondents, which grants directors the right to manage the business and affairs of the corporation.

Reasoning and analysis

The application judge had dismissed E. Automotive's oppression application at the first stage of the BCE test, finding that E. Automotive had not established any reasonable expectation capable of grounding an oppression claim. The application judge characterised E. Automotive's shifting position as a "tactical change" and held that there was "no evidence" of the appellant's asserted expectation that the respondents would not trample on its statutory shareholder rights. He further held that s. 168 of the OBCA could not itself ground such an expectation, and that the share issuance was a business decision Lemoine was entitled to make to save Autocorp from insolvency.

The Divisional Court disagreed. It held that the application judge erred in law by requiring subjective testimony that precisely matched the appellant's expectation at the relevant time. The Court affirmed the well-established principle, drawn from BCE and the Court of Appeal's decision in Ernst & Young Inc. v. Essar Global Fund Limited, 2017 ONCA 1014, that evidence of a reasonable expectation may take many forms and that a stakeholder's reasonable expectation of fair treatment may be readily inferred — because fundamentally, all stakeholders are entitled to expect fair treatment. The Court also noted that direct testimony of expectations is not required, citing Ford Motor Company of Canada, Ltd. v. Ontario Municipal Employees Retirement Board (2006), 79 O.R. (3d) 81 (C.A.).

The Court found that the extensive record — including the structure of the proposed Blossom transaction, the communications between the parties, E. Automotive's objections, and the secret steps taken to reduce its shareholding — was more than sufficient to establish the appellant's reasonable expectations. The application judge had himself found, without dispute, that the respondents were attempting to dilute E. Automotive's shares to prevent it from blocking the Blossom deal. The Court further held that s. 168 of the OBCA, as part of the statutory framework protecting minority shareholders, was itself capable of grounding a reasonable expectation that a shareholder holding more than one-third of shares could block a transaction requiring a special resolution — and that this expectation necessarily included an expectation that the vote would not be rigged.

On the second stage of the BCE test, the Court found that the conduct clearly violated those reasonable expectations. Lemoine, who had a personal interest in obtaining the loan due to his potential tax liability, secretly structured a warrant issuance with Blossom to circumvent E. Automotive's objection — without proposing the newly structured transaction to E. Automotive as he had done with the initial Blossom proposal. The Court rejected the respondents' argument that the company's need for financing justified the conduct, holding that allowing vote-rigging whenever a company needs money would render meaningless the fairness principles that govern director conduct under the OBCA. The Court also rejected the application of criminal law consistency principles raised by the respondents, finding those cases inapplicable.

Ruling and overall outcome

The Divisional Court, per Matheson J. (with Corbett and Mew JJ. agreeing), allowed the appeal and found the transaction oppressive. E. Automotive Inc. was the successful party. The question of remedy — and the costs of the application below, which had been fixed on consent at $208,548.22 — was deferred, with both parties (and Blossom) directed to file written submissions on remedy and costs within 30 days, limited to fifteen pages per side. The costs of the appeal itself were noted to have been agreed upon by the parties and were also to be addressed together with the remedy determination. No final monetary award has yet been determined by the Court at this stage.