An Ontario shareholder has won the right to sue company directors on behalf of two businesses after alleging the directors paid themselves “extravagant, unreasonable and unfair sums in salaries and fees” while revenues plummeted by up to 60% over a decade.
The Superior Court of Justice granted leave for a derivative action to proceed against three directors of Cen-Ta Real Estate and Plum Financial Planning, two closely held companies where the shareholder owns minority stakes of 45% and 49.5% respectively.
The proposed lawsuit seeks $1.5 million in damages and asks the court to set limits on future director compensation.
Compensation consumed most of declining revenue
The case centres on stark financial data. Cen-Ta’s gross revenue fell from $1.36 million in 2014 to $768,395 in 2023. Plum’s revenue dropped from $523,764 to $207,219 over the same period.
Despite these declines, director compensation remained high. Over fiscal years 2022 and 2023, the directors withdrew $1,694,390 from the companies. That amount represented 76.2% of the companies’ revenues and 73.6% of their expenses. Together, the companies lost $79,859 during those two years.
Neither company has paid dividends to shareholders in 10 years or issued bonuses since 2017.
Directors fought the lawsuit
The three directors opposed the action, arguing the shareholder was acting in bad faith and trying to offload litigation costs onto struggling companies. They pointed out he has been pursuing a separate oppression remedy action against them since 2021 over similar allegations.
The directors also noted the shareholder continued receiving $50,000 annual compensation for three years after he stopped providing services and was removed as a director in 2020.
Court found good faith despite concerns
The court sided with the shareholder on whether he was acting in good faith. “I cannot say that the remedies sought in the derivative action only benefit the complainant to the exclusion of the company,” the court found.
The court noted that “the primary purpose must be to benefit the company” and found the evidence supported an arguable case that director compensation was excessive given the financial decline.
The court accepted the shareholder’s explanation that he was not aware of the option to bring a derivative claim until he retained new counsel. “I do not find that the applicant’s own conduct undermines a finding of good faith,” the court stated.
Separate claims for different harms
The court distinguished between the two legal proceedings. The oppression action addresses personal harm to the shareholder, including a request that directors buy out his shares. The derivative action seeks to recover money for the companies themselves.
“A director’s fiduciary duty is to the corporation, which does not directly impact the interests of an individual shareholder,” the court noted.
The court rejected concerns about duplicate litigation, finding that “proceeding with both the derivative and oppression actions would not entail costly inefficiencies or risk inconsistent findings that would compromise the best interests of the companies, if the actions are consolidated or heard together.”
Limitations period narrows scope
The court ruled that only alleged overcompensation from 2022 and 2023 falls within the two-year limitation period. Claims for earlier years are barred.
The court expressed skepticism about one requested remedy. “I question whether this has any validity as this would entail the court intruding on how private companies pay their officers/directors,” the court stated regarding the request for court-ordered limits on future compensation.
No expert report on reasonable compensation for directors has been filed.
Cost-sharing ordered
The court ordered that legal costs for the derivative action be split equally between the shareholder and the companies.
“In this manner no [one] has a ‘free ride in the litigation,'” the court stated. “The lawsuit has potential benefits for both. This proportion may be re-adjusted at trial on the basis of the eventual outcome of the lawsuit.”
Background of the dispute
The shareholder purchased his stakes in 2013 for $1 million on advice from one of the directors, who was then his financial advisor. A share purchase agreement set one director’s salary at $350,000 plus benefits.
Disagreements over company management began in 2017. The shareholder was removed as a director in 2020 but continued receiving compensation until 2023.
The directors attribute revenue declines to factors including the departure of another shareholder in 2016, older investors selling properties, and damage from the ongoing litigation. They have counterclaimed for return of compensation the shareholder received after he stopped working.
The court emphasized that requirements for derivative actions “are to be given a liberal interpretation in favour of the complainant because the provision is remedial and is set out in broad and permissive terms.”
The oppression action has been ongoing for four years, with cross-examinations completed and further discoveries scheduled.
For more information, see Clark v. Cen-Ta Real Estate Ltd et al, 2025 ONSC 5759 (CanLII).
