Greenlight, a New York-based hedge fund, invested in MI Developments (MID), a company that had been spun out of Magna International in August 2003. MID owns real estate that is leased to Magna entities, among others, and also holds a controlling interest in Magna Entertainment Corp. (MEC). MEC owns and operates horse-racing and gaming facilities. Both MID and MEC have dual-class share structures composed of single and multiple-voting shares. Greenlight held 10% of the single-vote Class A shares of MID. The majority of the multiple-voting Class B shares were owned by a holding company controlled by a Stronach family trust (the Stronach Trust).

MID expanded its real estate business in 2004 and 2005, but also engaged in transactions connected to MEC. MID convened a special committee of its board of directors to consider and assess such transactions. Greenlight complained about these transactions and instead proposed that MEC be spun out and MID be converted into a real-estate investment trust. After Greenlight's proposals were defeated at an MID shareholders' meeting as a result of the Stronach Trust's vote against the proposals, Greenlight sought an oppression remedy under s. 248 of the Ontario Business Corporations Act (the OBCA). Greenlight alleged that Stronach had unduly influenced MID and used it to fund his personal plans for MEC, that the special committee lacked independence, and that MID's corporate governance practices were poor.

In his reasons for judgment dismissing Greenlight's claims, Mr. Justice Ground provided a useful review of the law of oppression, which turns on whether the allegedly oppressive acts are contrary to the reasonable expectations of the applicant, determined objectively. This involves a two-step analysis: first, the subjective expectations of shareholders are to be ascertained, generally based on the company's conduct, representations and/or public statements; second, the court must analyze whether those expectations were reasonable, on an objective basis. The conduct of directors, committees and officers is relevant to determining whether they acted fairly in approving a transaction, and it is also relevant to consider whether they received independent legal and financial advice. It is not necessary to show that they acted in bad faith if the foreseeable result of their actions is oppressive to a minority of shareholders.

Justice Ground found that there was no evidence of undue influence by Stronach personally on MID regarding MEC to the detriment of minority shareholders. He had, in fact, properly abstained from voting on the proposed transactions, after declaring his interest. It was not improper for the Stronach-controlled holding company to vote down the Greenlight proposals where (as appeared to be the case here) there was an honest belief that they were not in the best interests of the corporation or shareholders generally. The special committee was found to be truly independent, and it was determined that both the special committee and MID's board had acted independently, arriving at their decisions based on their own business judgment and appropriate outside advice. Justice Ground held that there was no evidence of improper behaviour on the part of the special committee.

Justice Ground rejected Greenlight's contention that MID's decision to pursue racing and gaming investments was a marked departure from its stated industrial and commercial real-estate business strategy and the reasonable expectations of its shareholders and was therefore oppressive. On the evidence, MID had not acted contrary to any of its public statements or published business plans, and had never stated that it would not invest in racing and gaming assets. Justice Ground also found that the creation of a special committee to examine the proposed transactions did fall within reasonable shareholder expectations, and that these expectations were "inextricably intertwined" with the business judgment rule. The fact that the proposed transactions were recommended by the special committee and approved by the board with the proper exercise of their business judgment was crucial to the determination that MID had not diverted its core business strategy beyond the reasonable expectations of minority shareholders. Further, Greenlight bought its Class A shares knowing that there was a dual-class voting structure and that the Stronach Trust controlled the Class B shares (and therefore the direction of the company). The implementation of the Greenlight proposals could therefore not have been within Greenlight's reasonable expectations.

The judge also noted that while Greenlight did not necessarily have clean hands (it was alleged that it had engaged in improper conduct prior to its oppression complaint), such conduct does not disentitle a complainant from relief unless the improper conduct was the direct cause of the alleged oppressive conduct itself.

Greenlight has appealed the decision.

FOOTNOTE
1] [2006] O.J. No. 4353 (S.C.J.).