A Shareholder Can Sue For Wrongs Done To A Corporation ' An Exception To The Rule

• Published date: 26 August 2020
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Corporate and Company Law, Landlord & Tenant - Leases, Shareholders
• Law Firm: Pallett Valo LLP
• Author: Mr Daniel Waldman

A shareholder of a corporation cannot sue for wrongs done to the corporation. This has been the law since the UK House of Lords decision Foss v. Harbottle in 1843. Since a corporation is a separate legal entity, only the corporation can bring actions for wrongs committed against it. The rule also prevents multiple actions being brought by shareholders, since they are always indirectly harmed when a wrong is done to a corporation.

However, a recent decision from the Ontario Court of Appeal shows that this rule may have some narrow exceptions.

In Tran v. Bloorston Farms Ltd., 2020 ONCA 440, the plaintiff was the sole shareholder of a restaurant who sued her commercial landlord for the diminution in the value of her shares. In 2010, she had entered into an agreement with the previous property owner, which specified the rent and square footage of the leased premises (the "Agreement").

While the corporation that operated the restaurant was not a party to the Agreement, all parties knew that the restaurant would operate in the space. In 2014, the defendant landlord purchased the property and inherited the Agreement.

Shortly after it purchased the property, the landlord claimed the leased premises were larger than specified in the Agreement and demanded increased rent for space and property taxes. The plaintiff refused to pay the increased rent and continued to act in accordance with the Agreement. The landlord then changed the locks on the leased premises and the restaurant business had to close.

The plaintiff sued the landlord for damages from breach of the lease, claiming the lost value of her shares as a result of the restaurant closing. The corporation that operated the restaurant was also a plaintiff to the action.

The motion judge held that the corporation had no cause of action against the landlord since it was not a party to the Agreement, but granted summary judgement in favour of the plaintiff, holding that the increased and additional rents were unjustified. As a result, the plaintiff won damages for the lost value of her shares in the corporation.

The landlord appealed, claiming primarily that the rule in Foss v. Harbottle bars the plaintiff's claim for diminution in share value. The appeal was dismissed on the basis that Foss v. Harbottle rule did not apply in this situation. The Court held that the rule has limits, the two main ones being: (1) when both the shareholder and corporation have distinct causes of action; and (2) when the company...