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Intercorporate Transactions May be Oppressive.

Article Excerpt
An unfair intercorporate transfer price system in place between Ford Motor Company of Canada and its US parent, Ford Motor Company, oppressed Ford Canada's minority shareholders, the Ontario Court of Appeal ruled in early 2006.1 However, because there was no evidence as to when these shareholders owned their shares, they were each entitled to only one day's damages.

The court's decision is replete with lessons for parent companies of non-wholly-owned subsidiaries, including:

Treating a partly-owned subsidiary as though it were wholly-owned may be oppressive toward minority shareholders of the subsidiary.

Intercorporate transactions should be on the same basis as the subsidiary would negotiate if it were a truly independent entity.

Disparity in profitability between a parent and a subsidiary can lead to a finding that intercorporate transactions are unfair, and thus oppressive, toward minority shareholders of the subsidiary.

The subsidiary's managers have a duty to apply business judgment to, and negotiate, intercorporate transactions; they cannot simply take the terms imposed by the parent.

It may even be oppressive not to change the way in which a parent and a subsidiary do business with one another in response to changing economic circumstances.

As well, this decision establishes potentially far-reaching principles relevant to oppression claims involving any public company:

The court will presume that shareholders of public companies have certain reasonable expectations about how the business of the company will be carried out.

Statements in financial statements and annual reports can give rise to reasonable expectations by shareholders and, if untrue, found an action in oppression.

A public company that does not meet general "shared expectations about the way in which a public company should be run" may be liable for oppression.

A shareholder cannot obtain a remedy for oppression that occurred before the shareholder became a shareholder.

The court will not adjust a valuation to account for historical oppression. However, the valuation will include a...