Fair Value and Oppression Decision - International Law Office

On January 22 2004, in Ford Motor Company of Canada, Limited v Ontario Municipal Employees Retirement Board, Justice Cumming of the Ontario Superior Court of Justice (Commercial List) found that Ford Motor Company of Canada, Limited had oppressed its minority shareholders and ordered it to pay more than the C$185 per share Ford Canada had offered dissenting shareholders upon the squeeze-out of public minority shareholders in September 1995.

A group of minority shareholders holding approximately 200,000 shares, including the Ontario Municipal Employees Retirement Board and Mackenzie Financial Corporation, dissented from the fair value offer made by Ford Canada in 1995 and brought a counterclaim against Ford Canada and its US parent, Ford Motor Company (Ford US), based on oppressive conduct. The issue in dispute both for the fair value and oppression issues was whether the 'transfer pricing' system through which Ford Canada and Ford US bought and sold automotive components, vehicles and assembly services in inter-related transactions between 1985 and 1995 unfairly benefited the majority shareholder, Ford US, at the expense of Ford Canada and the public minority shareholders.

Following a lengthy trial, involving numerous experts and voluminous documentary evidence, the court found that the transfer pricing system benefited Ford US, the majority shareholder, by approximately C$3 billion between 1985 and 1995, while depleting Ford Canada of those assets. The court held that the value of a Ford Canada share in the absence of the flawed transfer pricing system would have been between C$555 and C$610 per share, rather than the C$185 offered.

The court restricted recovery by those shareholders who did not bring an oppression counterclaim to a fair value of C$207 per share, on the basis that the transfer pricing losses of Ford Canada could be recovered only under the oppression remedy and not as a component of fair value. For the defendants, recovery on the oppression counterclaim was restricted to a maximum of C$52 per share in addition to the C$207 fair value amount, since the court held that the defendants ought to have discovered that the transfer pricing system was flawed by 1984, notwithstanding that Ford Canada's financial reports advised that prices between Ford Canada and Ford US were determined at arm's length. Consequently, only that portion of the losses caused by the improper transfer pricing system that fell within the six-year period prior to the oppression counterclaim could be recovered. The court also held that the defendants could only recover losses for the oppressive conduct for the period they held shares in Ford Canada, further limiting the recovery available.

The decision raises important issues with respect to the fairness of transfer pricing systems. In particular, it is clear that the courts will require that transactions between
inter-related parties be effected at arm's length, and that boards of directors of Canadian companies make diligent efforts to review the transfer pricing system in place to ensure that it is fair to the interests of the corporation and its minority shareholders. A failure to consider such issues could lead minority shareholders to seek relief through the oppression remedy, and to claim increased amounts in a fair value proceeding if a fundamental change takes place in the corporation.

The decision also raises interesting issues concerning the application of the fair value remedy in the context of unfair conduct that harms the corporation. Rather than award all shareholders the same fair value as shareholders at the time the oppressive conduct is discovered and the funds returned to the corporation, the effect of the decision is to limit recovery only to the oppression remedy for historical unfairness, and to require each shareholder to establish damages that arose during the time that he or she was a shareholder. The decision could lead to confusion as to the value of shares arising after a determination of unfair conduct has been made.

The decision also imposes a significant burden on investors, particularly sophisticated investors, to discover unfair conduct even in light of public pronouncements of corporations to the contrary. The effect of the decision is that if the consequences of an unfair transfer pricing system (or in theory, any oppressive conduct) are known, shareholders will be expected to inquire and determine as to the causes of those consequences, and uncover the true reason for such losses.

The decision is a significant victory for shareholders, who can now challenge inter-corporate transactions between Canadian corporations and their foreign parents. However, it imposes significant limitations on such claims. Those limitations will be the subject of an appeal by the defendants, who will seek the full fair value of their Ford Canada shares as found by the court, rather than the limited additional amounts ordered to be paid.

For further information on this topic please contact Christopher D Bredt at Borden Ladner Gervais LLP by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email (cbredt@blgcanada.com).