By Theodore Goloff, from our Labour and Employment Law Group
Contrary to the old adage, not all is fair in love and economic war.
In Raymond Chabot Grant Thornton c. Bourgeois, 2021 QCCS 237, the Superior Court has provided fresh perspectives regarding both what constitutes “unfair competition” and the possible responsibility that shareholders — even those shareholders who are not directors — might bear for the actionable wrongs of a corporate entity that engages in egregious unfair competition.
Even though this is a preliminary judgment, the Court sounds a number of very insightful warning bells that wise businesspeople and employers should heed.
An office party with an unusual sequel
The facts are quite simple. The accounting firm Raymond Chabot Grant Thornton [RCGT] operates an office in Saint-Hyacinthe. On a Friday night in September 2018, after a day of volunteering work, the office’s employees are having a drink in a local bar. One person, the sole partner of the firm, announces her resignation. Within an hour, a partner from Mallette, a competitor accounting firm, shows up at the bar and invites all those present to join his firm.
The very next Monday, at 5 p.m., after signing employment contracts with Mallette inc., 18 of the 22 employees of RCGT’s Saint-Hyacinthe office file their resignation letters. Understandably, numerous clients follow, and the branch’s activities are severely affected.
RCGT reacts by filing a claim for damages and an injunction. The defendants include the RCGT employees who abandoned the firm, Mallette inc. who hired the ex-employees, but also Mallette LLP, a limited liability partnership that is a shareholder of Mallette inc.
The employment law issues
An employer who recruits key employees or the bulk of the employees of a competitor, inviting them to leave their employer en masse, without notice, intending to cripple or at least very seriously hamper that competitor’s economic activities, may face serious liability for extra-contractual fault.
The Court endorsed the proposition that: “disorganizing a rival business is a fault likely to engage the party’s extracontractual liability” [par 29; our translations]. As examples of such problematic behavior the Court cites: “poaching a competitor’s personnel or massively hiring its employees, hijacking files” [Ibid].
Article 2091 of the Civil Code of Québec requires both employee and employer to provide the other party with reasonable notice prior to ending an employment relationship. When a new employer endorses or supports the en masse resignation of a group of employees from an ex-employer, without their providing any notice, in order to divert the clientele of the ex-employer to his profit and advantage, such behavior could constitute extra-contractual fault.
Courts can and will sanction conduct which they find to be reprehensible by awarding damages or issuing injunctive orders. If the new employer profits from the violation by the ex-employees of their legal obligations of confidentiality and discretion owed to their previous employer by making use of information that become known to the new employer only through this violation, the actionable wrong becomes even more egregious and costly.
The second warning bell revolves around a basic concept of corporate law: a corporation’s debts are not its shareholders’. The corporation’s coffers may be empty: its creditors have no right over its shareholders’ assets to enforce their claims. However, under special circumstances, this separation of assets can be set aside: this is what is referred as “lifting the corporate veil”.
The decision is interesting in that it confirms that shareholders of a corporation could be held liable for the corporation’s wrongdoing even without lifting the corporate veil. In this case, the entity engaging in the alleged egregious “unfair competition”, Mallette Inc., a corporate entity, was sued together with one of its principal shareholders Mallette LLP. The question then arose whether this shareholder’s liability could be attracted and engaged in circumstances which do not satisfy the rigid criteria for lifting the corporate veil.
In this case, the Court found that as it was alleged that the shareholder had been active in or complicit in the conduct complained of, then the shareholder, like the directors of the corporate entity, might make themselves liable for the resulting damages.
The distinction between a corporate entity and its shareholders is real. They are in law separate persons. But there are limits to using this separate legal personality as a shield to protect shareholders who direct, participate in, are complicit in or endorse actionable conduct by the corporate entity, even when the strict rules that govern lifting the corporate veil are not satisfied.
As said in the beginning, this was a preliminary judgment: the Court did not decide on the merits of the case. It ruled on a motion to quash the proceedings and only had to decide whether the allegations, if true, could allow a Court after trial to grant the relief requested.
The Court left open for the trial on the merits the issue of whether or not the provisions that govern limited liability partnerships could be invoked to further support the extra-contractual liability of Mallette LLP. As noted above, Mallette LLP, a limited liability partnership, was a shareholder — indeed, not even the majority shareholder of Mallette Inc. The takeaway from this is that the rules that govern LLPs create both rights and obligations but do not insulate the various partners from any and all civil liability.
In the end, the wise businessman stays informed of the ever-changing rules of “fair competition” and seeks to abide by them.
Seeking advice from competent professionals in these respects is not only prudent conduct, it may well be a business imperative!