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Business Law Commercial Litigation

Court Refuses to Order Winding Up of a Corporation

Operating a business necessitates not only understanding incorporation and the various corporate transactions that follow, but also requires contemplation of winding up, or dissolving, a corporation. This blog will provide a brief overview of the process of winding up a corporation in Ontario. It will also review a recent decision from the Ontario Superior Court of Justice, where the Court considered whether or not to permit the winding up of a corporation.

The Ontario Business Corporations Act: Winding Up Procedure

The Ontario Business Corporations Act (“OCBA”) governs the liquidation procedure of winding up a corporation. Under certain circumstances, such as insolvency, the corporation may be liquidated per the federal Winding-up and Restructuring Act (“WURA”) provisions. This blog, however, will focus on the voluntary liquidation procedure contained in the Ontario Business Corporations Act.

The Ontario Business Corporations Act permits shareholders to voluntarily liquidate a corporation by special resolution, the procedures of which are laid out in sections 193-205. Generally, the process calls for the appointment of one or more liquidators, who can be directors, officers, or employees of the corporation. Following the resolution, the corporation ceases its regular business operations and any subsequent share transfers require the approval of the liquidator. The liquidator assumes control of the corporation’s assets, selling them to settle debts and liabilities. After the liquidator completes asset disposal and debt settlement, a final shareholder meeting is called. The liquidator files a form with the director, publishes a notice in the Ontario Gazette, and, three months later, the corporation is dissolved unless a court order defers or accelerates the dissolution.

However, there is also the process of winding up by the courts. The court may wind up a corporation where it cannot continue with its business and it is advisable to have it wound up, even if it is not bankrupt. There is also a catch-all provision that allows a court to order a corporation to be wound up when “it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation.”

Company Founded in Blockchain Technology Company

In Srivastava v. DLT Global Inc., the Court considered the grounds of what may be considered “just and equitable” to wind up a corporation where there had been a falling out between the founders. The case involved an application by Mr. Srivastava, a shareholder, co-founder, former director and CTO of DLT Global, a blockchain business, for an order to wind up the business.

After several years of operating a company under a different name in the same space, Mr. Srivastava met Mr. Owen, who had experience growing blockchain businesses. The two entered into business and eventually incorporated DLT Global. The company went on to generate significant business and proprietary technology that was subject to patent applications. However, despite its initial success, the company began to lose money and the relationship between Mr. Srivastava and Mr. Owen broke down.

In the ensuing dispute, Mr. Srivastava claimed ownership of the source code based on his previous corporation’s business activities, which he claims DLT Global adopted. Mr. Owen denies that DLT Global is using intellectual property owned by Mr. Srivastava.

Court Considers Whether Winding Up the Business is Appropriate

Firstly, Mr. Srivastava claimed that DLT Global cannot, by reason of its liabilities, continue its business and it is advisable to wind it up. He submitted that the company was unable to pay a variety of expenses, had expenses in excess of $1.4M per month, and was involved in ongoing litigation. As a result, he claimed that the company would not be able to sustain operations through the next year and had no reasonable prospect of changing course.

The Court considered whether winding up was appropriate in these circumstances, especially where less restrictive options are available. The Court was persuaded by DLT Global’s evidence that it had raised $17M in the previous months and could fund its deficiencies for the time being. As such, the Court found that it was not established that DLT Global could not continue with its business and the Court declined to make an order under the section.

Mr. Srivastava also claimed that it was “just and equitable” to wind up the corporation because the “animating purpose” of the business (to grow his pre-existing business) had been lost. He also submitted that DLT Global was essentially a partnership between himself and Mr. Owen, and due to their dispute, the continuation of the business was not equitable.

Court Dismisses Application to Have Corporation Wound Up

Despite the Court’s finding that there had been a breakdown in the relationship, the Court refused to order a winding down of DLT Global. The Court rejected the submission that Mr. Srivastava and Mr. Owen were to operate the company effectively as partners and that DLT Global had failed to meet its reasonable expectations, which resulted in unfairness such that an order for winding up was just and equitable.

This case sheds light on the facts that the Court might consider when ordering a winding up of a corporation. It is clear that even if a company has a significant burn rate, funding necessary to maintain operations for the time being will often be enough to prevent court intervention. Depending on the facts, it may not be just and equitable to wind down a corporation where there has been a breakdown in the relationship of founders and shareholders.

Get Help with Corporate Liquidations

Purchasing or selling a business is a complicated matter that can result in significant risk and liability if not handled correctly. Corporate transactions involve a variety of legal issues to consider, from employment contracts to real estate matters. If you are a business owner considering a purchase, sale, merger, acquisition, or other transaction, having the right legal team behind you can help you ensure the best outcome.

Contact the Mississauga Corporate Lawyers at Bader Law for Advice on Winding Up a Corporation

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At Bader Law, we always provide advice that is in your best interests and the best interests of your venture. Our business law team considers the complete picture to identify and mitigate potential risks while protecting your business’ continued growth and success. Contact us online or at (289) 652-9092 to speak with a member of our team and learn how we can help you.

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Commercial Litigation

Precluding an Appeal in an Arbitration Agreement

In the dynamic and fast-paced world of commerce, disputes are an inevitable part of conducting business. Whether it is a contract disagreement, intellectual property conflict, or international trade dispute, finding a swift and effective resolution is crucial to maintaining healthy business relationships and ensuring the smooth functioning of the Canadian economy. Traditionally, litigation has been the go-to method for resolving commercial disputes, but in recent years, arbitration has emerged as a highly advantageous alternative. It is now common for many agreements to include a dispute resolution clause whereby any disputes are submitted to arbitration before litigation.

Despite their popularity, there are nuances to their use that business owners should understand, particularly regarding their appeal. Recent case law has emerged that has considered what language must be used when precluding an appeal of an award under an arbitration agreement.

What are Arbitration Agreements?

An arbitration agreement is a contractual provision that establishes arbitration as the preferred method for resolving disputes between parties. It is typically included as part of a larger contract, and it could consist of explicit language on the procedure of the parties and any associated timelines with submissions to an arbitrator. The arbitrator’s role is to hear the evidence and arguments presented by both sides and render a binding decision, known as an arbitration award.

If a party is unhappy with the arbitration award, it may appeal the decision per section 45(1) of Ontario’s Arbitration Act. This section allows for an appeal on a question of law, but only where the arbitration agreement is silent as to the availability of the appeal. In this case, the disputing party may only appeal with leave of the court, which shall be granted if:

“(a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and (b) determination of the question of law at issue will significantly affect the rights of the parties.”

In other words, there is a method to appeal an arbitration award, but the specific wording of the arbitration agreement is crucial in determining the availability of an appeal.

Parties Trigger Arbitration as a Result of Contract Termination

The operation of section 45 of the Arbitration Act was recently considered at the Ontario Court of Appeal in the case of Baffinland Iron Mines LP v. Tower-EBC G.P./S.E.N.C. The matter involved several Baffinland Iron Mines entities, mining corporations, as well as Tower-EBC, an earthworks company. In 2017, the two companies entered into two similar contracts to construct a railway to transport ore. The contracts were standard form and included provisions for an arbitration agreement.

The contracts included multiple dispute resolution methods, but the relevant process allowed the parties to refer the dispute to a Dispute Adjudication Board (which was not deemed arbitration), where the Board’s decisions could be “final and binding.” If the Board could not find an amicable solution, the dispute could be “finally settled” by arbitration.

In 2018, due to delays, Baffinland Iron Mines attempted to terminate the contracts. Tower-EBC filed a statement of claim challenging the right to cancel the contracts, which was the subject of the arbitration. Not long after, in 2020, the majority in the three-member arbitration panel awarded Tower-EBC an award exceeding $100 million. Baffinland sought leave to appeal the decision to the Superior Court under s.45(1) of the Arbitration Act.

Application Judge Dismisses Leave to Appeal

In the application, Baffinland argued that the inconsistent phrasing of “final and binding” and “finally settled” concerning two different steps in the dispute resolution mechanism entitled it to leave to appeal the arbitration award. It argued that since the “final and binding” language applied to the Board decision “that has been recognized to preclude appeals but used a different phrase – ‘finally settled’ − in relation to arbitration, the parties must have intended a different meaning for the latter.” The application judge considered these phrases to have the same meaning, which precluded an appeal. The application for leave to appeal was dismissed.

Baffinland then sought an appeal of the application judge’s denial of leave. In hearing this appeal, the Court of Appeal also weighed in on the substance of the wording.

The Operative Term is “Final”

As described by the Court, Baffinland argued that the application judge’s decision is subject to appellate review on the standard of correctness and is based on principles of contractual interpretation, one of which being the principle of consistent expression.

Consistent expression is the principle whereby it is presumed that language in a contract is used consistently. In light of the different wording, it was submitted that since “final and binding” was commonly used to preclude appeals, the term “finally settled” had a different meaning. The Court disagreed and noted a common word in both phrases – “final.” In this case, the presumption “pulls toward giving the word “final” or “finally” the same meaning.” Whether the word was used in combination with “binding” or “settled” was not material, as the word conveys the meaning of “admitting of no further disputation.” The Court found that in the context of the principle of consistent expression, the phrases had the same meaning of precluding an appeal.

The Court concluded that the application judge made no reversible error. As a result, leave to appeal was not available to Baffinland under the Arbitration Act.

This decision highlights the importance of carefully reviewing or drafting language for arbitration clauses. If a party wishes to be able to make an arbitration decision, the arbitration agreement must exclude any language that could preclude an appeal.

Contact Bader Law for Effective Advice and Representation in Business Disputes

The experienced corporate lawyers at Bader Law help businesses navigate the complexities of corporate law in Ontario. Our lawyers help clients mitigate risk and future disputes by conceptualizing and drafting dispute resolution mechanisms that accurately match the business’s needs. Our knowledgeable corporate team works to create unique legal solutions to help clients obtain their desired outcomes in matters such as corporate financing and information technology law. Located in Mississauga, our firm proudly serves clients throughout the Greater Toronto area. To schedule a confidential consultation, contact us at 289-652-9092 or reach out to us online.

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Commercial Litigation

Can the Limitations Act Prevent the Production of Audited Financial Statements?

There is a long list of procedural requirements that any director and shareholder must be aware of with respect to the administration of a corporation, such as the requirement to appoint and carry out audits of a corporation’s financial statements. It is a statutory mandate in Ontario, and in a recent case before the Superior Court of Justice, this requirement was the subject of a dispute between equal shareholders of a house-flipping business. In this matter, the Court considered whether exemptions applied and whether there were limitations issues for the appointment of an auditor.

Statutory Audit Requirements Under the Ontario Business Corporations Act

The statutory audit requirements for a corporation in Ontario are established under the Ontario Business Corporations Act and various accounting and auditing standards. Sections 149-154 of the Ontario Business Corporations Act require a corporation to appoint an independent auditor of the corporation on an annual basis. However, section 148 allows the corporation to be exempt from these requirements if the corporation is a “non-offering” corporation and all shareholders consent to exemption for that reporting year. A non-offering corporation does not issue or offer its securities (such as stocks or bonds) to the general public or external investors.

In the case that a shareholder has not exempted the corporation from appointing an auditor, section 253(1) of the Ontario Business Corporations Act can enable a shareholder to “apply to the court for an order directing the corporation or any person to comply with, or restraining the corporation or any person from acting in breach of, any provisions thereof, and upon such application the court may so order and make further order it thinks fit.”

Applicant Requests Audit of Financial Statements from Incorporation

In the decision of Lagana v. 2324965 Ontario Inc., a shareholder brought an application under section 253(1) to compel a corporation to comply with the Ontario Business Corporations Act by appointing an auditor and providing audited financial statements.

In April 2012, Carmela Lagana Sr., the applicant’s father, and David Power, the respondent, incorporated 2324965 Ontario Inc., for the purpose of flipping houses. They also entered a shareholder agreement and were equal shareholders. Not long after this, Carmela Lagana Sr. died and the shares passed on to his wife.

Carmelo Lagana, the applicant, subsequently purchased the shares. The applicant entered into an agreement with the respondent and the corporation agreeing to be bound by the terms of the original shareholder’s agreement, which did not include any provisions regarding the appointment of an auditor.

Respondent Claims that Request for Auditor is Statute-Barred

Between 2013 to 2020, multiple properties were purchased and sold through the corporation. The division of labour was such that the applicant was responsible for the substantive house-flipping work, while the respondent was responsible for the corporation’s finances. As such, the applicant started to request financial information around 2019. None were provided, except for the 2021 fiscal year, in which the respondent claims to have provided some financial statements.

The respondent agreed that the corporation was required to produce financial statements and appoint an auditor but assumed that these obligations only begin in the fiscal year 2020. Primarily, the respondent argued that the applicant was estopped from requesting an auditor as they had not made the request before, and further, the request is statute-barred for the fiscal years before 2020 due to the operation of the Limitations Act.

The applicant argued that an auditor must be appointed to audit financial statements dating back to 2013 because the corporation is statutorily required to appoint an auditor unless the shareholders consent to non-appointment for that fiscal year.

Court Orders Appointment of Auditor

The Court ordered the corporation to comply with the Ontario Business Corporations Act and indicated that an auditor must be appointed and audited financial statements must be produced from 2013 onwards.

In its analysis, the Court first considered the exemption and estoppel argument. In doing so, the Court relied on various case law, notably Packall Packaging Inc. v. Ciszewski, and Barbour v. Jamestown Lumber Co., to reiterate the principle that a shareholder’s right to information is a “mandatory right” and it is not necessary to exercise any right under the Ontario Business Corporations Act. The Court also disagreed with the respondents on the submission that the Court had the discretion to exempt compliance with the Ontario Business Corporations Act, noting that the case law used to support this argument was determined in the context of oppression, which was irrelevant to this case.

Moving on to the limitations argument, the Court also disagreed with the respondents. The Court considered Middlesex Standard Condominium Corp. No. 643 v. Prosperity Homes Ltd., which dealt with the issue of whether a statutory entitlement under the Condominium Act could constitute a “claim” under the Limitations Act. In that case, the Court found that it was not a claim as no remedy was sought in the traditional sense; it was a requirement under the respective legislation. Therefore, in this case, the Court found that compliance with the Ontario Business Corporations Act is not a “claim”; it is an entitlement, and no broader relief was sought, so the application is not statute-barred.

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Cannabis Industry Commercial Litigation Shareholder Agreements & Disputes

Leave Granted for Action Against Cannabis Manufacturer

In a new business, it is nearly inevitable that mistakes will be made. As it relates to reporting, mere calculation errors happen all the time. However, when a company is operating as a reporting issuer, these errors can potentially lead to losses for its shareholders. It is important when operating any business to ensure that all documents being released to stakeholders accurately reflect the company’s position. If the documents are incorrect it may lead to shareholder disputes.

Class action involved a cannabis corporation that performed several exchange transactions with third party

The dispute in Badesha v Cronos Group Inc revolved around the eligibility of shareholders to bring an action based on misrepresentations against Cronos Group Inc. The shareholder who brought the action, Badesha, alleged that Cronos’s public filings in 2019 contained nearly 7,500 separate misrepresentations. When the alleged misrepresentations occurred, the price of Cronos’s shares dropped.

Cronos focuses on “the cultivation, manufacturing and marketing of cannabis and cannabis-derived products for medical and recreational purposes.” Its products are sold in Canada and in countries abroad where cannabis is legal. In March 2019, Cronos had two transactions with a third party where Cronos supplied cannabis dry flower in exchange for cannabis resin. Cronos reported revenue for these two exchange transactions at the end of Q1, ending March 31, 2019, as well as Q2, on August 8, 2019.

In September 2019, another exchange transaction took place between Cronos and a third party. Once again, the cannabis company reported the revenue from these transactions for Q3 on November 12, 2019.

Cannabis corporation updated its financial statements to exclude millions from previously reported revenue

In February 2020, Cronos announced that it had to delay its 2019 Q4 financial statements. In a press release in March 2020, it was stated that “Cronos was unable to complete the report on time due to several bulk resin purchases and sales of products through the wholesale channel and the appropriateness of revenue from those transactions.” Cronos’s share price subsequently dropped 8.10%. The same month, another press release was issued stating that the unaudited financial statements from Q1, Q2, and Q3 from 2019 were to be reissued and restated. After this disclosure, the share price dropped an additional 8.40%, and then a further 13.46% days later.

The company sought to reduce the reported revenue for Q1 and Q3 by $2.5 million and $5.1 million, respectively. By the end of March 2020, Cronos had released restated documents for Q1, Q2, and Q3 of 2019. In its 2019 Management Discussion and Analysis, it explained the weaknesses within its internal controls with regard to financial reporting. This document also outlined measures the company intended to adopt to remedy the identified shortcomings. After this disclosure, the share price dropped yet again by 10.24%.

Shareholder alleges cannabis corporation felt pressure to inflate revenues

One of Cronos’s shareholders filed a statement of claim to bring a class action on behalf of all shareholders who held shares during the relevant period. The key shareholder, Badesha, alleged that Cronos “orchestrated a scheme to inflate its reported revenue figures” due to pressure to show increased revenue and sustainable growth. 

In the quest for inflating revenues, Badesha’s claim alleged that Cronos failed to account for the inventory transferred in the transactions when reporting revenue for 2019 Q1 and 2019 Q3. The claim attributed these failings to a series of nearly 7,500 misrepresentations made by the company.

The motion judge denied leave to proceed with the claim

At the initial hearing before the motion judge, Badesha’s claim was denied for two reasons. First, Badesha had not shown that each alleged misrepresentation was a material contributor to the decrease in share price. Instead, the motion judge attributed the drop to the COVID-19 pandemic. Second, the motion judge held that there was no cause of action because none of the alleged misrepresentations were made by the individual defendants.

The appeal of this decision was heard by the Ontario Court of Appeal. Unlike the motion judge, the Ontario Court of Appeal found that there was a “reasonable possibility of success” in Badesha’s claim.

The motion judge erred in dismissing the claim based on technical grounds

The Court of Appeal considered the test for obtaining leave under the Securities Act. Under the Act, any person or company who acquires or gets rid of an issuer of shares in a specified time period after a misrepresentation occurs, has a right of action. 

In the case where multiple misrepresentations are similar, they can all be treated as a single misrepresentation. Therefore, the Court found that the motion judge erred by requiring that every single alleged misrepresentation (nearly 7,500) needs to be explicitly held to have contributed to the drop in share price.

Whether the misrepresentations were to be treated as separate misrepresentations or as a single misrepresentation was not a decision of the motion judge to make. Rather, it is an issue for trial. However, the motion judge should have conducted its analysis as if the claim were based on a single misrepresentation as well. 

The Court of Appeal explained, “The…test is about weeding out unmeritorious claims. It is not about dismissing potentially valid claims on technical grounds.” The Court then applied the test to determine whether leave could be granted to move forward with the action.

The motion judge’s assessment was tainted by his error

The Court of Appeal determined that if the motion judge assessed the claim properly, he would have determined that “there is a reasonable possibility that [Badesha] will succeed in the action.” Although there is a requirement for the Court of Appeal to show deference to the motion judge’s assessment, in this case, the assessment had been affected by the motion judge’s understanding of the claim, resulting in a flawed discussion about his view of the pleading. The determination did not touch on whether the evidence demonstrated that leave should be granted. 

The appeal was allowed and the Court of Appeal granted leave to proceed with the misrepresentation action under the Securities Act. The Ontario Superior Court of Justice will decide on the matter of whether the action qualifies as a class proceeding.

Contact the Bader Law in Mississauga for Support with Your Cannabis Enterprise 

Bader Law helps businesses navigate the complexities of the cannabis industry in Ontario. Our knowledgeable business lawyers assist clients in obtaining Retail Store Authorizations and ensuring ongoing compliance with the shifting changes in cannabis regulation. We create dynamic, creative legal solutions for cannabis newbies and experienced operators. We also represent clients with corporate financing and information technology law, amongst other areas. Our firm proudly serves clients in Mississauga and throughout the Greater Toronto area. To schedule a consultation, call us at 289-652-9092 or reach out online.

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Business Law Commercial Litigation

Cineplex Awarded $1.23 billion in Damages for Failed Cineworld Acquisition

The COVID-19 pandemic has impacted businesses around the world, big and small. The proposed acquisition of Cineplex by Cineworld was intended to facilitate the creation of one of the largest global cinema chains upon deal completion. The deal was originally scheduled to close in June of 2020. The subsequent legal challenges and financial penalties incurred by Cineworld by repudiating its agreement to acquire Cineplex are described below.

Cineworld sought to terminate Cineplex acquisition after COVID-19 shutdowns

Cineworld and Cineplex entered into an agreement on December 15, 2019. According to the terms of the agreement, Cineworld would acquire all the shares of Cineplex for $34 per share, which represented a 42% premium to the market price of the shares at the time. The deal was to be completed through a plan of arrangement pursuant to s. 182 of the Ontario Business Corporations Act.

The parties moved quickly, obtaining nearly all requisite regulatory approvals, financing, and making other arrangements in short order. The only thing outstanding at the beginning of March was obtaining approval for the transaction under the Investment Canada Act (“ICA”).

After a flurry of government shutdown orders following the World Health Organization’s declaration of a pandemic on March 11, 2020, both chains were forced to close. On March 16, 2020, Cineplex was forced to shut down all its theatres. On March 17, 2020, Cineworld was forced to do the same.

In the background, and against the backdrop of a global pandemic, there was evidence presented at trial that made it clear that Cineworld was attempting to back out of the acquisition as early as March or April of 2020. Finally, in June of 2020, Cineworld refused to close and withdrew its application seeking ICA Approval.

Cineplex sued on the basis of inability to seek specific performance

Cineworld sought to terminate the acquisition deal, relying on a Material Adverse Event (“MAE”) clause that was contained in the deal agreement. It cited the COVID-19 pandemic as an MAE that allowed it to terminate the agreement. Essentially, Cineworld argued that by shutting down during the pandemic, Cineplex breached its covenants in the agreement – in particular, the covenant to operate in the ordinary course of business between the date of the agreement and closing. 

Cineplex sued Cineworld, alleging that once Cineworld withdrew its application for ICA approval, Cineplex was unable to seek specific performance.  Cineplex stated that Cineworld had no basis for terminating the agreement and that its notice was a repudiation of the agreement.  Cineplex sought damages for breach of contract in the range of $1 billion. 

Managing risks before the closure of a deal

The hearing centred on the interpretation of the Material Adverse Event clause contained in the agreement and an alleged breach of operating covenants by Cineplex. Cineworld argued that Cineplex had breached its operating covenant by relying on deferred payments to suppliers, film studios and landlords and reduced capital expenditures to reduce its obligations under the $725 million debt ceiling covenant that was outlined in the agreement.

In mergers and acquisition agreements where there is a period of delay between signing and closing, the parties typically address the problems posed by that delay in two ways.  The first is through the MAE clauses, and the second is through interim covenants.

Material Adverse Event Clauses

Justice Conway of the Ontario Superior Court disagreed with the position taken by Cineworld and held that Cineworld could not refuse to close the deal on this basis, nor could it walk away.

The court found that the MAE clause squarely addressed the risk of a pandemic and allocated that systemic risk to the buyer, Cineworld. The definition of MAE explicitly excluded “outbreaks of illness”, and therefore, Cineworld could not refuse to close.

Interim Covenants

Under the agreement, Cineplex agreed to maintain its debt obligations below $725 million. Cineworld alleged that the manner in which Cineplex complied with that covenant was improper. However, Justice Conway disagreed, finding that Cineplex was trying to preserve and manage its cash flow during this period of economic uncertainty and held that “the decision to defer payables and restrict spending . . . was made in the context of the very real concerns about COVID-19 and the reality of its impact on the Cineplex business”.

Lost synergies as a source of damages

In the end, the court awarded damages to Cineplex in the amount of $1.236 billion in lost synergies (financial benefits) and $5.5 million in transactional costs.

The decision presents the first major insight into how the COVID-19 pandemic impacts business acquisitions and provides significant guidance to businesses and their counsel as they navigate the post-pandemic world.

Contact Bader Law for Advice on Corporate Acquisitions

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