Category: Shareholder Agreements & Disputes

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Business Law Shareholder Agreements & Disputes

Owning a Business and Share Capital

photo of shareholder looking at stock rates on phone and laptop representing shareholder rights

Owning a business can be a complicated venture, and understanding how shares work is essential to any business’s success. Shares are not merely financial instruments; they represent a stake in ownership, a vote in decision-making, and a potential source of capital. This blog will act as a guide to understanding the fundamental workings of shares in Ontario business law.

Shares as a Legal Mechanism

First and foremost, shares are the legal representation of an ownership interest in a corporation. Each share is a fractional part of the ownership interest in the corporation. A share certificate evidences the ownership of a share. Depending on the type of share and the rights associated with such shares, a share can confer rights on the shareholder, which can include:

  • a right to a dividend,
  • voting rights for any actions that the corporation may make, or
  • a right to a share of the assets of the corporation upon a winding-up.

Per the Canada Business Corporations Act (CBCA) and the Ontario Business Corporations Act (OBCA), a shareholder also has the right to:

  • receive notices of meetings of shareholders, if entitled to voting rights;
  • receive information about the corporation, such as annual audited financial statements and minutes for meetings of shareholders; and
  • vote on the winding-up and dissolution of the corporation.

The legislation divides shares into “authorized capital” and “issued capital.” Authorized capital refers to the maximum number of shares a company can issue. The Ontario Business Corporations Act requires that any maximum issuance of shares is recorded in the articles of incorporation, along with the conditions that attach to each class of shares if there is more than one. Issued capital is the portion of the authorized capital the company has issued and sold to shareholders. The Ontario Business Corporations Act requires that shares are fully paid for before being issued.

Classes of Shares

The corporation may have one class of shares or multiple classes of shares.

If the corporation has one class of shares (typically known as common shares), the Ontario Business Corporations Act requires that such shares must rank equally and that all rights prescribed for such shares will be applied to all issued shares (otherwise known as shares ranking pari passu). The legislation requires that these rights include the right to vote at all shareholders’ meetings and to receive property upon the dissolution of the corporation.

If the corporation has more than one class of shares, the Ontario Business Corporations Act requires that the specific rights and obligations attaching to a class be set out in the articles of incorporation. The rights described above can be allocated among one class of shares or another. For example, one class may have the right to vote at a meeting of shareholders, while another class has the right to the corporation’s property upon dissolution.

It is important to review the articles and the legislation to determine whether there are multiple classes of shares and the specific rights assigned to each.

Stated Capital Account

According to the Ontario Business Corporations Act, every corporation must maintain a stated capital account, which is an accounting record of the money it received for issuing shares for each class. If shares are issued for other types of consideration, such as property or past services, the corporation’s directors must determine the amount of money the corporation would have received if the corporation received money for those shares and the value of the property or past services. This amount must then be added to the stated capital account.

The director of a corporation must be familiar with these requirements when issuing shares in a corporation.

Paid-Up Capital

“Paid-up capital” is the source of much confusion when determining the tax consequences on the corporation when issuing capital. In accordance with the Income Tax Act, paid-up capital is an amount of money a corporation may return to its shareholders free of income tax. In simple terms, paid-up capital refers to the total amount of money that a company’s shareholders have paid for the shares they own. For example, if a company issues 1,000 shares at $10 per share, and shareholders buy all those shares, the paid-up capital would be $10,000. This is the actual money that the company has received from its shareholders in exchange for the shares they hold.

However, paid-up capital can have tax consequences. For example, on a purchase of a share for cancellation, the amount paid by a corporation to a shareholder for the purchase in excess of the paid-up capital of that share is treated as a deemed dividend, which is generally taxed at a higher level.

Contact Bader Law in Mississauga for Advice on Shareholder Matters

The intersection of share ownership and income tax is one of the most critical aspects of understanding how shares work, especially if the issuing corporation is public. The business law team at Bader Law provides comprehensive business organization advice to our clients, including share purchase options, buy-sell arrangements, corporate reorganization and restructuring, and shareholder disputes. We work with our clients to help them determine what legal structure is best suited for their needs in order to reduce liability and maximize income. To speak with one of our lawyers about your business needs, contact us online or call us at 289-652-9092.

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Business Law Shareholder Agreements & Disputes

Court Turns Down Presumption of Lost Opportunity Damages

Contracts serve as the bedrock of business relationships, especially for business shareholdings, ensuring that parties fulfill their obligations. When one party fails to uphold their end of the bargain, it can lead to significant consequences and potential litigation. This is where the concept of breach of contract comes into play, and having an understanding of the available remedies can be crucial.

In many cases, the harm caused is relatively straightforward, as the innocent party is often entitled to any combination of compensatory damages, specific performance, and injunctive relief. However, there are also cases where harm is more abstract, such as when a party breaches the duty of honest performance. In these cases, the innocent party may be entitled to damages for loss of opportunity. This blog post will provide an overview of the availability of these damages in light of recent case law decided by the Ontario Court of Appeal.

Legal Principle: Loss of Opportunity

Damages for loss of opportunity is a legal principle that allows a party to claim damages based on the loss of a specific opportunity that resulted from a breach of contract or wrongful act. It recognizes that certain breaches or wrongful acts can deprive a party of a valuable opportunity, and the injured party should be compensated for the lost chance or potential benefit.

In the decision of M. Callow Inc. v. Zollinger, the Supreme Court of Canada held that where a duty of honesty is breached, it can attract damages for loss of opportunity. However, it is important to note that the dishonesty complained of in the case was directly linked to the performance of the contract, where the lost opportunity flowed from the conduct of the infringing party.

In a recent case before the Ontario Court of Appeal, the appellants asserted that the above ruling created a legal presumption of loss where there was a breach of the duty of honesty.

Company Missed Revenue Target after Late Deal Close

The case of Bhatnagar v. Cresco Labs Inc. involved the appellants, Boris Giller, Ashutosh Jha, and Gopal Bhatnagar, who were the founders of a company conducting business as 180 Smoke, which is a retailer, wholesaler, and manufacturer of vape products. In 2019, the founders sold 180 Smoke in accordance with a share purchase agreement for $25 million to a company operating as Origin House. Per the share purchase agreement, the appellants could earn an additional $15 million if 180 Smoke achieved certain revenue milestones and $2.5 million if they acquired a cannabis licence.

Later that same year, Origin House announced that it was going to be bought out by Cresco Labs Inc. The transaction was intended to close before the end of 2019. However, it was delayed until January 8, 2020, due to poor market conditions and difficulties securing financing. In the meantime, there was little chance 180 Smoke would reach its revenue target. As a result of the late closing, Origin House only paid the appellants a portion of the amount owed under the share purchase agreement, representing the 2020 and 2021 revenue payments.

Application Judge Finds Duty of Honesty Breached; No Damages Awarded

The appellants brought an application for the 2019 payment and the cannabis licence, claiming that they missed the revenue payments due to the breaches of the share purchase agreement by Origin House, amongst those being a breach of the duty of honesty.

The judge found that Origin House had breached this duty as a result of its “failure to advise the appellants that Cresco Labs Inc. intended to delay the closing of the deal to January 8, 2020, after having advised the Appellants on numerous occasions that the closing was expected to occur in 2019.” Nevertheless, the judge did not award damages since there was little chance that 180 Smoke would meet its revenue target or force the Cresco Labs Inc. transaction to close in 2019. In effect, the judge ruled that there was no evidence of lost opportunity.

No Evidence of Lost Opportunity; Court Dismisses Appeal

The main thrust of the appellants’ argument in their appeal was that the case of M. Callow Inc. v. Zollinger establishes that even if there is no evidence of a lost opportunity, the Court must presume this loss where there is a breach of a duty of honesty. The appellants relied on the following passage:

“As the trial judge found, Baycrest “failed to provide a fair opportunity for [Callow] to protect its interests” (para. 67). Had Baycrest acted honestly in exercising its right of termination, and thus corrected Mr. Callow’s false impression, Callow would have taken proactive steps to bid on other contracts for the upcoming winter (A.F., at paras. 91-95). Indeed, there was ample evidence before the trial judge that Callow had opportunities to bid on other winter maintenance contracts in the summer of 2013 but chose to forego those opportunities due to Mr. Callow’s misapprehension as to the status of the contract with Baycrest. In any event, even if I were to conclude that the trial judge did not make an explicit finding as to whether Callow lost an opportunity, it may be presumed as a matter of law that it did since it was Baycrest’s own dishonesty that now precludes Callow from conclusively proving what would have happened if Baycrest had been honest (see Lamb v. Kincaid (1907), 38 S.C.R. 516, at pp. 539-40).”

Although the end of the paragraph appears to create such a presumption, the Court noted that this paragraph must be read as a whole. The Court pointed out that there was “ample evidence” that the innocent party had other opportunities but chose to forego them based on the conduct of the infringing party. The Court also noted that the paragraph includes permissive words rather than mandatory words. Even so, the appellants did not provide any evidence as to what would have happened or what they would have done if they had been advised of late closing.

The Court dismissed the appeal and turned down the appellants’ argument that such a presumption must be made. In doing so, the Court reinforced the importance of forwarding evidence of a lost opportunity where claiming damages for the like and a breach of the duty of honesty does not give rise to a presumption of a lost opportunity.

The Lawyers at Bader Law Advise Clients on Contractual Disputes in Ontario

The respected business lawyers at Bader Law advise clients on a range of business matters, including start-up and reorganization, corporate transactions, shareholders agreements and more. Our advice has helped many corporate clients avoid costly disputes while ensuring that their needs are met and they are set up for success. Contact us at 289-652-9092 or complete our online form to schedule a consultation with a member of our business law team to learn how we can assist you.

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Corporate Transactions, Mergers & Acquisitions Shareholder Agreements & Disputes

Ontario Court Finds Jurisdiction in Share Purchase Agreement Dispute

The Ontario Court of Appeal recently upheld the Superior Court’s decision in Savanta v. Hilditch, which considered ambiguous language regarding jurisdiction over disputes in a Shareholder Purchase Agreement. The dispute centred around whether the Shareholder Purchase Agreement conveyed exclusive jurisdiction to the courts of Massachusetts, or whether Ontario could adjudicate the dispute, as litigation had been commenced in both places.

Massachusetts Corporation (“GEI”) acquires Ontario Corporation (“Savanta”)

The Plaintiff, in this case, was Savanta. Savanta is a privately held Ontario corporation that provides environmental consulting services.

The other party in this case (a co-defendant), was GEI Consultants, Inc. (“GEI’”), which is a privately held corporation incorporated under Massachusetts law. GEI’s head office is in Massachusetts. GEI also offers environmental consulting in the United States.

GEI incorporated GEI Consultants Corporation to purchase Savanta’s shares under a Share Purchase Agreement which was signed in January 2019. After GEI Consultants Corporation acquired Savanta, it amalgamated with GEI, making GEI the sole shareholder of Savanta at the time of these proceedings.

Savanta commenced lawsuit in Ontario; GEI commenced lawsuit in Massachusetts

Savanta began a lawsuit in Ontario. GEI began a lawsuit in Massachusetts. The parties challenged the jurisdiction of the Ontario court to adjudicate certain matters which were in dispute. The other co-defendant, the Hilditch defendants, wanted the lawsuit to continue in Ontario. The Hilditch defendants were employees of Savanta. The Hilditch defendants were involved in a dispute over their employment agreements and non-competition agreement, which all parties agreed was properly dealt with in Ontario, and which formed part of the overall litigation.

Ambiguous language in the Share Purchase Agreement did not provide Massachusetts court with exclusive jurisdiction

The Share Purchase Agreement contained a section which provided that any dispute relating to that Agreement:

“[m]ust be brought in any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts, and each Party irrevocably submits and agrees to attorn to the non-exclusive jurisdiction of such court.”

Both Savanta and GEI argued that this was an “exclusive jurisdiction” clause. They argued that the word “non-exclusive” referred only to the state or federal court of Massachusetts.

The Ontario Superior Court disagreed with Savanta and GEI’s interpretation of this clause, holding that “the parties ought to have been more precise in their language by simply using the word exclusive.” By not doing so, they created ambiguity within the Share Purchase Agreement as to their intentions. The Share Purchase Agreement did not have the “clear and express language” that was required in order to convey exclusive jurisdiction to a particular court or place.

Ontario Superior Court determines that Ontario is the most convenient forum to adjudicate the dispute

The Superior Court found that the language of the Share Purchase Agreement did not oust its jurisdiction. Subsequent to this finding, the Court was then required to determine whether it was the most convenient forum to hear the dispute – that is, would it exercise its jurisdiction?

While Savanta had already consented to the jurisdiction of Ontario courts by starting its claim within Ontario, this was not determinative of whether Ontario would exercise its jurisdiction.

Several factors assessed to determine the most convenient forum

In a previous case of Muscutt at al. v. Courcelles, the Ontario Court of Appeal provided the factors to be considered when determining the most convenient forum for the hearing of a case. While not an exhaustive list, these factors are intended to assist a judge in deciding which jurisdiction has a real and substantial connection to the dispute. These factors include:

  1. The location with the majority of the parties;
  2. The location of key witnesses and evidence;
  3. The contractual provisions that specify the law or jurisdiction;
  4. The avoidance of having multiple proceedings;
  5. The applicable law and its weight in comparison to the factual questions to be determined;
  6. Geographical factors suggesting the best forum;
  7. Whether declining jurisdiction would deprive the plaintiff of a legislative juridical advantage available in the domestic court.

The Superior Court also considered three additional factors, which are:

  1. The threshold for displacing the plaintiff’s choice of jurisdiction is high;
  2. Efficiency and convenience should be balanced against the fairness and justice of a particular forum;
  3. At this stage, the court should be cautious about making findings of fact about the dispute itself.

Dispute had a stronger connection to Ontario

The Superior Court acknowledged that this was an “unusual motion” as it was the plaintiff and one co-defendant who sought to displace their own choice of jurisdiction. The burden was on the plaintiff, Savanta, to demonstrate that Massachusetts was the more appropriate place for the dispute to be determined.

The Superior Court considered that three of the four parties in the underlying proceeding were located within Ontario. The witnesses would all be from either Ontario or Massachusetts. There was also a risk of multiple proceedings, given that GEI had commenced a lawsuit on the same issues within Massachusetts. However, certain claims made concerning the Share Purchase Agreement would turn on the outcome of another aspect of this proceeding regarding the termination of employment of Mr. Hilditch. This aspect of the proceeding was one that all parties agreed was within the exclusive jurisdiction of the Ontario courts. While this was not considered “particularly compelling” it was one additional factor weighing in favour of Ontario.

Considering all the Muscutt factors, the Superior Court found that Ontario was the most convenient forum to hear all the disputes, holding that the dispute had a “much stronger connection with Ontario” than with Massachusetts.

Ontario upheld to be the most convenient forum

Savanta and GEI appealed the decision of the Superior Court to the Ontario Court of Appeal. Savanta and GEI argued that the judge did not consider the meaning of “of such court” found within the jurisdiction clause of the Shareholder Purchase Agreement. They argued that this made the clause clear that it was referring to only the courts of Massachusetts:

“must be brought in any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts, and each Party irrevocably submits and agrees to attorn to the non-exclusive jurisdiction of such court.”

The Ontario Court of Appeal rejected this argument and noted that the threshold that Savanta and GEI needed to meet was that of “palpable and overriding error” on the part of the motions judge. They did not meet that threshold.

The Court awarded costs of $18,390 and $17,748 against Savanta and GEI.

The Lawyers at Bader Law in Toronto advise clients on contracts, corporate organization, and shareholder disputes

The respected business lawyers at Bader Law provide advice to clients on a range of business matters, including start up and reorganization, corporate transactions, shareholders agreements, disputes and more. Contact us at 289-652-9092 or contact us online to schedule a consultation with a member of our business law team to find out how we can assist you.

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Organizing Your Business Shareholder Agreements & Disputes

Ontario Court Reminds Shareholders To Ensure Business Arrangements Are In Writing

The recent decision of Basegmez et al. v Akman et al. released by the Ontario Superior Court is a potent reminder that it is important for all business partners, including friends and family members, to reduce their verbal contractual arrangements to writing. Due to the absence of written contracts in this case, a dispute between partners resulted in “misunderstandings, the collapse of a potentially lucrative development opportunity and the destruction of decades-long friendships.”

This case also acts as a further reminder that the requirements of the Ontario Business Corporations Act should always be considered. This includes the requirement to fully disclose contracts that personally benefit one officer or director to other shareholders in writing or risk those contracts being invalidated by the courts.

Three friends and experienced businessmen planned an ambitious property redevelopment together

The issues in Basegmez et al. v. Akman et al., arose from a dispute regarding a property development project. In 2014, the Respondent, Ali Akman (the “Respondent shareholder”) acquired the Delta Hotel in Scarborough for a property redevelopment project. The Respondent shareholder learned that he had secured this property while he was on his yacht in the Turkish Riviera. At the time on the yacht next to him was a business acquaintance, Volkan Basegmez (“Volkan” or the “Applicant shareholders”). The two decided that Volkan would invest $6 million into the property redevelopment project in exchange for a 40% interest.

Three weeks after speaking with Volkan, the Respondent shareholder spoke with his friend and another Applicant in this case, Serdar Kocturk (“Serdar” or the “Applicant shareholders”). The Respondent shareholder and Serdar had a close relationship as they had previously invested in projects and vacationed together. Serdar agreed to pay $3 million for a 20% interest in the project.

The three friends incorporated Tarn Construction together to redevelop the property. They planned to construct two towers with over 700 condominium units, demolish part of the existing hotel to construct a further high-rise condominium and demolish part of the existing hotel’s parking garage to build a low-rise commercial building with parks, restaurants, cafes, and shops.

Applicant shareholders discovered undisclosed contracts between Tarn Construction and a corporation solely held by the Respondent shareholder

The project moved forward until July 2016, when the 2015 financial statements were completed. The financial statements revealed that the Respondent shareholder had created a set of Class B shares that gave him total control of the project, despite only holding 40% of the equity. The Applicant shareholders conducted further investigations into the finances of the project. They quickly discovered that the Respondent shareholder had entered Tarn Financial into a management agreement with a corporation owned by himself while paying that corporation 4% of hotel revenue as a management fee.

The Respondent shareholder had signed an agreement for both Tarn Construction and his solely owned corporation. The Respondent shareholder was also charging Tarn Construction development fees for his work on the project without the knowledge of the Applicant shareholders.

A shareholder dispute resulted in the corporation being ordered to liquidate

The Applicant shareholders believed that the Respondent shareholder was not entitled to charge Tarn Construction development fees because the Respondent shareholder was already receiving a greater rateable portion of equity than the other two.

The Respondent shareholder alleged that the parties had agreed that he could do so. The parties were unable to resolve the disputes amongst themselves, which led to the Applicant shareholders bringing an oppression application before the Ontario Superior Court, seeking a winding up of Tarn Construction.

The oppression remedy was granted and Tarn Financial was ordered to be liquidated.

Lack of written contract deprives shareholder of multi-million dollar claim

Before Tarn Construction could be wound up, a trial was held to resolve outstanding financial issues, including development fees and hotel management fees which the Respondent shareholder claimed.

Regarding development fees, the Respondent shareholder alleged that because third-party developer’s rates were so high, he and the Applicant shareholders had all agreed that he would do the development work for a to-be-determined fee. The development fees being claimed totalled almost $10 million dollars, at which time the Respondent shareholder had been paid $1 million. The Respondent shareholder justified this fee by stating that he had completed significant work to move the project forwards, including rezoning, architectural design, and site plan approval, as well as working with dozens of consultants.

Despite the Respondent shareholder’s insistence that the development fees had been discussed, he could not produce documentation to corroborate his account and the Court held that there was no agreement to pay him development fees.

Respondent shareholder not entitled to development and hotel management fees due to noncompliance with Business Corporations Act

The Court explained that the Respondent shareholder’s claims also ran afoul of section 132 of the Ontario Business Corporations Act, which provides that officers and directors must disclose in writing the nature and extent of their interest in any contract with the corporation, and that this information must be disclosed when the proposed contract is first considered.

The Respondent shareholder did not comply with this requirement regarding the payment of development fees from Tarn Construction to his own corporation, since this was done without the knowledge of the two Applicant shareholders. Regarding hotel management fees, there was a contract between Tarn Construction and the Respondent shareholder’s solely owned corporation, however, this was made without the knowledge of the Applicant shareholders and therefore did not meet the requirements of section 132.

Section 132 of the Business Corporations Act operates to protect shareholders from prejudice or mischief by controlling shareholders

The Court remarked that there are “good policy reasons” for holding the Respondent shareholder to the requirements of section 132 of the Ontario Business Corporations Act. Even when both sides act in good faith, or are parties known to each other, there is often too much room for disagreement about the terms of complex commercial arrangements.

It would also create opportunities for “mischief” by controlling shareholders to benefit themselves and prejudice other shareholders if non-arms-length contracts are not fully disclosed, in writing, to all shareholders.

Contact the Lawyers at Bader Law in Toronto for Advice on Contacts and Shareholder Disputes

The experienced business lawyers at Bader Law regularly advise clients on the full spectrum of business matters, including start-up and reorganization, corporate financing and lending, corporate transactions, shareholders agreements and disputes, employment issues, and more. In the event of a dispute amongst shareholders, our lawyers work to ensure that resolutions are reached in a timely and cost-effective manner. Call us at 289-652-9092 or contact us online to schedule a consultation with a member of our trusted business law team.

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Shareholder Agreements & Disputes

Director Granted Leave to Commence Derivative Action

When a director of a corporation acts in bad faith, the law provides some avenues for relief for other directors. One option available to other directors of the corporation is to commence a derivative action. The Ontario Superior Court of Justice recently decided the case of Luo v 9477322 Canada Inc, in which one corporate director was successfully granted leave to commence a derivative action.

What is a derivative action?

A derivative action is a claim brought by a shareholder on behalf of a company, rather than by the company itself. It is meant to protect the interests of the company’s shareholders by preventing harmful activities from going unchecked.

A derivative action may be commenced when there are reasonable grounds to believe that the corporation has been harmed, or that its business has been adversely affected by improper acts or omissions of directors, officers, or employees. For example, suppose a shareholder suspects that the directors of a corporation are committing fraud, and that shareholder wishes to commence a lawsuit without separately suing the individuals. In that case, they could instead file a complaint as a representative of the company’s shareholders and ask for compensation from the company itself.

In order for a shareholder to receive permission to bring a derivative action before the court, there must be evidence to show that the potential applicant is acting in good faith with the interests of the corporation in mind.

Two Directors went behind another’s back for their own profit

In Luo v. 9477322 Canada Inc., there were three directors in the numbered company hereinafter referred to as 947. In 2017, two of the directors, Luo and Weng, incorporated another numbered company, 258, for the purpose of purchasing a property for a project in Oakville. 258 entered into an Agreement of Purchase and Sale in June 2017, and in July 2017, the directors advanced a $500,000 loan from 947 to pay 258’s purchase deposit. By November 2017, the property transaction fell through.

Weng and Li, two directors of 947 negotiated, without Luo, to arrange for the return of the majority of the deposit funds to 258. In lieu of returning the funds to 947, Weng and Li added themselves as directors of 258 and distributed the returned funds between themselves and other partners of 947. They did not share any of these funds, which they described as “profits,” with Luo.

In December 2019, Luo started a derivative action against 258, along with others who had been excluded and counsel of 947. In January 2020, Weng and Li, as majority directors of 947, passed a resolution that Luo had commenced the action without the corporation’s authority. Weng and Li directed counsel for 947 to discontinue the action.

The majority of Directors were not acting in good faith

Weng and Li submitted to the court that Luo had not been acting in good faith, or in the interests of 947, in bringing this action. The Court found that it was in fact Weng and Li who were not acting in good faith or in the interests of 947. The Court explained its reasoning as follows:

“I find that, by diverting the funds away from 947, and by adding themselves as Directors to 258, and thereby deliberately excluding Luo from involvement in the distributions of the returned funds, Weng and Li preferred their own interests to those of 947. They did not act in the interests of 947, nor in good faith with respect to their obligations as Directors to act in the best interests of 947.”

There was a conflict between Weng and Li’s obligations as directors of 947, their personal interests and those of 258. The only director who could bring a derivative action, therefore, was Luo.

Court permitted derivative action

Ultimately, the Court found that there was a prima facie case against Weng and Li for torts including “breach of trust, breach of fiduciary duty, fraud, oppression, conversion, theft, misappropriation of funds, and deceit.” Additionally, Weng and Li had tried to block Luo from continuing the action against them. For these reasons, the Court determined that Luo was acting in good faith by attempting to advance the derivative claim on behalf of 947.

Furthermore, the Court determined that the derivative action was also in the interest of 947, therefore Luo was granted leave to continue with the action.

Court limits potential applicants to the derivative action

Weng and Li’s counsel argued that the other applicants did not require leave due to Luo having already obtained leave for the derivative relief under the Canada Business Corporations Act. The Court agreed that it was “neither necessary nor proportionate to grant leave to Applicants other than Luo to prosecute the derivative action.”

Luo asked the Court to order Weng and Li to transfer the returned funds from 258 back to 947, however Weng and Li claimed that the limitation period had already passed. The Court left this issue to be decided in the derivative action.

Contact the Lawyers at Bader Law for Resolving Shareholder Disputes

The corporate lawyers at Bader Law help businesses navigate the various complexities of corporate law in Ontario. Our knowledgeable 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, call us at 289-652-9092 or reach out to us online.

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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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Shareholder Agreements & Disputes

Shareholders Must Come to Court with Clean Hands

A risk of getting into business is doing so with the wrong people. When it comes to public corporations, shareholders are often at the mercy of the majority shareholder(s). When the majority shareholder is a corporation that begins to act in a manner that is oppressive or otherwise irresponsible, courts may need to intervene.

In 2321492 Ontario Inc. v. Taetlbum, both the plaintiffs and the defendant were seeking relief for conduct by the other party which they claimed to be oppressive. The main issue at the hearing was whether the conduct of each of the parties warranted entitlement to relief.

The defendant was terminated by the majority shareholders of three corporations

In the case at hand, both plaintiffs, who resided outside of Canada, each owned 40% of the shares of an Ontario corporation, NAWC2000 Inc., which operates as the Canadian Centre for Addictions, treating mental health and substance abuse.

The defendant, who served as the Director of Operations of the Canadian Centre for Addictions from April 2015 to January 2022, owned 20% of the shares in the company. The defendant was terminated by two of the plaintiff shareholders of NAWC2000 Inc., in January 2022. NAWC2000 Inc., is related to numbered company 2321492 Ontario Inc., which owned land in Port Hope, and another numbered company, 2759655 Ontario Ltd., which was used to hold title to property in Coburg. Both properties were used for, or were to be used for, treatment facilities.

The defendant owned 20% of 2321492 Ontario Inc., and 100% of the shares of the latter. However, all parties agreed that 80% of the shares relating to numbered company 2759655 Ontario Ltd., was being held for the plaintiffs.

Shareholders and beneficial owners can be complainants in shareholder disputes

In this matter, the first issue to be determined was whether each individual party could be a complainant within the Ontario Business Corporations Act (the “Act”). Under the Act, a complainant “includes a registered holder and beneficial holder of a security as well as director or officer or former director or officer of a corporation.” The plaintiffs were shareholders of NAWC2000 Inc., and 2321492 Ontario Inc., as well as beneficial owners of 2759655 Ontario Ltd. The defendant was the shareholder of NAWC2000 Inc., 2321492 Ontario Inc., and 2759655 Ontario Ltd. Therefore, all were valid complainants under the Act.

Shareholder meetings terminating the defendant were properly held

Next, the Court had to decide whether the meeting terminating the defendant in January 2022 was properly held. In particular, the Court examined whether the defendant had received proper notice of the meetings held for NAWC2000 Inc., and 2321492 Ontario Inc. Notice here is essential as shareholders meetings are a shareholder’s opportunity to be heard in relation to the corporation.

The defendant had only perceived that the meeting was not properly being held and chose not to attend. He had even logged into the Zoom meeting early but chose to leave. Therefore, the Court found that the meeting was properly held.

Inconclusive evidence for shareholders meeting

At the NAWC2000 Inc., shareholders’ meeting, the defendant was removed as Director of Operations, which resulted in the election of two new members to the Board of Directors. The shareholders further authorized the Directors to “enter a new banking resolution and appoint new signatories to the accounts.” Similar things occurred in the meeting for 2321492 Ontario Inc.

The Court was unable to find sufficient evidence that the meeting for 2759655 Ontario Ltd., was properly held, but it was also not able to conclude that it was improperly held.

Shareholders seeking relief must come to court with “clean hands”

When making a finding on whether a remedy should be awarded, the Court is required to consider whether any of the parties have acted unfairly or oppressively in a way which would warrant the Court’s intervention.

Due to the circumstances of his dismissal, the defendant claimed he was the subject of wrongful dismissal and oppressive conduct, as his employment was enmeshed with his role as Officer and Director. In considering the oppression remedy, the Court was tasked with assessing the conduct of all parties involved. In order for a party to be successful in obtaining a remedy, they must come to court with “clean hands”.

The Court found that the defendant had not come to the court with clean hands. Instead, the Court determined that the defendant had “conducted the business and affairs of the Corporate Plaintiffs and exercised his powers as director of the Corporate Plaintiffs in a manner that is oppressive, unfairly prejudicial or which unfairly disregards the interests of the Individual Plaintiffs as shareholders, creditors, directors, or officers of the Corporate Plaintiffs.”

Conduct of party seeking relief called into question

The Court outlined several of the allegations which were made against the defendant when considering conduct in the “clean hands” analysis. It was clear to the Court that the defendant had operated entirely in his own interest. This was determined based on the defendant transferring funds between accounts which resulted in a default of the corporation’s financial loan, and withholding funds and shares of NAWC2000 Inc., to the detriment of both the corporation and the plaintiffs.

As a result, the Court ordered that the beneficial shares of 2759655 Ontario Ltd., were to be transferred to NAWC2000 Inc.

Plaintiff’s motion for relief was successful

Ultimately, the Court held that the defendant should not expect payment of his dividends from NAWC2000 Inc., after transferring over $702,000 out of its account to 2759655 Ontario Ltd. The plaintiffs opted to credit his dividends against these transferred funds.

The Court found it reasonable for the defendant to be provided with information about the corporations for which he is still a shareholder, therefore it was ordered that he have access to a read-only version of the bank accounts and financial statements.

The Plaintiff’s motion for relief was granted.

Contact Bader Law in Mississauga for Advice on Shareholder Disputes

The business law team at Bader Law provides comprehensive business organization advice to our clients including share purchase options, buy-sell arrangements, corporate reorganization and restructuring, and shareholder disputes. We work with our clients to help them determine the legal structure best suited for them in order to reduce liability and maximize income. To speak with a lawyer about your business needs, contact us online or call us at 289-652-9092.

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Shareholder Agreements & Disputes

Negligent Reporting of Pre-IPO Sale of Shares Triggers Tax Liability Over 10 Years Later

Business structure and corporate tax planning are critical parts of a business venture, regardless of a company’s size. The lack of due diligence can leave a business vulnerable to scrutiny by courts and the Canada Revenue Agency and may result in serious tax and legal consequences.

An example of this is found in the Tax Court of Canada’s appeal decisions in the parallel cases of Lauria v. The Queen and Freedman v. The Queen. The cases, which were decided together, involved the sale of business shares to family trusts only months before a business went public and the reassessment by Canada Revenue Agency triggered by the sale.

Business partners transferred shares to family trust prior to IPO

The two individual appellants, Lauria and Freedman, held senior positions and were shareholders of a business that provided wealth management services. The business, Gluskin Sheff + Associates Inc. (GS+A), was independently owned by the appellants and others. At the time the appellant purchased their shares, the shares were issued as Common Shares.

In February 2006, the appellants were told that the founders had decided to take the company public and pursue an initial public offering of shares (IPO). They were advised to work with a financial planner to transfer a portion of their shares into a family trust. Freedman transferred 3,000 Common Shares, valued at $77,340, while Lauria transferred 1,000 Common Shares at a price of $25,780. They each filed a T1 General Tax Return reporting these sales.

Share value increased exponentially upon IPO sales

GS+A created three share classes before the Initial Public Offering. The Common Shares held by the appellants were converted into Subordinate Voting Shares. Freedman’s 3,000 Common Shares became 86,400 Subordinate Voting Shares, while Lauria’s 1,000 Common Shares became 28,800 Subordinate Voting Shares.

Further to the terms of the IPO, the trusts, as shareholders, were obligated to sell these Subordinate Voting Shares. The sale took place on May 26, 2006. Freedman’s trust brought in $1,598,000 from the sale, while Lauria’s trust sold its shares for $495,418.

Tax returns trigger reassessment more than 10 years after shares sold

The appellants’ tax returns were not reassessed until 2017, more than 10 years after they were filed. The Canada Revenue Agency (CRA) determined the shares had been undervalued when sold to the family trusts and that they should have been sold closer to what they were valued at only a short time later (after the IPO). As the CRA labelled this issue a misrepresentation, it was able to conduct a reassessment past its normal 10-year limitation. The appellant partners, Lauria and Freedman, denied that there had been a misrepresentation and appealed the reassessment.

Misrepresentation allows CRA to extend reassessment limitation period, regardless of intent

The Tax Court of Canada first considered whether the Canada Revenue Agency was able to issue a reassessment past the usual 10-year window.

The court held that even if the appellants did not intentionally mislead the CRA in their tax returns, that intent is not required. Simply failing to take reasonable steps to ensure tax compliance is enough to cross the threshold needed to allow the CRA to reassess their taxes after the limitation period has expired.

Shares not sold at fair market value given shareholders’ expectation of price increase

The second issue considered by the Tax Court was whether the shares had been sold to the family trusts for fair market value.

The appellants argued that when they sold the shares, the IPO had not yet occurred. As a result, the prices paid represented the fair market value at the time. The Canada Revenue Agency asserted that while the IPO may not yet have occurred, the appellants knew it was coming and understood that the shares would increase in value once the company had been taken public.

The Tax Court agreed with the CRA’s argument. It found that while the appellants were not majority shareholders or founders of the company, they should have known that a windfall was imminent, particularly as the IPO occurred just six weeks after the sale to the family trusts.

Misrepresentation “negligent and careless” in light of appellants’ status as financial professionals

After establishing that the appellants’ had committed a misrepresentation in their tax returns, the Tax Court turned to the question of whether it was attributable to neglect, carelessness, or wilful default.

The court agreed with the Canada Revenue Agency’s assertion that the appellants’ misrepresentation was “negligent and careless”. Both appellants were financial professionals who were aware of the effect of an IPO on a company’s stock values. The court also noted that the estate planning undertaken by the appellants would likely have been done with the knowledge that their stock values would rise following the IPO.

Additionally, the court found that the appellants were negligent in failing to engage independent legal counsel to confirm the value of their shares or the extent of their expected price increase at the time of the IPO. The court held that a wise and prudent person would have sought counsel on such a large decision.

Contact Bader Law in Mississauga for Skilled Advice on Business Organization & Shareholder Issues

Bader Law provides comprehensive business organization advice and helps clients choose the appropriate legal structure to reduce liability and maximize income. Our business lawyers secure clients’ financial interests in a variety of issues, including share purchase options, buy-sell arrangements, corporate reorganization and restructuring, and shareholder disputes. To schedule a consultation, contact us online or call 289-652-9092.

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Shareholder Agreements & Disputes

Court Sanctions Party’s Misconduct During Zoom Cross-Examination

The COVID-19 pandemic has forced many court proceedings online. While all parties, including their lawyers, remain bound by the same rules as in-person proceedings, there is always a risk for mischief in online activities.

In a recent Ontario decision, the court sanctioned a party who was found to have engaged in misconduct during a cross-examination conducted over Zoom.

Shareholder Dispute Leads to Court Application

The applicant and the respondent were each a 50% shareholder in a company they incorporated in 2019.

However, in July 2020, the applicant filed an application with the court seeking, among other things, an order compelling the respondent to sell his shares in the company and a declaration that the respondent’s actions had been conducted in a manner that was oppressive.

The cross-examination of the respondent was scheduled for November 12, 2020 in preparation for the application hearing. 

Due to the COVID-19 pandemic, the cross-examination was conducted via Zoom. 

Misconduct Alleged During Virtual Cross-Examination of Party

On the date of the cross-examination, the respondent, the respondent’s lawyer and an interpreter were present in the lawyer’s boardroom. Each was on a separate device so that each had a separate participant window for the Zoom attendance. The court reporter and the applicant’s lawyer attended from elsewhere on separate computers. The applicant also attended from a separate computer.

The respondent’s wife and son had gone with him to the examination, but the respondent stated to the applicant’s lawyer that they remained in the reception area at all times and were never in the room during the examination. The respondent’s lawyer also confirmed that only himself, the respondent and the interpreter were in the room.

However, after the examination was over, the applicant remained on the Zoom meeting and noticed that a microphone and video camera on one or more of the devices used for the examination in the respondent’s lawyer’s boardroom were still on. The applicant could hear the voices of the respondent’s wife and his son, which the applicant recognized because they had all previously worked together. The court reporter and the interpreter were still on the link, so the applicant continued to listen.

As he listened, the applicant became alarmed when he heard some exchanges between the respondent’s wife, son, and the interpreter, including the following comments:

  • The interpreter said, “When he’s asked a question you confused him. You should have prepared him properly about what your answers were going to be.”
  • The son said, “We got the papers out last night at 10:00 pm.”
  • The interpreter said, “When you are sitting there doing ‘this’ it was hard for him.”
  • The wife said: “No, no he still answered well and gave excellent answers.” 

As such, it became clear to the applicant, from what the wife had been saying, that she had listened in on the examination. The applicant recorded the exchanges on his cell phone.

When the applicant’s lawyer confronted the respondent’s lawyer about this, the respondent’s lawyer denied it. However, later, the interpreter confirmed that the respondent’s family had been in the room during the examination.

As a result, the applicant filed a motion to strike out the evidence of the respondent on the basis of misconduct during his cross-examination and on the grounds of abuse of process.

Court Sanctions Respondent for Misconduct

After reviewing the evidence, the court concluded that there had been misconduct during the respondent’s cross-examination. It found that, while off screen, the respondent’s wife and son had been present in the room with him. It further found that the wife and son had made hand and facial gestures to assist the respondent during his examination.

In considering the risk of misconduct and mischief during virtual examinations, the court stated:

“The risk of mischief on a virtual examination is an area which has yet to be fully explored… 

It is clear that the use of virtual examinations will continue by this Court and will become the norm for the foreseeable future. Even when the pandemic is behind us, the comfort level we have all gained with this form of technology is such that it is likely to continue to be a strong option for parties, particularly where a witness is out of country, out of province or has mobility or health issues.

Given the inevitable future of virtual examinations in the legal system, it is up to the judiciary, as its gatekeepers, to ensure that this tool is not abused nor seen to undermine our globally admired legal system.”

Ultimately, the court allowed the applicant’s motion, ordering the striking out of the respondent’s evidence during examination. While the court noted the severity of the remedy, it stated:

“The integrity of the fact-finding process must be maintained. This includes the fact-finding process on virtual cross-examinations. This mischief could only have happened on a virtual examination. In a face-to-face examination, examining counsel has control over who is and is not present at the examination….

I find that the Respondent’s misconduct in this matter amounts to an abuse of process of this Court and the affidavit in his Responding Record must be struck. The Court must send a strong message that interference in the fact-finding process by abusing or taking advantage of a virtual examination will not be tolerated. In a broader sense, this type of misconduct strikes at the very heart of the integrity of the fact-finding process such that general deterrence is also a factor.”  

The court refrained from issuing any sanctions for the respondent’s lawyer, noting that the applicant had not sought such a remedy. It noted, however, that had the applicant sought to have the respondent’s lawyer removed, it would have given the request serious consideration. In closing, the court observed:

“In any event, I believe that it would be inappropriate for [the respondent’s lawyer] to continue as counsel in this matter, but make no order in that regard.”

As a result, the applicant’s motion was allowed and the respondent’s examination evidence was struck out.

Get Help

When shareholders find themselves in conflict about key business decisions or management strategies, this can create a significant threat to the day-to-day operations and overall success of the company. The best practice to avoid such disagreements in the first place is to have an effective and comprehensive shareholder agreement in place.

The business law lawyers at Bader Law have been helping business owners and entrepreneurs in Mississauga and the surrounding areas mitigate their liability and potential risk for over a decade. We will review each client’s specific needs and work with them to design a shareholder agreement that contemplates and sets out strategies for managing a variety of potential issues. Our clients range from small family businesses to large operations with millions of dollars in annual revenue, giving us the experience to know how to effectively address the needs of any type of organization.

The business lawyers at Bader Law have been establishing trusted relationships with business owners and entrepreneurs in the Mississauga community for over a decade. We work with each client to develop an effective strategy focused on their specific needs and will create custom shareholder agreements designed to avoid conflict and mitigate risk.  When conflicts do arise, we represent clients in a variety of issues and work to find effective and practical resolutions in every situation. To discuss your needs with a skilled lawyer, contact us online or at (289) 652-9092.

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Shareholder Agreements & Disputes

Employee Entitlements under a Shareholders’ Agreement after Termination

A recent Ontario Court of Appeal decision determined that the terms of a shareholders’ agreement apply as written, regardless of whether an employee was terminated with or without cause.

What Happened?

The employer is an employee-owned engineering firm that provides engineering and construction consulting services. 

The employee was employed by the employer for 31 years, most recently in the position of Director, Business Development. On October 26, 2017, the employee was notified in writing that his employment was being terminated without cause, effective immediately.

The employee commenced an action for wrongful dismissal. In granting partial summary judgment, the motion judge awarded the employee damages for wrongful dismissal based on a notice period of 26 months. That determination was not appealed.

The motion judge also made a determination regarding the value that the employee was entitled to be paid for the shares that he held in the employer’s parent corporation, along with his entitlement to a share bonus. Those determinations were the subject of the appeal.

Shareholders’ Agreement

The employee was one of a select group of employees who were eligible to purchase shares of the employer’s parent corporation. 

Those shares were governed by the terms and conditions of a shareholders’ agreement. At the time that his employment was terminated, the employee owned a total of 5,108 shares.

Under the terms of the shareholders’ agreement, the employee and other shareholders were eligible to receive annual “share bonuses”. The share bonus payable in respect of each share was determined by an objective calculation based on the company’s financial results. As a result, the total share bonus payable to each shareholder depended on the total number of shares that the shareholder had previously decided to purchase. The share bonus was not related to the shareholder’s contributions as an employee; it was, in effect, a dividend. 

With respect to the employee’s shareholdings, the motion judge determined that he was entitled to: 

  • hold the shares until the end of the reasonable notice period (i.e. 26 months after he was notified of his termination and his association with the employer had ceased); and 
  • receive damages for the loss of the share bonus that would have been payable during such 26 month period.

Article 3 of the shareholders’ agreement dealt with “Automatic Transfer Notices”, and applied in situations where, among other things, a shareholder resigns, is terminated, becomes bankrupt, or dies. Article 3.2 applied in cases of termination, and stated:

“A Shareholder whose association with the Corporation and its Affiliates ceases by reason of termination by the Corporation of his/her employment with the Corporation and its Affiliates shall, immediately after such termination, be deemed to have given a Transfer Notice covering all of the Shares held by him/her on a date which is 30 days from the date he/she is notified of such termination by the Corporation.”

The shareholders’ agreement proceeded to specify that a shareholder who was deemed to have given a Transfer Notice under Article 3 was entitled to the “fair value” of his or her shares. 

The employer took the position that the employee’s association with it had ceased by reason of the termination of his employment on October 26, 2017, which became the “trigger” date for purposes of the shareholders’ agreement. 

In accordance with that position, the employer paid the employee the sum of $999,431 (representing the “fair value” of his shares on November 25, 2017, which was 30 days from October 26, 2017, the date of his termination).

The motion judge disagreed with the employer’s position. He concluded that the employee was entitled to receive payment for his shares with the value calculated at the end of the reasonable notice period. The motion judge also concluded that the employee was entitled to the share bonus that would have accrued during the notice period. The motion judge reached this conclusion based on his view that the “basic principle to be applied is to put the person in the same position they would have been in if lawfully terminated”. 

Court of Appeal Decision

At the outset, the court stated that the motion judge had erred in concluding that the employee was entitled to compensation in respect of his shares calculated at the end of the notice period. 

The court found that the motion judge improperly conflated the employee’s entitlement to compensation arising from the breach of his contract of employment with his contractual entitlements respecting his shares. 

The court stated that it was the terms of the shareholders’ agreement that determined the employee’s rights with respect to those shares and that the common law relating to compensation for breaches of a contract of employment did not apply to the employee’s entitlements regarding his shares, stating:

“[The employee’s] entitlements relating to his shares are separate and apart from the relief to which he is entitled arising from his contract of employment. His entitlements relating to his shares fall to be determined by the terms of the Shareholders’ Agreement. […]

None of this turns on whether the employee has been terminated with or without cause.”

The court found that the shareholders’ agreement expressly provided that the corporation became entitled to repurchase the shares 30 days from the date the shareholder was “notified of such termination”. It further found that this conclusion also dealt with the share bonus issue; once it was concluded that the shares had to be transferred resulting from the employee’s termination, he ceased to have any entitlement to any bonus arising from the shares that he no longer owned.

As a result, the appeal was allowed, as the court determined that the employee had already received what he was contractually entitled to when he was paid for his shares.

Get Advice

At Campbell Bader LLP, we have been helping businesses and business owners with matters related to shareholder agreements since 1999. We are proud of the strong client relationships we have built since then. We take the time to understand your business before deciding on a course of action, keep you well informed throughout the process and ensure you make the best strategic decisions at every stage. 

If you have questions about unfair practices in the workplace, wrongful dismissal, or any other employment matter, contact the Mississauga employment lawyers at Campbell Bader LLP. We regularly advise both employers and employees on a wide range of issues that arise at work. Contact us online or by phone at 905-828-2247 to schedule a consultation.