Running a business can be difficult as there are many challenges that business owners have to navigate, such as securing financing, managing day-to-day operations, and employing the right people. However, few business owners contemplate the difficulties faced when relationships break down between business partners. When a business relationship breaks down, it can have both financial and operational consequences. The importance of clear shareholder agreements and well-defined mechanisms for addressing relationship breakdowns cannot be overstated.
In the recent Court of Appeal decision in Aiello v. Bleta, a relationship broke down between two siblings who owned and managed several entities, leading to costly litigation due to the lack of an explicit agreement. This case demonstrates the necessity of having a plan for disputes and following legal formalities when carving out business ownership.
After the death of their father, LeRoy Bleta and Bertha Aiello assumed ownership of three companies: Floriri Village Investments Inc., Niazi Holdings Inc., and Korce Group Ltd. Soon after, their relationship deteriorated, and they enacted an agreement as to their ownership and management of these companies.
It was this agreement that was the subject of the trial at first instance. The respondent, Bleta, claimed that this agreement only provided for a temporary division of management responsibilities, and there was no agreement as to the ownership of these companies. On the other hand, Aiello claimed there was an agreement as to ownership such that she was the exclusive owner of Floriri Village Investments, Bleta breached the agreement and the fiduciary duties owed to her, and Bleta was unjustly enriched at her expense.
Aiello sought a declaration that she was the beneficial owner of Bleta’s shares in Floriri Village Investments, along with an order that she be entitled to purchase his interest in exchange for transferring her interest in the Bleta Family Trust. This would effectively transfer her ownership in Niazi Holdings and Korce Group to Bleta.
The trial judge ruled in favour of Aiello, finding that there was an agreement between the two siblings regarding the ownership of the three companies. The trial judge also found that Bleta owed and breached his fiduciary duty to Aiello and that he was unjustly enriched. The declaration was made, and upon a different action’s completion, Aiello could seek an order for specific performance regarding the transfer of shares in Floriri Village Investments.
Bleta appealed, arguing that the judge erred in finding there was an agreement, that he was unjustly enriched, and that he owed a fiduciary relationship.
The crux of the appellant’s argument was that the documentation and behavior of the parties demonstrated, at most, that there was only “an agreement to agree.” At the time of the breakdown, Bleta prepared resolutions where he became a director of Niazi Holdings, Aeillo a director of Floriri Village Investments, and Aiello also signed a “Renunciation Agreement” resigning as a trustee of the Bleta Family Trust, which made no reference to Floriri. Even so, Bleta argued that there was no agreement as to significant terms.
The Court found that there were factual findings to support the trial judge’s reasons in deciding that the parties agreed that Bleta would release his interest in Floriri Village Investments, and in exchange, Aiello would release her shares in the Bleta Family Trust. For example, the Renunciation Agreement did not hint that this was a temporary agreement, nor was Aiello reinstated as a trustee. Furthermore, the parties acted as if they had “unimpeded management and control”; Bleta even sold properties owned by Niazi and managed properties owned by Korce without consulting Aiello.
The Court found that the trial judge was entitled to deference, as the conduct of the parties and the terms of the agreement supported the finding that there was a valid agreement. Therefore, as Bleta had not transferred his interest in Floriri to Aiello, the agreement was breached, and he was unjustly enriched.
Bleta also appealed the trial judge’s finding that he owed Aiello a fiduciary duty based on the judge’s conclusion that there was an undertaking to act on her behalf. The requirement for an undertaking was given in Galambos v. Perez. Furthermore, the Supreme Court in Alberta v. Elder Advocates of Alberta Society found that a fiduciary duty may be found without an express undertaking as long as the fiduciary could exercise some discretion unilaterally to the detriment of the other party’s interests and the other party was vulnerable to this exercise of power or discretion.
The Court found no error in the trial judge’s decision, even without referring to the Alberta v. Elder Advocates of Alberta Society decision. The Court ruled there was an implied understanding that Bleta would act in accordance with his duty of loyalty, especially since he was a lawyer by profession. Bleta exercised discretion by drafting the resolution and agreements, which affected Aiello’s rights. The Court also found that Bleta knew Aiello was vulnerable, and although he advised her to seek independent legal advice, he would not allow her to access company funds to pay for such advice.
The Court found no basis to interfere with the trial judge’s determination that Bleta breached his fiduciary duty to Aiello.
This case highlights the importance of ensuring that there are contingencies for the breakdown of the business relationship and the proper legal formalities are followed when carving out ownership and management of the resulting business.
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.