Sutherland et al. v. Birks et al. [Indexed as: Sutherland v. Birks]
65 O.R. (3d) 812
[2003] O.J. No. 2885
Docket No. C37495
Court of Appeal for Ontario
Feldman, Simmons and Gillese JJ.A.
July 14, 2003
*Application for leave to appeal dismissed with costs April 1, 2004 (Bastarache, LeBel and Deschamps JJ.).
Corporations -- Oppression -- Remedies -- Corporation ordered to purchase shares for cancellation -- Shareholders to receive compensation for pro rata share of capital dividend account -- Shareholder to receive compensation for pro rata share of refundable dividend tax on hand.
LBS and SBD applied pursuant to ss. 214 and 241 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, for an order that they receive from RWMB, Vicbir Holdings Ltd. ("Vicbir") and Vicbir Family Foundation ("Foundation") value for their interest in Vicbir. Their application was tried by Farley J., and he ordered that LBS's and SBD's shares be purchased by Vicbir for cancellation and that a variety of adjustments be made in determining the share value. Amongst other adjustments, Farley J. devised a formula that included an unequal distribution of Vicbir's capital dividend account. He made this adjustment having concluded that they would have shared in the benefit of the capital dividend account and of the refundable dividend tax on hand had they remained shareholders and had there been no oppression.
RWMB, Vicbir and Foundation appealed, and LBS and SBD cross- appealed. The appellants' grounds of appeal were that: (1) the trial judge misunderstood his function when he valued LBS's and SBD's interest in Vicbir using oppression principles; (2) he erred in finding oppression and in his imposition of a remedy; and (3) he erred in dividing the corporation's tax accounts. In the cross-appeal, LBS and SBD also challenged the treatment of the corporate tax accounts on the basis that the formula did not achieve the result of fully compensating them for their shares in Vicbir, and they submitted that the trial judge ought to have ordered that RWMB purchase their shares rather than there being a share redemption by Vicbir. [page813]
Held, the order under appeal should be varied.
The only error made by the trial judge was in respect of his treatment of the two tax accounts. He erred because the compensating credit did not fully compensate the respondents for their interest in the corporation's refundable dividend tax on hand. This error could be corrected on the appeal without the necessity of a further hearing where new evidence would be led. Rather than attempting to correct the approach used by the trial judge, the simpler approach was to direct that Vicbir structure dividend payments to LBS and SBD so that they receive their pro rata share of the capital dividend account and the resulting tax savings, and that Vicbir compensate them directly for their pro rata share of the refundable dividend tax on hand. Given that the capital gains taxes payable by the corporation on a wind-up would be more or less equivalent to the benefits to the shareholders through the augmentations of the capital dividend and the refundable dividend tax on hand accounts created by the realization of the capital gains that would be distributed on the wind-up, the trial judge's valuation method -- as adjusted -- operated as a summary method of calculating notional wind-up value; there was no basis for ordering a different method of valuation or additional reports. Because LBS and SBD would no longer be receiving more than their share of the capital dividend account, their concern about the General Avoidance Rule was no longer relevant.
APPEAL and CROSS-APPEAL in an action to determine the value of an interest in a corporation pursuant to ss. 214 and 241 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44.
Cases referred to Jaska v. Jaska (1996), 1996 2926 (MB CA), 141 D.L.R. (4th) 385, [1997] 2 W.W.R. 86, 30 B.L.R. (2d) 104 (Man. C.A.), revg (1996), 1996 18339 (MB QB), 108 Man. R. (2d) 140, 47 C.P.C. (3d) 297 (Q.B.); Waxman v. Waxman, 2002 49644 (ON SC), [2002] O.J. No. 2528 (QL), 25 B.L.R. (3d) 1, [2002] O.T.C. 443 (S.C.J.) Statutes referred to Canada Business Corporations Act, R.S.C. 1985, c. C-44 Corporations Act, R.S.M. 1987, c. C225 Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) Limitations of Actions Act, R.S.M. 1987, c. L150 Limitations Act, R.S.O. 1990, c. L.15
Vern Krishna, Q.C., Andrew M. Robinson and Kelly A. Charlebois, for appellants. Ronald G. Slaght, Q.C., and Nina Bombier, for respondents.
The judgment of the court was delivered by
FELDMAN and SIMMONS JJ.A.: -
INTRODUCTION
[1] The trial judge tried this action on the basis of a consent order, paras. 1 and 2 of which provide: [page814]
THIS COURT ORDERS that, pursuant to sections 214 and 241 of the Canada Business Corporations Act, the applicants or their nominees receive from the respondents or their nominees value for their interest in the respondent Vicbir Holdings Ltd. on such terms and in such manner, including without limiting the generality of the foregoing any reorganization under the Canada Business Corporations Act including a butterfly reorganization of the kind described in the Advance Income Tax ruling dated July 23, 1999 attached as Exhibit V to the affidavit of Robert William Massey Birks dated November 28, 2000 or otherwise, and at such price or value as determined by this Court.
THIS COURT ORDERS that all of the issues raised in paras. 1(b) to 1(j), 1(l) and 1(m) of the Notice of Application, as well as the issues in paragraph 1 hereof (such as value, terms, etc.), be tried by a judge of the Commercial List on an expedited basis pursuant to the schedule set out in paragraph 6 hereof.
[2] The issues raised in paragraphs 1(b) to 1(j), and 1(l) and 1(m) of the Notice of Application are:
(b) a declaration that the respondent Robert W.M. Birks has conducted the business and affairs of Vicbir and Vicbir Family Foundation in a manner oppressive or unfairly prejudicial to or that unfairly disregards the interests of the applicants, breaching statutory and fiduciary duties owed to Vicbir and the applicants, including a duty to act honestly and in good faith in the best interests of Vicbir;
(c) an order for the division of Vicbir's and Vicbir Family Foundation's assets on a pro-rata basis, taking into account the accrued rights of the applicants and the other orders sought in this Application; [dealt with in a separate judgment of Farley J.]
(d) an order for a full accounting of the business and affairs of Vicbir and Vicbir Family Foundation including, full and unrestricted access to all books and records of Vicbir and Vicbir Family Foundation, an order for an equitable tracing of its property, and an order requiring the respondent Robert W.M. Birks to repay to Vicbir all professional fees, salary and other amounts improperly or imprudently paid to himself, Jack Miller, Scott Wilson and other persons;
(e) an order for an independent review of the 1989 disposition of shares in Henry Birks & Sons Ltd. and re-allocation of the proceedings among the parties;
(f) an order requiring the respondent Robert W.M. Birks to return Vicbir property to Vicbir;
(g) an order reversing the respondent Robert W.M. Birks' acquisition of the applicant Susan S. Dwyer's 95 common shares or a corresponding adjustment;
(h) an order requiring Robert W.M. Birks to transfer Fourth Preferred Shares obtained by him in 1995 to the applicants so as to allocate control equally in Vicbir among Robert W.M. Birks and the applicants or a corresponding adjustment; [page815]
(i) interim and final orders compensating the applicants for dividends in an amount ultimately to be determined by the accounting ordered by this Court;
(j) an order that Robert pay compensation to each of the applicants as aggrieved persons for his oppressive and unfairly prejudicial conduct in an amount of $1 million;
(l) interim and final orders enjoining the respondent Robert W.M. Birks from utilizing the assets of Vicbir or Vicbir Family Foundation to fund his defence of the Application and from making or causing to be made any dispositions, expenditures or decisions with respect to the business of Vicbir and the Vicbir Family Foundation without leave of this Court or until disposition of the Application;
(m) costs of this proceeding on a solicitor and client basis, plus GST;
[3] Following a trial, the trial judge ordered that the respondents' shares be purchased by the corporation for cancellation and that the following adjustments be incorporated into the value to be received by the respondents (para. 58 of the reasons):
a. Professional fees as to $1.1 million plus interest are to be added back in.
b. The allocation of proceeds from Jon's purchase is to be adjusted as aforesaid to have Vicbir reimbursed for the legal accounts plus an attributable earnings growth rate on such reimbursement as discussed above.
c. Sue's interest is to be readjusted for her deemed reacquisition of 5 of the 1992 40 shares sold to Rob and 15 shares of the 1994 sale.
d. There is to be no minority or marketability discount.
e. Vicbir is not to be burdened by a pension reserve for Rob.
f. As per the Neil Harris April 8, 2001 report Vicbir is to structure the deemed dividend so that there is a capital dividend to the extent of the CDA. This is designed to utilize the full amount of the CDA available, not just the sisters' pro rata share (an adjustment (below) will be made to the RDTOH account), to the extent necessary.
g. . . . (superseded by a subsequent order).
h. If after applying the CDA in (f) above, there are taxable dividends, then "each of the sisters holding companies" is to receive a compensating credit based on the following formula (as to their pro rata interest): Add their pro rata interest in the CDA plus 50 [per cent] of the pro rata interest in the RDTOH and subtract therefrom the CDA actually utilized.
i. The valuation date is taken as December 31, 2000. Book value is to be adjusted to market.
[4] The appellant raises three categories of grounds of appeal:
Process: The trial judge misunderstood his function under the consent order and valued the respondents' interest in [page816] the appellant company using oppression principles after making a finding of oppression. Instead his function was to value the respondents' interest based on the "compact of shareholders", that is the intent of the father who set up the company and therefore the understanding of the children regarding the value of the shares, based on that understanding. That value included deductions for a salary for Robert Birks, a pension for Robert Birks, a minority discount because the intent of the company was to provide financial security for the family but within the control and supervision of the father, the mother and Robert Birks, with no control in the respondents, and a substantial reserve to care for Doreen Birks, the wife of Victor and mother of Robert, Susan and Lorna. Only after valuing the interest based on those valuation criteria was the trial judge to apply any adjustments based on any findings of oppression that he might make. The trial judge also erred in his valuation by failing to adjust for embedded taxes, disposition costs, and Robert Birks' salary.
Oppression: The trial judge erred in his findings of oppression and in the remedy he imposed. First, the trial judge erred in effectively overruling the decision of the Board of Directors not to declare dividends by finding that Robert Birks' decision not to declare dividends, which he directed the Board to implement, was an act of oppression. Second, the court gave remedies for share transactions between Susan and Robert which were not corporate transactions but transactions between shareholders. Third, the trial judge erred by providing remedies for actions which occurred over 6 years before the action was commenced and were therefore untimely and beyond the reach of the court.
Error in dividing the corporation's tax accounts: The trial judge's formula may offend the General Avoidance Rule under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) and therefore might result in a reassessment.
[5] In our view, the trial judge made no error in respect of the matters raised under issues 1 and 2. We agree that the trial judge did err in his treatment of the two tax accounts in paras. 58 f. and h. The respondents also challenged the trial judge's treatment of the corporate tax accounts in their cross- appeal, but on the basis that the formula does not achieve the result of fully compensating them for the value of their shares. In our view, the error in the formula can be corrected on this appeal without the [page817] necessity of a further hearing where new evidence would be led. The third issue raised by the appellants is resolved by our disposition of the cross- appeal and, accordingly, will be dealt with as part of the cross-appeal.
[6] The facts are fully set out in the reasons for judgment of Farley J. dated December 4, 2001, and it is unnecessary for the purposes of this appeal to repeat them here.
DISPOSITION OF THE SUBISSUES RAISED UNDER ISSUES (1) AND (2)
[7] The appellant suggested in argument that there were no pleadings in this action which was tried on the Commercial List based on the consent order and the affidavits filed by the parties in accordance with the order, and that as a result, the issues were not defined, leaving the trial judge to use facts arising from the evidence to make decisions not anticipated by the parties.
[8] There is no merit in this submission. In response, the respondents point to the Trial Requirements Memorandum, prepared and submitted by both sides as required in accordance with the practice on the Commercial List. The memorandum includes a list of five issues to be resolved as follows:
Has there been oppression in the manner in which Robert Birks conducted the business and affairs of Vicbir and Vicbir Family Foundation and, if so, what is the remedy?
On what terms, in which manner and for what price or value should Vicbir be divided among the parties?
Should any assets be "added back" to Vicbir for valuation purposes for the purposes of issue 2 above: should there be a re-allocation of the proceeds of the 1989 disposition of shares in Henry Birks & Sons Ltd.; should there be an accounting for professional and advisory fees paid by Vicbir; should the $2 million contribution to the Vicbir Family Foundation be included as a Vicbir asset for valuation purposes, etc.?
Does Susan have the right to re-purchase shares sold to Robert in 1992 and 1994, and to recover shares paid as amends to Robert in 1991?
Should the Fourth Preferred Shares transferred to Robert by his mother in 1995 be redistributed so as to allocate control equally in Vicbir among Robert and his sisters?
[9] These issues are set out verbatim by the trial judge in his reasons at para. 3 following a summary of the facts, with the notation that the fifth issue was no longer outstanding between the parties, and that the Foundation issues were dealt with in separate reasons. He then proceeded to address the issues. There can be no suggestion of procedural misunderstanding.
[10] Furthermore, the reasons of the trial judge demonstrate that in valuing the shares based on the reasonable expectations [page818] of the sisters, he took into account those wishes of the father in setting up the company that he found formed part of their reasonable expectations from time to time. He did not ignore any alleged obligations on the minority shareholders resulting from the father's gift, but took into account the alleged burdens on the shares in his assessment of the reasonable expectations of the parties over time.
[11] Although the trial judge made findings of oppression against Robert Birks in his role as controller of Vicbir in his dealings with his sisters, in his analysis of the value of the shares of the company, the trial judge referred to the reasonable expectations of the parties based on the history of the company as well as events as they occurred. In discussing Robert Birks' motive for maintaining the status quo from the time of Miller's opinion letter in 1990 that a dividend/income policy for the company was necessary to avoid a legitimate claim for wind-up, the trial judge stated, at para. 32 [[2001] O.J. No. 5540 (QL) (S.C.J.)]:
There was no appreciated incentive for him to do anything. The status quo was fine by him. In doing nothing, it appears to me that he did not appreciate or regard (and so unfairly disregarded) his sisters' reasonable expectations of having a policy in Vicbir which would look after Mother and thereafter afford them some regular flow of funds.
[12] This statement amounts to a finding by the trial judge of the reasonable expectations of the sisters which, after the lawyer Miller's advice, included an income policy but also a recognition of Mother's interest. Mother's needs are not accounted for at the time of valuation because, before her death, Mother transferred all of her personal wealth to her son Robert, who acknowledged that at that point"having acquired all her interests, he is responsible for her well-being" (p. 6).
[13] The trial judge also dealt with the issue of Robert Birks' salary for managing the portfolio and the corporate governance details by declining to add back the salary in valuing the company. The trial judge did not discuss any provision for future salary as a deduction from value. Clearly this would have made no sense as once the sisters' shares were purchased, any ongoing salary would be paid by the company, now wholly owned by Robert Birks.
[14] The trial judge rejected a provision for a pension for Robert Birks, making a specific finding that the reasonable expectations of the shareholders including Robert Birks "would be that Rob be provided for in his retirement by the wealth- managed assets of Vicbir in the same way as the other shareholders" (para. 45). There is no basis to interfere with this finding. [page819]
[15] On the issue of a minority or marketability discount applying to the value of the sisters' shares, the trial judge relied on two bases for determining that no such discounts were appropriate in this situation. The first was that the consent order stated that the sisters would receive "value" for their interest, not "fair market value", and on that basis he concluded that the parties had effectively agreed that the usual discounts which are applied to achieve fair market value would not apply in this case. He went on, however, to conclude that without Robert's oppressive conduct in his control of the Board and of the company, the sisters would have received an ongoing income stream from their shares and eventually full value on a wind-up and distribution of the portfolio. Consequently, there was no reason for them to suffer a minority discount because their interest had to be bought out for them to achieve their reasonable expectations.
[16] The appellant suggests that the trial judge erred by not taking into account certain matters which were addressed by the expert appraisers in their reports. The first is subtracting the value of the preference shares. The respondents point out that the trial judge did not mention deducting the value of the preference shares because he was only valuing the common shares. They agree that the value of the preference shares must be deducted. The other matters are embedded taxes as a cost to Vicbir of disposition of its assets as well as the other costs of disposing of the assets. The appraisers did not agree on the value to be attributed to these factors. It appears that Farley J. determined that it would be appropriate to ignore embedded taxes and we would not interfere with that determination. In any event, our disposition of the cross-appeal addresses and deals with this issue.
[17] In relation to disposition costs, the appraisers agreed on basic disposition costs of one per cent but disagreed on the applicability of a further discount based on disposition of the full portfolio. The trial judge provided that the value of the assets was to be adjusted from book value to market value. That adjustment could include appropriate disposition costs. Had the parties been able to agree on the figures following the release of the reasons of the trial judge, they may have been able to include an amount to account for these costs. As they did not agree, in our view it is appropriate to include one per cent for disposition costs in order to bring the value of the assets up to market value. A discount based on a portfolio disposition is not consistent with the valuation method adopted by the trial judge.
[18] The appellant appeals the trial judge's determination that the amount Vicbir paid for the legal costs of the litigation assigned to Jonathon Birks as part of the settlement in 1989, be [page820] added back to the company together with a reasonable rate of return on the money, as part of a proper allocation of the $22 million of settlement funds. The parties agreed after trial to assign a value of $900,000 to be added back to Vicbir. The appellant submits that there was no evidence or argument on the value of the litigation, that the adjustment occurred over 12 years before and was out of time, that the trial judge himself selected the legal fees paid as the value of the litigation, and that in fact the value of the litigation should have accrued to Robert and not to the company.
[19] We would not give effect to this submission. The trial judge spent a considerable portion of his reasons on the proper allocation of the $22 million sale of the Birks store shares, the voting trust certificates and the litigation. He referred to the Samson Report, commissioned at the time, which alluded to the fact that the litigation should be accorded some value. He reasoned that the litigation had tactical value to Robert and because it was financed by Vicbir and was difficult to value 13 years after the fact, a reasonable value was what Vicbir paid for it. In our view, it was within the discretion of the trial judge to make this determination and we would not interfere with it.
[20] The appellant submits that the trial judge erred in awarding the respondents an add-back of $1.1 million for legal fees incurred by Vicbir that were expended for Robert's benefit over time. He submits that the amount acknowledged by Robert was $1 million and that the trial judge misapprehended the amount. It is clear from the reasons that the trial judge chose the amount of $1.1 million as the mid-point between the $1 million suggested by Robert and the $1.2 million suggested by the sisters. In order to attribute interest fairly on that amount, which had been paid for legal fees over time, the trial judge divided the amount into segments to be treated as having been paid at designated points in time. The fact that a figure of $650,000 was treated as accruing interest from January 1989 does not, in our view, reflect confusion with the premium on legal fees paid to Mr. Miller in connection with the settlement with Jonathon Birks.
[21] The appellant submits that the trial judge erred in not applying the doctrine of laches, or in giving an oppression remedy for matters that were not current, relying on the Manitoba Court of Appeal decision in Jaska v. Jaska (1996), 1996 2926 (MB CA), 141 D.L.R. (4th) 385, 30 B.L.R. (2d) 104 (Man. C.A.). The trial judge considered and rejected the appellant's submission that laches should bar the remedy in this case. He found that any delay by the sisters did not reflect acquiescence on their part as they were trying to achieve some resolution with their brother since 1991, based on his promises. He also found that the appellant had not altered his [page821] position because of any delay, and that justice between the parties required a remedy to be given, not withheld.
[22] Jaska is not applicable here because it was decided under the Manitoba Limitation of Actions Act, R.S.M. 1987, c. L150 (Waxman v. Waxman, 2002 49644 (ON SC), [2002] O.J. No. 2528 (QL), 25 B.L.R. (3d) 1 (S.C.J.)). In Jaska, the Manitoba Court of Appeal decided that the "basket clause" of the Limitation of Actions Act applied to oppression actions brought under Manitoba's Corporations Act, R.S.M. 1987, c. C225. The Ontario Limitations Act, R.S.O. 1990, c. L.15 does not have such a provision. The court also stated that the scope and purpose of the oppression provisions of various corporations statutes requires that oppression actions be brought in a timely manner. On the facts of this case, the matters raised with respect to oppression are not stale and were raised in a timely manner. There is no basis to interfere with the trial judge's determination of this issue.
[23] The appellant submits that the purchase of Susan's shares by Robert was not a corporate but a personal transaction and therefore not the proper subject of an oppression remedy. The trial judge specifically found that the portion of the shares for which he gave a remedy were sold by Susan because she needed money as a result of Robert's oppressive conduct of not allowing the company to pay dividends to the sisters. There is no basis to interfere with this finding.
[24] The appellant submits that the trial judge erred in law by finding that failure to declare dividends could be an act of oppression, arguing that declaring dividends was a matter within the discretion of the directors. This argument was linked with the argument discussed above, that there was no basis for the sisters to have a reasonable expectation that the company would be a source of a steady income for them, rather than just a form of long-term financial security. The trial judge made no error. He was entitled to find that the Miller letter was accepted by the family and formed the basis for the reasonable expectation that the company would implement a dividend policy, and that although Robert also accepted this advice and agreed to implement it, his actions were intended and did have the effect of procrastination to avoid implementation.
CROSS-APPEAL
[25] The respondents raise two issues by way of cross-appeal. First, they claim that the trial judge erred because he ordered a remedy that does not produce what he said he intended, namely, that the respondents receive the highest value for their Vicbir [page822] common shares, regardless of which method of distribution was selected. As part of the first issue, the respondents also claim that the trial judge ought to have ordered that Rob purchase their shares rather than ordering a share redemption by the company.
(1) The CDA and RDTOH Tax Accounts
[26] The trial judge ordered that the respondents' Vicbir shares be purchased for cancellation based on a valuation formula that he devised, which included an unequal distribution of Vicbir's capital dividend account (CDA) to the respondents as compensation for their share of Vicbir's refundable dividend tax on hand (RDTOH). The trial judge believed that the formula would result in the respondents receiving "appropriate value for their interest . . . in line with Rob's agreement that in principle they should receive . . . the most favourable [value] ... of any of the reviewed proposals (i.e. double or single wing butterfly, windup, or purchase for cancellation)" (Emphasis added). He also said that the respondents should share in the CDA and RDTOH accounts "since they would have had the benefit of these accounts if they had remained shareholders unoppressed in Vicbir" [[2002] O.J. No. 2505 at para 3 (S.C.J.)].
[27] The respondents submit that the trial judge erred in the articulation of the formula, because a distribution based on a notional wind-up produces a share value well in excess of the value produced by the trial judge's formula. In addition, they claim that the tax accounts adjustment does not work mathematically in the way the trial judge appeared to anticipate, with the result that they receive no value for Vicbir's RDTOH. Finally, the respondents claim that the trial judge should have ordered that Robert purchase their shares in Vicbir, because they should not have to bear the risk of what has happened in Vicbir subsequent to the valuation date and because that is the usual remedy ordered in oppression cases.
[28] We agree that the tax accounts adjustment set out in paras. 58 f. and h. contains an error and does not give the respondents appropriate compensation for their share of Vicbir's RDTOH. However, apart from correcting that error, we would not give effect to the respondents' submissions on this issue. We are satisfied that as corrected, the trial judge's formula achieves its intended purpose of giving the respondents "appropriate value for their interest . . . in line with Rob's agreement that in principle they should receive . . . the most favourable [value] ... of any of the reviewed proposals (i.e. double or single wing butterfly, windup, or purchase for cancellation)". [page823]
[29] The trial judge attempted to compensate the respondents for their interest in the corporation's CDA and the RDTOH tax accounts by giving them the whole of the CDA as compensation for their pro rata share of the CDA and as partial compensation for their pro rata share of the RDTOH. He also created a formula for a compensating credit for any balance of their pro rata share of the RDTOH that was not fully recognized by allocating the excess CDA to them.
[30] The trial judge appears to have erred in structuring the compensating credit in a way which did not fully compensate the respondents for their interest in the corporation's RDTOH. This is illustrated by comparing the distribution the trial judge said the respondents were entitled to as compensation for their share of the RDTOH, with the actual value of their share of the RDTOH and with the amount they would get using his formula.
(a) The Respondents' Pro Rata Share of the CDA [Note 1]
[31] Using Susan's readjusted interest in the common shares of Vicbir [Note 2], the respondents had a combined total of 32.5 per cent of the common shares as of December 31, 2000. On that date, Vicbir's CDA was $1,946,585. Accordingly, the respondents' pro rata share of the CDA totalled $632,640 ($1,946,585 x 32.5 per cent).
(b) The Value of the Respondents' Excess Share of the CDA as Partial Compensation for their Pro Rata Share of the RDTOH
[32] As partial compensation for their pro rata share of the RDTOH, the trial judge allocated to the respondents the CDA in excess of their pro rata share, namely, $1,313,945 ($1,946,585 - $632,640). The sum of $1,313,945 would therefore be paid to the respondents in the form of a capital dividend as part of the redemption price otherwise payable for their common shares. It is not itself an adjustment to the price and it does not, in itself, form part of the compensation for the respondents' share of the RDTOH. Rather, the compensation arises from the tax savings that the respondents would realize as a result of receiving payment in the form of capital dividends. Because shareholders receive capital dividends paid from the CDA on a tax-free basis, the respondents would realize tax savings in the amount of 31.33 per cent [Note 3] [page824] on the excess CDA forming part of the redemption price, amounting to $411,659 ($1,313,945 x 31.33 per cent) in after-tax dollars.
(c) The Compensating Credit for the Value of the Respondents' Share of RDTOH Not Accounted for by the Allocation of Excess CDA
[33] Using the trial judge's formula, the determination whether the respondents would be entitled to a compensating credit for the value of any part of their share of RDTOH not accounted for by allocating to them the excess CDA, required comparing the after-tax value of the respondents' pro rata share of the RDTOH to the tax they would save by receiving excess CDA.
[34] As of December 31, 2000, the Vicbir RDTOH was $5,241,000, of which the respondents' undiscounted pro rata share was $1,703,325. Accordingly, the value of the respondents' pro rata share of the RDTOH is $1,169,674 in after-tax dollars ($1,703,325 less 31.33 per cent), whereas the tax savings they achieve from receiving excess CDA is only $411,659. Accordingly, the undiscounted value of the necessary compensating credit should be $758,015 in after-tax dollars ($1,169,674 - $411,659), or $1,103,852 in pre-tax dollars. However, the trial judge's formula does not produce such a credit.
[35] The trial judge's formula in para. 58 h. [[2001] O.J. No. 5540 (QL) (S.C.J.)] for calculating the compensating credit is:
Add their [the sisters'] pro rata interest in the CDA plus 50 [per cent] of the pro rata interest in the RDTOH and subtract therefrom the CDA actually utilized.
The respondents' pro rata share of the CDA is $632,640 (32.5 per cent x $1,946,585). Fifty per cent of their pro rata share of the RDTOH is $851,663 (50 per cent x (32.5 per cent x $5,241,000)). The CDA actually utilized is $1,946,585. The net result is a zero compensating credit, based on a negative result, namely, - $462,282. This was not the intended effect.
[36] The formula for the compensating credit does not produce the intended result because it offsets a percentage of the RDTOH against the excess CDA allocated to the respondents, rather than offsetting the after-tax value of the RDTOH against the tax saved as a result of receiving the excess CDA. Put another way, the items the trial judge used to calculate the credit for RDTOH not accounted for in para. 58 f. are not equivalent, and consequently, do not produce an appropriate compensating credit. [page825]
[37] The trial judge did not explain how he arrived at the specific formula set out in para. 58 h. It is not clear whether the 50 per cent discount stipulated in para. 58 h. is part of the arithmetic formula for calculating the compensating credit, or whether it was intended as some form of discount, such as a present value discount. Either way, in our view, it is not an appropriate discount. The calculations set out above demonstrate that the formula in paragraph 58 h. does not achieve its intended effect, with or without the 50 per cent discount. Further, in our view, a present value discount is not appropriate in this case. Although RDTOH would normally be distributed over time, because on a wind-up the RDTOH would be realized within a relatively compressed time frame, it should therefore be part of the calculation on a notional wind-up and requires no present value discount.
[38] Rather than attempting to correct the approach in para. 58 h., we would adopt a simpler approach and direct that Vicbir structure the dividend payments to the respondents so that they receive their pro rata share of the CDA and the resulting tax savings, and compensate them directly for their pro rata share of the RDTOH.
[39] Accordingly, in order to correct the unintended effect of subpara. 58 h. as it currently stands, but to achieve the notional wind-up value intended by the trial judge, we would delete existing subparas. 58 f. and h. and substitute the following:
f. Vicbir is to structure the deemed dividend so that the sisters receive a capital dividend to the extent of their pro rata share of the CDA.
h. Each of the sisters is to receive a compensating credit in the amount of their pro rata interest in the RDTOH [Note 4].
[40] Because the respondents are no longer receiving more than their share of the CDA, the appellants' concern regarding the General Avoidance Rule is no longer relevant.
[41] In our view, given that the capital gains taxes payable by the corporation on a wind-up would be more or less equivalent to the benefits to the shareholders through the augmentations of the CDA and RDTOH accounts created by the realization of the capital gains which would be distributed on the wind-up, the trial judge's valuation method (as adjusted in these reasons), operates as a summary method of calculating notional wind-up value and [page826] we see no basis for ordering a different method of valuation or additional reports. Our review of the February 25, 2002, report (the "Sohmer report") provided and relied on by the respondents does not dissuade us from this view.
[42] Finally, we would not set aside the trial judge's order that the realization proceed by way of share redemption. In fashioning a remedy, the trial judge relied on the appellant's acknowledgment that the respondents should receive the highest value of any of "the reviewed proposals (i.e., double or single wing butterfly, windup, or purchase for cancellation)". On appeal, the respondents have also relied on the appellant's acknowledgment. Although, at trial, the respondents requested that Rob purchase their shares, that was not one of the options that the appellant referred to in its acknowledgment. In the circumstances, we see no basis for interfering with the trial judge's exercise of discretion in fashioning an appropriate remedy.
(2) The "Amends"
[43] The second issue raised by the respondents on their cross-appeal is that the trial judge erred in holding that the oppression remedy is not flexible enough to provide relief to rectify the oppressive conduct of Rob in demanding that Susan turn over 40 common shares to him and pay him $19,000 by way of "amends". In the alternative, the respondents claim that the trial judge failed to consider the doctrine of unconscionability in disposing of this claim.
[44] We would not give effect to this ground of appeal. The trial judge made express findings that "the family bought into the question of amends" and that "payment of amends . . . fit within [Susan's] reasonable expectations of treatment". In our view, these findings were available on the record and the finding concerning Susan's reasonable expectations fully negates the suggestion of either oppression by Rob or of an unconscionable transaction.
DISPOSITION OF THE APPEAL AND CROSS-APPEAL
[45] We would dismiss the appeal and allow the cross-appeal in part. Paragraphs 1(g) and (h) of the judgment dated December 4, 2001 are deleted and the following subparagraphs are substituted:
g. the purchase shall be structured so that the applicants receive a capital dividend to the extent of their pro rata share of the CDA.
h. each of the applicants is to receive a compensating credit in the amount of their pro rata interest in the RDTOH.
We would dismiss the balance of the cross-appeal. [page827]
COSTS
[46] The parties have helpfully agreed on the quantum of costs. The issues are the award and the scale of costs. The respondents seek costs on the substantial indemnity scale for both the appeal and cross-appeal. The appellants submit that costs on the partial indemnity scale should follow the event. The trial judge also considered this issue and ordered costs on the partial indemnity scale to the respondents because of his view that there was mixed success and that although the conduct of Robert Birks was in some cases "atrocious", the respondents had also engaged in some "overreaching".
[47] The trial judge was in the best position to assess the situation having seen the parties and heard the evidence. We would follow his assessment and conclusion for the appeal as well. The respondents were wholly successful on the appeal and partially successful on the cross-appeal, but on a significant matter, which could have been resolved before Farley J. on a re-attendance. We would therefore award costs to the respondents of both the appeal and cross-appeal on the partial indemnity scale. The agreed figure is therefore $135,000.
Order accordingly.
APPENDIX
(1) Book Value to Market
Shareholders Equity at book value $19,714,762 [Note 5]
Gain at December 31, 2000 5,574,087 [Note 6]
Less 1% Disposition Costs -195,899 [Note 7]
Less Preferred Shares - 3,002,998 [Note 8]
(2) Adjustments to value ordered by the trial judge
i) Adjustment re Jon's Purchase + 900,000
ii) Professional fees + 1,100,000
iii) Interest + 647,405 [Note 9]
(3) Total Common Share Value $24,737,357[page828]
(4) Calculation of taxable and Nontaxable Dividend Amounts
Total Common Share Value $24,737,357
Return of Capital - 2,000,000
CDA (Available for Capital Dividends) - 1,946,585
Total Value to be Distributed by Taxable Dividends $20,790,772
(5) Allocation of total common share value to the respondents
$24,737,357 20% 12.5%
2,000,000 Return of Capital $ 400,000 $ 250,000
1,946,585 Pro Rata CDA 389,317 243,323
$20,790,772 Taxable Dividend 4,158,154 2,598,846
$5,241,000 Pro Rata RDTOH 1,048,200 655,125
(6) Calculation of estimated after tax value to the respondents
a) Calculation of tax on taxable dividends
Taxable Dividend $4,158,154 2,598,846
Tax (31.33%) 1,302,749 814,218
Dividend Net of Tax $2,855,405 $1,784,628
b) Calculation of Tax on Share of RDTOH
Pro Rata RDTOH $1,048,200 $655,125
Net RDTOH $719,799 $449,875
c) Estimated after Tax Value
Return of Capital $ 400,000 $250,000
Pro Rata CDA 389,317 243,323
Dividend Net of Tax 2,855,405 1,784,628
Net RDTOH 719,799 449,875
[page829]
Notes
Note 1: Figures are not in dispute, and for the purpose of these reasons are taken from the Wise Report provided by the appellants.
Note 2: See para. 58 c. of the trial judge's reasons.
Note 3: Ontario taxpayers pay a 31.33 per cent tax on taxable dividends.
Note 4: See Appendix for our estimate of the redemption price of the respondents' common shares based on these revisions.
Note 5: Wise Report, Schedule 2.
Note 6: Wise Report, Schedule 3.
Note 7: Both Wise and Low estimated the disposition costs based on the aggregate fair value of the stocks, namely $19,589,900.
Note 8: Wise Report, Schedule 1A.
Note 9: Sohmer Report, Schedule 1AE; acknowledged as accurate by counsel for the appellant in oral argument.