ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
LANE, THEN AND PARDU JJ.
B E T W E E N:
WILLIAM HALL
Plaintiff
(Respondent)
- and -
JOHN ATTO, BARBARA HUBEL, JONI THOMPSON, ROBERT PISSEY, ROBERT ATTO, MARY ATTO and ATTO & ASSOCIATES INSURANCE BROKERS INC.
Defendants
(Appellant)
Barry H. Bresner & Robert Dawkins, for the Respondent
Donald M. Plumley, Q.C. & Joseph C. D’Angelo, for the Appellant, John Atto
HEARD: November 21, 2005
1John Atto appeals from the judgment of Swinton J. which established the value of the minority shareholding held by William Hall, and calculated the amounts of excessive compensation taken by Atto, the majority shareholder, and expenses paid for by the corporation but not incurred for its benefit, and the resulting detriment to the minority shareholder.
2In an earlier judgment Farley J. had ordered a trial of these issues, after finding that John Atto had acted oppressively and unfairly disregarded the Hall’s interest as a minority shareholder. He held that Atto had taken excessive compensation and benefited personally from the company’s sponsorship of a horse race. Atto was directed to purchase Hall’s interest in Atto & Associates Insurance Brokers Inc. at fair market value without minority discount and further to compensate Hall for the unjustified compensation taken by John Atto and his wife and for the amount spent on the horse race which was not for the benefit of the business.
3The Appellant argues that Swinton J. erred in the following respects:
At the opening of trial the Appellant moved to amend his Statement of Defence. He had admitted that Hall “held approximately 10% of the issued and common shares of AAIB”, but wished to add an allegation that since Hall had executed a transfer of these shares to a family holding company, he was no longer a shareholder and was no longer entitled to compensation for the oppression. The Appellant says he only received these transfer documents on the eve of trial and that Swinton J. ought to have allowed the amendment to pursue this argument.
There were four appraisers who testified at trial. The Appellant argues that the trial judge ought to have weighed their evidence differently and that she erred in the following respects:
(a) Finding that $445,000 per annum was a reasonable figure for annual compensation for the Attos;
(b) Miscalculating the actual compensation taken by the Attos by relying on amounts related to the calendar year rather than the fiscal year;
(c) Disallowing 50% of the Atto Mile horse race expenses and refusing leave to the Appellant to correct an answer given at discovery;
(d) Failing to discount the valuation of the company to reflect J. Atto’s unwillingness to agree to a non-competition covenant with a national purchaser;
(e) Including contingent profit commissions in earning when there was an issue whether those would be received in the future and were not in fact received in the period following valuation date;
(f) Failing to reduce the projected maintainable earnings by the cost of increased numbers of staff projected by some of the witnesses.
Background
4AAIB carries on the business of an insurance broker. Hall was an employee of the business from December, 1993 until the end of 1994 and was a director of the corporation from 1992 until May, 1997. In 1997 he had a falling-out with Atto and has had no active role in the company since except as shareholder. At the valuation date, June 25, 2001, Hall held 102,000 shares or 10.08% of the company; the holding company controlled by John and Mary Atto held 890,000 shares or 88%.
5In 1999, Hall and his wife executed a transfer of the 102,000 shares to a family holding company controlled by them (“Admiral”) in exchange for a promissory note for $1.1 million. Hall issued this application in December, 2000.
6The Appellant argues that “none of this was disclosed”, that documentation was finally provided shortly before trial, and that the trial judge ought to have allowed an amendment to add a pleading that “Hall had no beneficial interest in the shares and therefore no interest in AAIB to be valued” and that “by having already received consideration of $1.1 million from Admiral as of 1999 for the sale of the shares, Hall should not be entitled to a further cash payment for those same shares”.
7The compensation trial took place in November and December, 2003. Hall had written to the corporation on May 5, 1999, asking that his shares be transferred to an incorporated company. When cross-examined by Atto’s counsel on June 15, 2000, Hall said he had transferred his shares to a family corporation two years earlier. The Appellant did not raise any issue as to Hall’s ownership of shares during the trial before Farley J., the appeal to the Divisional Court nor on the motion for leave to appeal to the Court of Appeal.
8The Statement of Claim for the compensation phase was issued on April 23, 2002, and the Statement of Defence conceded that Hall was the holder of the shares.
9The Agreed Statement of Facts filed at trial indicated:
As of the valuation date, the AAIB Shareholder’s Register reflects the following holdings of common shares:
William Hall 102,000 shares (10.08%)
1119595 Ontario Limited (John & Mary Atto’s holding company) 890,000 shares (88%)
10On November 29, 2002, Hall was examined under oath and indicated that his shares were held by a family corporation, “Admiral”. At that time, Hall’s counsel asked Atto’s counsel if he intended to make an issue of the share transfer. Atto’s counsel responded that he did not intend to make an issue of the transfer and did not do so in the trial before Farley J. This understanding was confirmed by letter. Had the transfer been an issue, Hall’s counsel would simply have added the family holding company as a party.
11On April 7, 2003, Atto filed a motion for “an Order that the application be dismissed as the beneficial owner of the shares, Admiral Business Forms Inc. was not before the court when the Order of His Honour Judge Farley dated June 25, 2001 was made”.
12Hall’s counsel reminded Atto’s new counsel of the earlier understanding and the motion was not pursued.
13Atto’s counsel cannot have been taken by surprise by the Hall purported transfer to Admiral, and had expressly abandoned any reliance upon that issue. To raise the issue again, after the liability hearing, at the start of the compensation trial was surely not appropriate and Swinton J. was correct to dismiss the motion.
14Even if the amendment had been made, the result would not have been different. As of the date of trial, Hall was still the registered owner of the shares. While John Atto had apparently told Hall at one point that he would consent to the transfer, according to the corporate share register, Hall was still the registered holder of the shares. From this it is reasonable to infer that the Board of Directors never approved the transfer as required by the corporate articles. Thus the purported transfer by Hall to Admiral was not effective to transfer the legal ownership of the shares. As registered holder of the shares, Hall was entitled to the relief awarded. Section 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16 (the “OBCA”), provides, in part, that:
(a) a complainant …may apply to the court for an order under this section; and
(b) in connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing:
i) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder; or
ii) an order compensating an aggrieved person.
The definition of complainant in section 245 of the OBCA includes a “registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation”.
15As “security holder” and “aggrieved person”, Hall was entitled to the remedies granted by Farley J. which were not overturned on appeal.
Compensation
16The Appellant essentially argues that the trial judge ought to have weighed the evidence of the four valuators differently. There was evidence which supported the conclusions of the trial judge. An appellate court must not retry a case. As noted in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at para. 1:
A proposition that should be unnecessary to state is that a court of appeal should not interfere with a trial judge’s reasons unless there is a palpable and overriding error. The same proposition is sometimes stated as prohibiting an appellate court from reviewing a trial judge’s decision if there was some evidence upon which he or she could have relied to reach that conclusion.
The same deference is owed to a trial judge’s evaluation of expert evidence. (Delrina Corp. v. Triolet Systems Inc. (2002), 2002 11389 (ON CA), 58 O.R. (3d) 339 (C.A.)
17Assessment of fair market value is “not a mechanical or formalistic process of choosing one and applying the formula to produce an answer with the illusion of mathematical certainty. To the contrary, the determination of fair value has been recognized as an exercise in judgment. It is necessary that a court exercise the best judgment that can be brought to bear on all the evidence relating to the value of the shares and a determination of the best approach(s) to the problem.” Market value means “the highest price available in an open and unrestricted market between informed, prudent parties acting at arm’s length and under no compulsion to act”.
New Quebec Raglan v. Blok-Anderson (1993), B.L.R. (2d) 93 at p. 108; Brant Investments Ltd. v. KeepRite Inc. (1987), 1987 4366 (ON SC), 60 O.R. (2d) 737
18Further, as noted in Smeenk v. Dexleigh Corp. (1990), 1990 6935 (ON SC), 74 O.R. (2d) 385 at 404:
Valuation of shares under s. 190 of the Act is a matter of assessment in accordance with the facts of the particular case. It is not proper for the court to adopt a rigid formula and to view the matter as one of seeking mathematical precision. Whatever the decision, there is an important element of judgment involved and particular attention must be given to seeking a value that is fair having regard to all the circumstances; this invokes the equitable jurisdiction of the court.
19Keeping these principles in mind I turn then to consider the specific complaints raised by the Appellant.
20The mid points of the various appraisers’ evidence of the value of Hall’s shares were as follows:
{Horvath 1,020,000
Hall’s experts {
{Penner 880,000
{Walker 680,000
Atto’s experts {
{Strezos 519,000
21The trial judge rejected the opinions at the upper and lower extremes on the grounds that the underlying assumptions were overly pessimistic or optimistic, that the methodology used was not the most appropriate (Horvath) or that the wrong valuation date was selected (Strezos). She focussed on the key differences which led to the different views expressed by Walker & Penner.
Compensation taken by the Attos
22The Appellant argues that the trial judge erred in using an annual figure of $445,000 as a reasonable level of compensation for the Attos in order to calculate excess compensation paid. Three of the experts used this figure, and the fourth, Strezos, used $450,000. The Hay Report filed at trial related that the median (i.e. halfway point between the highest and lowest) remuneration for Chief Executive Officers in publicly-traded companies who were also significant shareholders inclusive of salary, bonuses and stock options was $445,000 for 2000, and that 75% of those twenty-five in fact earned less than $400,000. Hall testified that he did not know Atto’s salary and was told it was none of his business. The trial judge was entitled to accept this and conclude that Hall had not agreed or acquiesced in higher compensation and that $445,000 would have been reasonable compensation.
Calendar Year vs. Fiscal Year
23The trial judge calculated excess compensation over the period from August 1, 1997 to June 25, 2001. Atto’s actual income for the fiscal year Feb. 1, 2001 to Jan. 31, 2002 was $1,613,567. The income in the calendar year 2001 was $2,020,168. The Appellant argues that this results in an overstatement of $406,601 for one fiscal year. The Appellant did not advance this argument at trial.
24Given that the trial judge had to calculate excess compensation over nearly four years, I am not satisfied that the overall calculation was inaccurate; for that purpose the fiscal or calendar year to which the compensation is assigned is not crucial.
25The Appellant’s own expert, Walbe, did not disagree with the methodology used which applied average monthly salaries calculated per calendar year and applied the fiscal year salaries.
Sponsorship of the Horse Race
26For several years, AAIB sponsored a horse race know as the “Atto Mile”. Mr. Atto was himself an avid horseman, owning 20-30 horses.
27There was ample basis for the trial judge’s conclusion that 50% of the expense was personal. She did not err in refusing to allow the Appellant to correct answers given on discovery after the Plaintiff’s case had closed and on the sixth day of an eight-day trial. The evidence was not enormously significant in any event. Sponsorship brought with it the right for four thirty-second commercial advertisements. At discovery he said he did not know if they had been used and later in answering undertakings said they had not. Atto was in the best position to testify about the dimensions of the personal component of the Atto Mile, and the trial judge did not err in inferring that his evidence would not have helped his case.
Non-Competition Covenant
28Three of the four experts testified that no discount should be applied to the fair market valuation on the basis that Atto might not agree to a non-competition agreement, as it would be reasonable to assume that a willing buyer and seller would execute such an agreement. The trial judge did not err in accepting this evidence, particularly in the absence of any evidence from Atto himself.
Contingent Profit Commissions
29About 70% of AAIB’s income was derived from one insurer, Allianz. Where premiums exceeded claims paid on insurance placed by AAIB, the broker was entitled to a share of the profit. By early 2000 however, Allianz was suffering a net loss on the policies sold by AAIB. By 2001 Allianz was expressing ominous concerns about the profitability of AAIB’s portfolio. The two appraisers in the mid-range, Walker and Penner, both included contingent profit commissions in their calculations, assuming there would likely be contingent profit commissions in the future. Horvath said it was not appropriate to project contingent profits but that he would have used a lower multiplier had he done so, to reflect the increased risk. While Strezos did not include contingent profits in his calculations, he anticipated a return of positive market conditions in 2002 for this cyclical industry.
30It was open to the trial judge to find on the evidence that there would likely be contingent profits in the future, although it happened that there were none in the year following valuation day.
Increased Support Staff
31Strezos and Walker assumed in their calculations additional costs to hire seven or eight more staff. The trial judge dealt with this issue at paragraphs [68] and [69]:
68If one looks at the evidence with respect to staffing in June, 2001, there is no documentation suggesting the hiring of a significant number of new staff was likely. While there were difficulties with Allianz, there was nothing to indicate that 6 to 8 new staff would be added in the immediate future. In fact, it is unclear who was hired and at what cost over the year, even after hearing Ms. Hubel’s evidence. It appears that as of June, 2001, three people had already been added to staff, so that it would be improper to assume a further six to eight staff would be hired, given the wording of the August memo.
69Finally, the practice at the company was to hire staff each year as revenues increased, and revenues were still healthy and increasing as of June, 2001. Ms. Hubel said on cross-examination that the company was adding staff on an annual basis through the 1990s, and salaries were going up annually. Therefore, I find that there should be no adjustment for the hiring of new staff, as inclusion of an amount for a significant number of new employees seems correct only with the application of hindsight, and there were no clear plans to make significant additions to staff prior to the valuation date.
32Again, it was up to the trial judge to weigh the evidence, and her conclusions were not unreasonable in light of the evidence.
33From the foregoing it follows that the appeal must be dismissed.
34Costs should follow the result. The parties may submit brief written submissions regarding costs, the Respondent by Jan. 2, 2006, the Appellant by Jan. 15, 2006.
PARDU J.
I agree
LANE J.
I agree
THEN J.
Released:
COURT FILE NO.: 396/04
DATE: 20051130
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
LANE, THEN AND PARDU JJ.
B E T W E E N:
WILLIAM HALL
Plaintiff
(Respondent)
- and -
JOHN ATTO, BARBARA HUBEL, JONI THOMPSON, ROBERT PISSEY, ROBERT ATTO, MARY ATTO and ATTO & ASSOCIATES INSURANCE BROKERS INC.
Defendants
(Appellant)
JUDGMENT
PARDU J.
Released: November 30, 2005