Greenlight Capital, Inc. et al. v. Stronach et al. [Indexed as: Greenlight Capital, Inc. v. Stronach]

91 O.R. (3d) 241

Ontario Superior Court of Justice,

Divisional Court,

Kitely, Molloy and Swinton JJ.

July 10, 2008

Corporations -- Oppression -- Costs -- Trial judge finding that oppression application was brought to achieve business result and amounted to abuse of process, that none of the allegations of oppression was substantiated and that serious and unfounded allegations of misconduct were made against individuals -- Trial judge not erring in awarding costs to respondents on substantial indemnity basis as result.

Corporations -- Oppression -- Reasonable expectations -- Business judgment rule -- Trial judge not erring in his analysis of shareholder's reasonable expectations or in his application of business judgment rule.

The appellant, an investment management firm, acquired shares in MID, a real estate operating company, when MID was spun off by Magna. As a result of the spin-off, MID acquired Magna's controlling interest in MEC, a company that owned and managed racehorses and gambling facilities. MID established a Special Committee of its Board of Directors to review and make recommendations to the MID Board with respect to related party transactions between MID and MEC and between MID and Magna. The appellant brought an application pursuant to s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA") attacking certain transactions between MID and MEC and complaining of the lack of independence of the Special Committee. The application was dismissed. The application judge awarded costs to the respondents on a substantial indemnity basis on the grounds that the application was brought to achieve a business result and amounted to an abuse of process and that the allegations of oppressive misconduct and impropriety were totally unfounded. The appellant appealed.

Held, the appeal on the merits should be dismissed; the appeal from the costs order should be allowed in part.

The standard of review with respect to the application judge's legal findings was correctness. The standard of review with respect to his findings of fact was palpable and overriding error.

The application judge did not err in his analysis of reasonable expectations or in concluding that MID did not thwart the appellant's reasonable expectations by entering into the challenged transactions with MEC. He took the correct approach in first considering the public statements of MID to determine the reasonable expectations of shareholders and then, having found that the type of transactions with MEC fell within the reasonable expectations of the shareholders, going on to determine whether the directors breached their duties under s. 134 of the OBCA in relation to the challenged transactions. There was ample evidence to support his conclusions that MID had not been diverted from its core real estate business and had not improperly diverted funds to the horse racing and gambling activities of MEC, and that to the extent there had been any change in MID's business strategy with respect to MEC, this arose from unforeseen circumstances. He did not err in his application of the business judgment rule. [page242]

The application judge was aware that substantial indemnity costs are awarded only in exceptional cases, and concluded that this was such a case based on three considerations: none of the many allegations of oppression was substantiated; serious allegations of misconduct were made against individuals that were unfounded; and the court's process was misused for business purposes. Given that combination of factors, the trial judge did not err in principle in awarding costs on a substantial indemnity basis. With respect to the quantum of costs, the trial judge erred in awarding costs that were incurred before the notice of application was served. The costs award was reduced accordingly.

APPEAL from a judgment of Ground J. of the Superior Court of Justice, dated October 30, 2006, dismissing an oppression application and from a costs award.

Cases referred to 820099 Ontario Inc. v. Harold E. Ballard Ltd., [1991] O.J. No. 1082, 3 B.L.R. (2d) 113 (Div. Ct.), 27 A.C.W.S. (3d) 1160 (Div. Ct.), affg [1991] O.J. No. 266, 3 B.L.R. (2d) 113, 25 A.C.W.S. (3d) 853 (Gen. Div.); Benson v. Third Canadian General Investment Trust Ltd. (1983), 1993 8596 (ON SC), 14 O.R. (3d) 493, [1993] O.J. No. 1491, 13 B.L.R. (2d) 265, 41 A.C.W.S. (3d) 298 (Gen. Div.); Casurina Ltd. Partnership v. Rio Algom Ltd., 2004 30309 (ON CA), [2004] O.J. No. 177, 181 O.A.C. 19, 40 B.L.R. (3d) 112, 128 A.C.W.S. (3d) 491 (C.A.) [Leave to appeal to S.C.C. refused [2004] S.C.C.A. No. 105]; Equity Waste Management of Canada v. Halton Hills (Town) (1997), 1997 2742 (ON CA), 35 O.R. (3d) 321, [1997] O.J. No. 3921, 103 O.A.C. 324, 40 M.P.L.R. (2d) 107, 74 A.C.W.S. (3d) 297 (C.A.); Greenhalgh v. Arderne Cinemas Ltd., [1951] Ch. 286, [1950] 2 All E.R. 1120, [1950] W.N. 564 (C.A.); Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, 2004 SCC 9, 235 D.L.R. (4th) 193, 316 N.R. 265, J.E. 2004-470, 184 O.A.C. 209, 40 B.L.R. (3d) 1, [2004] CLLC Â210-025, 128 A.C.W.S. (3d) 1111; Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1, 112 A.C.W.S. (3d) 991; Hunt v. TD Securities Inc. (2003), 2003 3649 (ON CA), 66 O.R. (3d) 481, [2003] O.J. No. 3245, 229 D.L.R. (4th) 609, 175 O.A.C. 19, 36 B.L.R. (3d) 165, 39 C.P.C. (5th) 206 (C.A.); Pente Investment Management Ltd. v. Schneider Corp. (1998), 1998 5121 (ON CA), 42 O.R. (3d) 177, [1998] O.J. No. 4142, 113 O.A.C. 253, 44 B.L.R. (2d) 115, 83 A.C.W.S. (3d) 51 (C.A.), affg 1998 14808 (ON SC), [1998] O.J. No. 2036, 62 O.T.C. 1, 40 B.L.R. (2d) 244, 79 A.C.W.S. (3d) 930 (Gen. Div.); Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64, 2004 SCC 68, 244 D.L.R. (4th) 564, 326 N.R. 267, J.E. 2004-2016, 49 B.L.R. (3d) 165, 4 C.B.R. (5th) 215, REJB 2004-72160, 134 A.C.W.S. (3d) 548; Stelco Inc. (Re) (2005), 2005 8671 (ON CA), 75 O.R. (3d) 5, [2005] O.J. No. 1171, 253 D.L.R. (4th) 109, 196 O.A.C. 142, 2 B.L.R. (4th) 238, 9 C.B.R. (5th) 135, 138 A.C.W.S. (3d) 222 (C.A.); Themadel Foundation v. Third Canadian General Investment Trust Ltd. (1998), 1998 973 (ON CA), 38 O.R. (3d) 749, [1998] O.J. No. 647, 107 O.A.C. 188, 77 A.C.W.S. (3d) 983 (C.A.); Toronto-Dominion Bank v. Grande Caledon Developments Inc. (1998), 1998 593 (ON CA), 39 O.R. (3d) 93, [1998] O.J. No. 2094, 110 O.A.C. 164, 79 A.C.W.S. (3d) 898 (C.A.); Twaits v. Monk, 2000 14725 (ON CA), [2000] O.J. No. 1699, 132 O.A.C. 180, 8 C.P.C. (5th) 230, 97 A.C.W.S. (3d) 69 (C.A.); UPM- Kymmene Corp. v. UPM-Kymmene Miramichi Inc., 2004 9479 (ON CA), [2004] O.J. No. 636, 250 D.L.R. (4th) 526, 183 O.A.C. 310, 42 B.L.R. (3d) 34, 32 C.C.E.L. (3d) 68, 40 C.C.P.B. 114, 137 A.C.W.S. (3d) 742 (C.A.); Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 186 O.A.C. 201, 44 B.L.R. (3d) 165, 132 A.C.W.S. (3d) 1046 (C.A.); Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, [1993] S.C.J. No. 112, 108 D.L.R. (4th) 193, 160 N.R. 1, [1993] 8 W.W.R. 513, J.E. 93-1766, 34 B.C.A.C. 161, 84 B.C.L.R. (2d) 1, 18 C.R.R. (2d) 41, 49 R.F.L. (3d) 117, 43 A.C.W.S. (3d) 410 Statutes referred to Business Corporations Act, R.S.O. 1990, c. B.16, ss. 134, 248 [as am.], (2), 255 Courts of Justice Act, R.S.O. 1990, c. C.34, s. 131(1) [page243]

R. Paul Steep and Jeffrey E. Feiner, for applicants (appellants). Kent E. Thomson and James W.E. Doris, for respondents MI Developments Inc. and John Simonetti. Benjamin Zarnett and Tom Friedland, for respondents M. Douglas Young, Phillip K. Fricke, Manfred Jakszus and Barry Byrd. Peter F.C. Howard and Elliot N. Kolers, for respondents Frank Stronach and 445327 Ontario Limited.

The judgment of the court was delivered by

SWINTON J.: -- Overview

[1] The appellants, Greenlight Capital, Inc. and certain of its affiliates (together "Greenlight"), appeal from the judgment of Ground J. dated October 30, 2006, in which he dismissed Greenlight's application under s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA") for orders and declaratory relief that Greenlight and other shareholders of MI Developments Inc. ("MID") were oppressed. They also appeal from certain aspects of the costs award dated May 10, 2007.

Background Facts

[2] Magna International Inc. ("Magna") is an automotive supplier that is publicly traded on the New York and Toronto Stock Exchanges. MID is a real estate operating company that owns industrial and commercial properties, principally leased to Magna companies. It was initially the real estate division of Magna.

[3] Magna announced its intention to spin off MID on July 7, 2003. MID was incorporated and taken public in August 2003. As a result of this spin-off from Magna, MID acquired Magna's controlling interest in Magna Entertainment Corporation ("MEC"). MEC is a Delaware corporation, publicly traded on the Nasdaq National Market and the Toronto Stock Exchange. It owns and manages horseracing and gambling facilities in North America and Austria. MEC had become a separate public company from its original parent, Magna, in 2000.

[4] On August 18, 2003, MID issued a Spin-out Prospectus (the "Prospectus") in which it described the assets being transferred [page244] to MID and its relationship with MEC. The Prospectus described MID as a successor to Magna's real estate division, engaged in the ownership, development, management, leasing, acquisition and expansion of industrial and commercial real estate properties, with virtually all income producing properties under long-term leases to Magna and its subsidiaries.

[5] The Prospectus stated that MID held a controlling "strategic" investment in MEC, noting that its investment in MEC represented 53 per cent of MID's combined assets as at March 31, 2003 and 86 per cent of its combined 2002 revenue. Given the significance to MID of its investment in MEC, 11 pages of risk factors relating to MEC were included in the Prospectus (pp. 24-35).

[6] MEC was described as a separate public company with its own board of directors. At one point, MID stated [at p. 84] that it viewed its shareholdings in MEC as:

a strategic investment that will potentially provide us with the opportunity to participate in co-developments or joint ventures should MEC pursue the development of excess lands around its racetracks or undertake other commercial real estate developments.

[7] The Prospectus also stated that although MID had "no current plans" to do so, it might make further investments in MEC "whether in the form of debt, equity or otherwise" or decrease its holdings. At p. 131, it stated, "We are not subject to any restrictions regarding future investments in MEC."

[8] Greenlight is an investment management firm based in New York City that primarily makes long-term investments. David Einhorn is its chief executive. Greenlight had previously invested in MEC in 2000, disposing of the shares at a profit in 2002. At the time of the initial public offering of MID shares, Greenlight invested approximately $94 million in Class A shares of MID. Its 4,730,000 Class A shares represented approximately 10 per cent of the outstanding Class A shares of MID. Each share carries one vote.

[9] Frank Stronach is the founder of Magna and Chairman of Magna, MID and MEC. The Stronach Family Trust, of which Mr. Stronach and other family members are trustees, holds all outstanding shares in the respondent 445327 Ontario Limited ("445"). 445 is the controlling shareholder of MID, holding 66.3 per cent of the Class B shares of MID, which carry 500 votes per share. This amounts to 56.5 per cent of the total votes attached to all the shares.

[10] In January 2004, MID established a Special Committee of its Board of Directors to review and make recommendations to [page245] the MID Board with respect to related party transactions between MID and MEC and between MID and Magna. The original appointees to the Special Committee were the respondents Barry Byrd, Phillip A. Fricke and Manfred Jakszus. Douglas Young became a member on September 2, 2004. Mr. Byrd resigned in January 2005, reducing the Special Committee membership back to three.

[11] In August 2005, Greenlight brought an application pursuant to s. 248 of the OBCA, the oppression remedy provision. Its complaints included the lack of independence of the Special Committee; undue influence exercised by Mr. Stronach over the MID Board, the Special Committee and the MEC Board; failure to follow established corporate governance policies; challenges to certain transactions (the "Challenged Transactions"); treatment of the proposed privatization of MEC; and rejection of Greenlight's Proposals with respect to MID and MEC.

[12] The Challenged Transactions, which occurred between 2003 and 2005, are summarized as follows:

(1) MID's acquisition from MEC, in October 2003, of an option to purchase certain lands in Romulus, Michigan and the subsequent purchase of the lands (the "Romulus purchase");

(2) a proposal made by MID in March through July 2004 to acquire 100 per cent of MEC and combine the two companies into one that was withdrawn in September 2004 (the "Privatization Proposal");

(3) financing $192 million in loans for MEC in December 2004 with respect to development of racing assets at two MEC properties, Gulfstream Park in Miami Beach, Florida and The Meadows near Pittsburgh, Pennsylvania (the "Project Financings"); and

(4) extending a further $100 million to MEC in July 2005 for funding (the "Bridge Loan").

[13] Greenlight's Proposals, made in January 2005, included the spin-off of MEC from MID and the conversion of MID into a REIT. Over the course of a number of meetings, the Special Committee reviewed and considered the proposals with the assistance of its independent legal and financial advisors: Goodmans LLP and CIBC World Markets respectively. The Special Committee ultimately recommended the rejection of Greenlight's Proposals. At the May 4, 2005 Annual and Special Meeting of MID shareholders, Mr. Stronach voted against the REIT conversion proposal and thereby defeated the resolution. [page246]

The Decision of the Application Judge

[14] After a 13-day hearing and on the basis of a voluminous written record, the application judge issued a 43-page decision in which he dismissed the application. He rejected the arguments that MID was held out to investors as a conventional real estate company that would maintain only a passive investment in MEC, and that MID thwarted the reasonable expectations of Greenlight by entering into the Challenged Transactions with MEC.

[15] The application judge found that the evidence did not establish any failure on the part of the MID Board or the Special Committee to comply with their duty of good faith or their duty of care in the case of the Challenged Transactions or the treatment of the Greenlight Proposals. As well, he found that the transactions were entered into after proper review and careful evaluation by the Special Committee, based on advice from legal and financial advisors, and that the decision to enter into the transactions was made for a proper purpose, namely to "preserve and enhance MID's investment in MEC and to exercise more direct control over MEC's operations" (at para. 101). He also found that there was no evidence that the transactions were not on commercially reasonable terms, or that entering into the transactions had a detrimental impact on MID.

[16] The application judge also rejected the argument that Mr. Stronach had exerted undue influence on the Special Committee and the Board.

[17] In a subsequent decision on costs, released May 10, 2007, the application judge awarded costs to the respondents on a substantial indemnity basis. His reasons for such an award are explained in the following quotation (Costs Endorsement, para. 11):

In the case at bar, Greenlight having failed to achieve its goal of causing a restructuring of MID's business for the purpose of affecting a short term "bump" in MID's share price, chose to initiate an oppression application to achieve that result. I have found that all of the allegations of oppressive conduct are not substantiated and I further found all of the serious allegations of misconduct, impropriety, breach of fiduciary [sic] and lack of professionalism levelled against the individual Respondents and against the professional advisers to the Respondents to be totally unfounded. Such a misuse of the court's process cannot be condoned and should be censured by the court, and accordingly, in my view, an award of costs on a substantially [sic] indemnity scale is amply justified in the case at bar.

[18] The application judge ordered costs of $870,000 to MID and Mr. Simonetti, $653,000 to 445 and Mr. Stronach, $561,000 to the members of the Special Committee and $85,000 to Brian Tobin, against whom the application had been dismissed prior to [page247] the hearing. The amount ordered to MID and Mr. Simonetti included 134.5 hours of work that took place prior to the commencement of the application.

The Issues on Appeal

[19] Greenlight has appealed to the Divisional Court pursuant to s. 255 of the OBCA, raising the following issues:

(1) What is the appropriate standard of review?

(2) Did the application judge err in his analysis of reasonable expectations?

(3) Did the application judge err in his application of the business judgment rule?

(4) Did the application judge misapprehend or fail to consider evidence concerning Mr. Stronach's influence over the board of directors and management of MID?

(5) Did the application judge err in excluding evidence of Mr. Einhorn and drawing an adverse inference?

(6) Did the application judge err in awarding costs on a substantial indemnity basis?

(7) Did the application judge err in awarding costs for work done prior to the issuance of the Notice of Application?

Analysis

What is the appropriate standard of review?

[20] Greenlight submitted that the errors of the application judge were errors of law and, therefore, the standard of review is one of correctness. All parties accept, and I agree, that the standard of review on errors of law is correctness. However, the respondents all took the position that the issues raised on this appeal are questions of fact and, therefore, this court should not intervene absent palpable and overriding error by the application judge.

[21] The Supreme Court of Canada in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31 held that the standard of review applicable to factual conclusions by a trial judge is palpable and overriding error (at para. 25).

[22] Prior to that decision, the Ontario Court of Appeal had held in [page248] Equity Waste Management of Canada v. Halton Hills (Town) (1997), 1997 2742 (ON CA), 35 O.R. (3d) 321, [1997] O.J. No. 3921 (C.A.) that there should be deference to a judge's findings of fact, even when those are made on the basis of a written record (at p. 336 O.R.). More recently, in Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 186 O.A.C. 201 (C.A.), the Ontario Court of Appeal made reference to Equity Waste Management in the context of an appeal from a trial judge's finding of oppression. At para. 305, Laskin J.A. stated:

After Housen, appellate courts will not review findings of fact, either primary or those drawn by inference, by asking whether on the totality of the record, those findings are reasonable. Cases from this court such as Keljanovic Estate v. Sanseverino (2000), 2000 5711 (ON CA), 186 D.L.R. (4th) 481 at 488-489 (Ont. C.A.), leave to appeal to S.C.C. refused, [2000] S.C.C.A. No. 300 and Equity Waste Management of Canada v. Halton Hills (Town) (1997), 1997 2742 (ON CA), 35 O.R. (3d) 321 (C.A.), must be taken as overruled to the extent that they contemplate appellate review of findings of fact based on an independent albeit limited appellate reassessment of the reasonableness of the findings of fact made at trial.

[23] In my view, the standard of review with respect to the application judge's findings of fact is "palpable and overriding error", given Housen and Waxman.

Did the application judge err in his analysis of reasonable expectations?

[24] Section 248(2) of the OBCA, the "oppression remedy", states:

248(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates, (a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result; (b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or (c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

[25] The courts have equated the interests of shareholders protected under this subsection with the "reasonable expectations" of shareholders (see, for example, Pente Investment Management Ltd. v. Schneider Corp., 1998 14808 (ON SC), [1998] O.J. No. 2036, 40 B.L.R. (2d) 244 (Gen. Div.), affd (1998), 1998 5121 (ON CA), 42 O.R. (3d) 177, [1998] O.J. No. 4142 (C.A.), at p. 201 O.R. ("Pente")). Whether a shareholder asserting a claim of oppression had a reasonable expectation and whether [page249] that reasonable expectation has been breached are questions of fact, not questions of law (Casurina Ltd. Partnership v. Rio Algom Ltd., 2004 30309 (ON CA), [2004] O.J. No. 177, 40 B.L.R. (3d) 112 (C.A.), at para. 24).

[26] The application judge correctly stated that reasonable expectations require an objective determination, at the time of the conduct complained of (see Pente, supra, pp. 201-202 O.R.). At para. 20 of his reasons, the application judge correctly stated:

The reasonable expectations of a shareholder is a question of fact, and, as a result, determining the expectation of any individual shareholder is a subjective exercise, whereas determining whether that subjective expectation is reasonable requires an objective analysis.

[27] As well, he correctly stated that the public pronouncements of corporations, particularly those publicly traded, constitute a component of the reasonable expectations of shareholders (Themadel Foundation v. Third Canadian General Investment Trust Ltd. (1998), 1998 973 (ON CA), 38 O.R. (3d) 749, [1998] O.J. No. 647 (C.A.), at p. 753 O.R.).

[28] According to Greenlight, MID was held out to investors as a "conventional" real estate company that would maintain only a passive investment in MEC. Greenlight argued that MID thwarted the reasonable expectations of shareholders by entering into the Challenged Transactions with MEC, along with the proposed privatization of MEC. As a result of the Challenged Transactions, MID entered into high risk investments in MEC's racetracks and gambling ventures.

[29] Greenlight submitted that the application judge erred by failing to fairly construe the Prospectus and, thus, he failed to find what the reasonable expectations of the shareholders were. More precisely, the application judge is said to have erred by relying on the fact that he could not find an express statement in the Prospectus that MID would restrict its investments in MEC. Because of the absence of such a statement, he is said to have found that the shareholders had no reasonable expectation that MID would not make investments in MEC's racetracks and its gambling activities.

[30] A careful reading of the reasons of the application judge shows that he did not rest his conclusion with respect to shareholders' expectations solely on the absence of a statement that MID would restrict its investments in MEC. Instead, he properly examined the Prospectus in order to determine the reasonable expectations of shareholders with respect to MID's investment activities. He expressly found that MID's public statements in the Prospectus contemplated direct investment [page250] by MID in facilities of MEC, as well as the possibility of further financings by MID of MEC by debt, equity or otherwise. He found as a fact that "the excerpts from the Spin-out Prospectus contemplate direct investments in facilities of MEC and a possibility of further financing of MEC by debt, equity or otherwise" (reasons, para. 99).

[31] Greenlight also submitted that MID had a legal obligation to describe its business clearly in the Prospectus, relying on the words of Farley J. in Pente, supra, at first instance, at para. 18: "It is to my view inappropriate and misleading if the language used was 'cute'; rather, it should be set out in obvious fashion."

[32] In my view, the application judge's conclusions with respect to the reasonable expectations created by the public statements of MID are fully supported by a number of statements found in the Prospectus. For example, the Prospectus states, at p. 11:

We view our shareholdings in MEC as a strategic investment that will potentially provide us with the opportunity to participate in co-developments or joint ventures should MEC pursue the development of excess lands around its racetracks or undertake other commercial real estate developments, and will also allow us to share in the future growth of MEC. The same information is conveyed at pp. 36 and 58 of the Prospectus.

[33] I see no error on the part of the application judge in his approach to determining the reasonable expectations of the shareholders. He considered the public pronouncements of the corporation, as set out in the Prospectus, and he gave a reasonable -- indeed, a correct -- interpretation of the document. Therefore, given the content of the Prospectus, the investments in MEC in the form of the Challenged Transactions were within the reasonable expectations of the MID shareholders.

[34] The application judge also found that MID had not been diverted from its core real estate business, nor had it improperly diverted funds to the horse racing and gambling activities of MEC. He found that to the extent there had been any change in MID's business strategy with respect to MEC, this arose from unforeseen circumstances, such as a deterioration in MEC's financial position and the need for additional capital to pursue new opportunities for gambling facilities and slot machines (reasons, para. 101). There was ample evidence to support his conclusions.

[35] Greenlight submitted in its factum that the application judge erred by failing to make any affirmative findings as to what the reasonable expectations of the shareholders actually were. [page251] There is no merit to this submission. The onus was on Greenlight, as the complainant, to show that the respondents defeated its reasonable expectations. The application judge rejected Greenlight's arguments. He had no obligation to go on and to determine the scope of the reasonable expectations of shareholders in the abstract.

[36] With respect to the proposed privatization, the application judge held that the MID shareholders could not have reasonably expected any sort of MID privatization. Moreover, given that the proposed privatization did not proceed, it could not have effected a result that was oppressive to, unduly prejudicial to or disregarded the interests of shareholders (reasons, para. 105).

[37] Greenlight submitted that the application judge erred in law in reaching this conclusion, as the privatization was said to be one of a series of techniques used by the MID Special Committee to accomplish related party transactions between MID and MEC. In Greenlight's view, there was a continuous course of action by MID to fundamentally change its relationship with MEC from that disclosed in the Prospectus.

[38] I see no merit to this argument. First, the application judge found that Greenlight's allegation of a hidden agenda to combine MID and MEC was not substantiated, and Greenlight has not shown that he erred in his appreciation of the evidence (reasons, para. 108). In addition, I see no error of law in the conclusion that the proposed privatization was not oppressive. Subsection 248(2) of the OBCA speaks of conduct that "threatens to effect a result" -- that is, it is result- oriented. Here, the proposed privatization was abandoned by the MID Board for reasons related to shareholder opposition to the proposal and a decline in MEC's financial situation. Therefore, the application judge did not err in concluding that the proposed privatization was not oppressive to shareholders.

[39] Greenlight also submitted that the application judge erred in rejecting fresh evidence that it sought to file concerning MEC's continuing financial weakness -- for example, a "going concern note" added to MEC's financial statements on March 31, 2006.

[40] The application judge made no error in refusing to admit the fresh evidence adduced following the hearing, as it was not relevant, for the reasons which he gave.

Did the application judge err in his application of the business judgment rule?

[41] The application judge held that the business judgment rule requires directors to make a decision that falls within the [page252] range of reasonableness (reasons, at para. 30). He also held that among a shareholder's reasonable expectations is the expectation that directors and officers of a corporation will act in accordance with their duties under s. 134 of the OBCA to act honestly and in good faith with a view to the best interests of the corporation and exercise their reasonable business judgment with the care, diligence and skill of a reasonably prudent person in comparable circumstances (reasons, para. 32).

[42] The Ontario Court of Appeal described the business judgment rule in Pente, supra (at p. 192 O.R.):

The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within the range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board's determination. As long as the directors have selected one of several reasonable alternatives, deference is to be accorded to the board's decision. . . . This formulation of deference to the decision of the Board is known as the "business judgment rule". The fact that alternative transactions were rejected by the Board is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction.

[43] In reference to the directors' duty of care under the federal corporations legislation, the Supreme Court of Canada stated in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64, at para. 67:

Directors and officers will not be held to be in breach of the duty of care under s. 122(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.

[44] Greenlight submitted that the application judge erred in stating that the issues of reasonable expectations, oppressive conduct and business judgment were inextricably intertwined. Instead, it submitted, the application judge should have determined reasonable expectations first and then considered the business judgment rule.

[45] In my view, that is exactly what the application judge did. He considered the public statements of MID to determine the [page253] "compact" between the corporation and its shareholders -- that is, the reasonable expectations of the shareholders. Having found that the type of transactions with MEC fell within the reasonable expectations of the shareholders, he then went on to determine whether the directors breached their duties under s. 134 of the OBCA in relation to the Challenged Transactions and the treatment of the Greenlight Proposals. This approach was consistent with his conclusion at para. 32 of his reasons that a shareholder has a reasonable expectation that a company's directors will act in compliance with their statutory duties found in s. 134 of the OBCA to act honestly and in good faith with a view to the best interests of the corporation and exercise their reasonable business judgment with the care, diligence and skill of a reasonably prudent person in comparable circumstances.

[46] Greenlight submitted that the application judge failed to apply an appropriate level of scrutiny to the Challenged Transactions from the perspective of s. 134 duties in that:

(1) he failed to find a breach of the MID directors' duty of care with respect to the Romulus transaction, where no Special Committee was used in the decision-making process;

(2) he failed to find a breach of the duty of care with respect to the Project Financings because of the failure to assign any apparent weight to the warnings in the Corporate Governance Analytics Report ("CGA Report") that MEC should not take on more debt and that its financial condition was likely to deteriorate;

(3) he failed to give adequate scrutiny to the meetings of the Special Committee and its advisors;

(4) he erred in law in holding that the Special Committee analysis of director independence was acceptable; [and]

(5) he erred in holding that corporate governance imperfections could not form the basis of a finding of oppression.

[47] In my view, the reasons of the application judge show that he did properly consider the evidence concerning the actions of the Special Committee and the Board and, having scrutinized what occurred, he concluded that they had met their duty of care. He then came to the following conclusion [reasons, at para. 79]:

The totality of the evidence in the case at bar, in my view, does not establish any failure on the part of the Board or of the Special Committee to comply with their duty of good faith or their duty of care in the case of the challenged transactions. [page254] He concluded that the deliberations of the Board and of the Special Committee "focused on consideration of the business objectives and the possibility of alternative structures for the transactions, and were based upon independent legal and financial advice and detailed information about the transactions provided by MID management". He also found that there was no evidence that the transactions were not on commercially reasonable terms or that entering into the transactions had had a detrimental impact on MID (reasons, at para. 101).

[48] There was ample evidence in the Record to support the application judge's conclusions that the Special Committee gave careful consideration to the Romulus sale from MID to MEC, to the Project Financings and the Bridge Loan, acting on the advice of independent legal and financial advisors. This is not a case comparable to UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., 2004 9479 (ON CA), [2004] O.J. No. 636, 183 O.A.C. 310 (C.A.), where the process by which a board of directors approved a compensation package was described as "seriously flawed" (at para. 7).

[49] Greenlight asserted that the application judge erred in law by applying the business judgment rule to the recommendations of the Special Committee in the face of the CGA Report delivered to the MID Board in November 2004, around the time that MID was considering the Project Financings. The expert who wrote the CGA Report was a director of MID who later became the CEO of MEC. The report concluded that MEC was in a precarious financial position, and that it must raise its next $200 million in capital funds in the form of equity, rather than debt. According to Greenlight, MID pursued the Project Financings without addressing how this was justified in light of the CGA Report.

[50] There was ample evidence to support the finding of the application judge that the Project Financings were within the range of reasonableness and thus complied with the business judgment rule. The members of the Special Committee were all members of the MID Board, and they attended the meeting where the CGA Report was presented. Thus, they would have been aware of its contents.

[51] In any event, the evidence indicates that the Special Committee members were fully apprised of MEC's financial situation and of information of the nature contained in the CGA Report. As well, the Special Committee had received the opinion of its independent advisor, CIBC World Markets, which supported the Project Financings, concluding that they were on commercially reasonable terms. In addition, the security package and the terms of the Project Financings were designed to protect MID's [page255] investment. Thus, there was ample evidence to support the conclusion of the application judge that the members of the Special Committee met their statutory duties.

[52] The application judge also found that the members of the Special Committee were independent. On the evidence before him, the application judge correctly concluded that there was no conflict on the part of Mr. Byrd when he acted as a member of the Special Committee. Moreover, he noted in his reasons that the directors of MID considered the substantive independence of the individuals to be selected for the Special Committee before their appointments were made, and the Board concluded that the necessary standards had been met (reasons, at para. 16). Again, there is evidence which supports his conclusion.

[53] Greenlight also submitted that the application judge incorrectly held that corporate governance imperfections could not form the basis of an oppression finding. In fact, that is not what he held. Rather, what the application judge said was the following (reasons, at para. 61):

There is no evidence before this court that the failure of the Board or the Special Committee in certain instances to comply scrupulously in all respects with such corporate governance practices or policies resulted in the directors not complying with either their duty of good faith or duty of care. He also held that Greenlight had not met the onus on it to show that the imperfections in the corporate governance process with respect to certain Challenged Transactions adversely affected their interests, as is required in an oppression proceeding (reasons, at paras. 62-63). Again, there is ample evidence to support this conclusion.

Did the application judge misapprehend or fail to consider evidence concerning Mr. Stronach's influence over the board of directors and management of MID?

[54] In its factum, Greenlight submitted that the application judge erred in determining that Mr. Stronach did not exercise undue influence on the course of the Challenged Transactions in six ways:

(1) he relied excessively on the fact that Mr. Stronach, when acting as a director of MID, adhered to basic corporate formalities, by declaring his interest and refraining from voting when formal votes were taken at board meetings or not attending meetings at which formal votes were held;

(2) he concluded that if Mr. Stronach was initially opposed to a particular Challenged Transaction, he could therefore not [page256] have influenced it excessively, even if he ultimately agreed to go along with it;

(3) he failed to give due weight to Mr. Stronach's insistence on keeping the privatization from being withdrawn simply because Mr. Stronach ultimately acquiesced and the privatization was withdrawn;

(4) he failed to give due weight to the totality of Mr. Stronach's influence as a controlling shareholder of MID to appoint the MID CEO, recruit and pre-vet Mr. Young (chair of the Special Committee from August 2004), suggest a structure for project financings to replace the privatization, pre-approval of all MID hiring, severance and real estate purchase obligations, and threatening to retaliate by having Magna withhold future business from MID if MID did not comply with his wishes;

(5) he directly contradicted his conclusions as to the absence of excessive influence by Mr. Stronach by repeatedly acknowledging the extent of Mr. Stronach's influence as controlling shareholder of MID and held that the extent of the influence should not have come as a surprise to Greenlight; and

(6) he failed to identify any public statement by Mr. Stronach made before the commencement of the oppression application to support his holding that it was always clear that Mr. Stronach believed that MID and its shareholders would be better off in the long term if MEC was retained and supported on a commercially reasonable basis.

[55] The application judge considered the allegations made against Mr. Stronach in the context of evidence as to how Mr. Stronach acted in each of his two relevant capacities: as director and officer of MID and as controlling shareholder of MID.

[56] He noted that Mr. Stronach, as a director and chairman of MID, declared his interest in the Challenged Transactions with MEC (the Romulus purchase, the Project Financings and the Bridge Loan), and he refrained from voting when the Board of MID considered recommendations from the Special Committee and approved the transactions. Moreover, he did not participate in the meeting and vote authorizing the privatization of MEC, nor did he vote when the MID Board voted not to proceed with the privatization. This was consistent with Mr. Stronach's duty as a director to disclose an interest in and refrain from voting on any material contract or transaction in which a conflict of [page257] interest exists (Stelco Inc. (Re) (2005), 2005 8671 (ON CA), 75 O.R. (3d) 5, [2005] O.J. No. 1171, 2 B.L.R. (4th) 238 (C.A.), at para. 76).

[57] The application judge also held that it was prudent for MID management to consult with Mr. Stronach as the controlling shareholder. There is ample law to support this conclusion (see, for example, 820099 Ontario Inc. v. Harold E. Ballard Ltd., [1991] O.J. No. 266, 3 B.L.R. (2d) 113 (Gen. Div.), at para. 129, affd [1991] O.J. No. 1082, 3 B.L.R. (2d) 113 (Div. Ct.)).

[58] Moreover, the application judge rejected the argument that Mr. Stronach improperly influenced or unduly interfered with the consideration of the Challenged Transactions by the Special Committee or Board. In a number of places in his reasons discussing the allegations of undue influence, he concluded that the allegations were not supported by the evidence. For example, at para. 49, he stated:

The evidence does not show any causal connection between any actions of Stronach and the resulting challenged transactions which are alleged to be oppressive. The challenged transactions were entered into based upon recommendations of the Special Committee and resolutions of the Board approving the transactions. Both the Special Committee and the Board thoroughly considered the terms of the transactions, possible alternatives to the transactions, background information provided by MID management and legal and financial advice from independent professionals retained by the Special Committee and the Board.

[59] The application judge set out the applicable law governing the conduct of Mr. Stronach as a controlling shareholder (Benson v. Third Canadian General Investment Trust Ltd. (1993), 1993 8596 (ON SC), 14 O.R. (3d) 493, [1993] O.J. No. 1491 (Gen. Div.), at p. 512 O.R.; Greenhalgh v. Arderne Cinemas Ltd., [1950] 2 All E.R. 1120, [1951] Ch. 286 (C.A.), at p. 1126 All E.R.), correctly stating that if there is any restriction on a majority or controlling shareholder voting, a shareholder is entitled to vote as he or she honestly believes to be in the best interests of the corporation or shareholders as a whole, and that does not constitute a "fraud on the minority" (reasons, para. 52).

[60] The application judge also found that MID's shareholders could not reasonably have expected Mr. Stronach, through 445, to have voted for the Greenlight Proposals, given his belief that the best interests of MID shareholders would be served if the MEC investment were retained and MEC were supported on a commercially reasonable basis.

[61] Greenlight is, in effect, asking this court to reweigh the evidence, in particular when it asserts that the application judge failed to give proper weight to certain facts. That is not an appropriate role for an appellate court. As Greenlight has failed to [page258] identify any palpable and overriding error by the application judge in his consideration of the evidence, I would not give effect to the grounds of appeal relating to Mr. Stronach.

Did the application judge err in excluding evidence of Mr. Einhorn and drawing an adverse inference?

[62] Greenlight relied heavily on an affidavit of Mr. Einhorn, characterized by the application judge as "largely hearsay". In particular, Mr. Einhorn referred to conversations between Venit Sethi, an officer of Greenlight, and two MID representatives in August 2003. The Einhorn evidence conflicted with the sworn evidence of the MID representatives who had participated in the conversations.

[63] The application judge drew an adverse inference because of Greenlight's failure to file an affidavit from Mr. Sethi (reasons, para. 89).

[64] Given the importance to Greenlight's case of the Sethi evidence concerning the private conversations, the application judge made no error in drawing an adverse inference from Greenlight's failure to file an affidavit from Mr. Sethi. Nor did he err in rejecting the hearsay evidence of Mr. Einhorn respecting statements contrary to MID's public statements at the time of the spin-out transaction. Instead, he properly focused on the public statements of MID, as set out in the Prospectus, to determine the reasonable expectations of shareholders.

The appeal on costs

[65] The application judge awarded costs to the respondents on a substantial indemnity basis in the total amount of $2,169,000. Greenlight sought leave to appeal the costs award, submitting that the application judge erred in awarding costs on a substantial indemnity basis, as well as in the quantum awarded. I would grant leave to appeal the costs award, but dismiss the costs appeal subject to one variation.

[66] The application judge found that the application brought by Greenlight was a misuse of the court's process, brought in an attempt to achieve Greenlight's goal of causing a restructuring of MID's business for the purpose of causing a short-term bump in MID's share price. None of Greenlight's allegations were proved, and Greenlight had made serious allegations of misconduct, impropriety, breach of fiduciary duty and lack of professionalism on the part of the individual respondents and their expert advisors. [page259]

[67] An appellate court will not interfere with a decision on costs unless there has been an error in principle or the costs award is plainly wrong (Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, at para. 27).

[68] It is a well-established principle of law that costs on a substantial indemnity basis are to be awarded only in rare and exceptional cases, where there has been reprehensible, scandalous or outrageous conduct in the course of litigation (Hunt v. TD Securities Inc. (2003), 2003 3649 (ON CA), 66 O.R. (3d) 481, [2003] O.J. No. 3245 (C.A.), at p. 509 O.R.). The fact that a party has failed to substantiate its claims is not a basis for awarding higher costs (Young v. Young, 1993 34 (SCC), [1993] 4 S.C.R. 3, [1993] S.C.J. No. 112, at para. 66).

[69] One of the reasons for an award of costs on the higher scale is the nature of the allegations against the responding party -- specifically, where unfounded allegations of a fraudulent or dishonest intention are made (Twaits v. Monk, 2000 14725 (ON CA), [2000] O.J. No. 1699, 8 C.P.C. (5th) 230 (C.A.), at para. 4). A higher award of costs has also been justified where a party has used litigation to harass another party (Toronto- Dominion Bank v. Grande Caledon Developments Inc. (1998), 1998 593 (ON CA), 39 O.R. (3d) 93, [1998] O.J. No. 2094 (C.A.), at p. 96 O.R.).

[70] Greenlight submitted that the application judge erred in awarding costs on a substantial indemnity basis, because its conduct was not reprehensible or deserving of censure. It did not plead fraud, dishonesty or deceitful conduct on the part of the respondents; rather, it pursued a statutory remedy for shareholders. For policy reasons, it submitted, the courts ought not to use punitive cost orders to sanction shareholders seeking to protect shareholder expectations through the use of the oppression remedy.

[71] The application judge was well aware that substantial indemnity costs are awarded only in exceptional cases. However, he concluded that this was such a case based on three considerations: none of the many allegations of oppression were substantiated; serious allegations of misconduct were made against individuals that were unfounded; and the court's process was misused for business purposes, and this should not be condoned.

[72] In my view, it is the cumulative effect of these three factors that led the application judge to award costs on the higher scale. He had found, in his reasons on the merits, that Greenlight commenced the oppression litigation for a business purpose -- namely, in an attempt to bump the share price (reasons on the merits, para. 115). None of the acts of oppression were proven. In his view, the proceeding was an abuse of the court's process. [page260]

[73] Moreover, Greenlight made serious allegations of misconduct against the individual respondents in the material filed in support of the application, and these were not supported by the evidence. While Greenlight did not use the word fraud, it did make serious and unfounded allegations against individuals -- for example, stating that the Special Committee process dealing with the Greenlight Proposals "was so lacking in substance that it should be regarded as a sham".

[74] Given the combination of the factors referred to by the application judge, I am of the view that he did not err in principle in awarding costs on a substantial indemnity basis in this case.

[75] With respect to the quantum of costs, Greenlight challenged the award on the basis that the application judge erred in awarding costs to MID and Mr. Simonetti that were incurred in the period between January 19, 2005 and August 1, 2005, before the Notice of Application was served. A total of 134.5 hours was billed during this period.

[76] In my view, the application judge erred in principle in awarding pre-application costs to these two parties. Section 131(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 grants a discretion to the court to award costs "of and incidental to the proceeding or a step in a proceeding".

[77] The Notice of Application was served August 2, 2005. MID and Simonetti claimed costs for the period between January 19, 2005 and August 1, 2005. While they may have anticipated that there might be litigation in the future, these costs, particularly those incurred many months before the service of the Notice of Application, are not incidental to the proceeding. Therefore, the application judge erred in including those hours in the determining the costs award. Using the calculations provided to this court at the oral hearing, and reducing the amount by 23 per cent, as did the application judge in his award of costs, I would reduce the costs awarded by $40,486. Subtracting that amount from the $870,000 originally awarded, I would order costs to MID and Simonetti in the amount of $829,514.

Conclusion

[78] The appeal with respect to the merits of the application is dismissed. The appeal with respect to the costs ordered to be paid to 445, Mr. Stronach and the Special Committee members is also dismissed. The appeal with respect to the costs ordered to be paid to MID and Mr. Simonetti is allowed in part, with the judgment to be varied in para. 1 to order costs of $829,514 to be paid to MID and Mr. Simonetti. [page261]

[79] If the parties cannot agree on costs of this appeal, the respondents may make written submissions within 21 days of the release of this decision. The appellants shall have 14 days to reply. All submissions are to be made through the Divisional Court office.

Appeal from dismissal of application dismissed; appeal from costs award allowed in part.