CITATION: Castillo v. Xela Enterprises Ltd., 2016 ONSC 6088

DIVISIONAL COURT FILE NO.: 065/16 DATE: 20161230

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

MOLLOY, DAMBROT and VARPIO JJ.

BETWEEN:

MARGARITA CASTILLO

Respondent (Applicant)

– and –

XELA ENTERPRISES LTD., TROPIC INTERNATIONAL LIMITED, FRESH QUEST, INC., 696096 ALBERTA LTD., JUAN GUILLERMO GUTIERREZ and JUAN ARTURO GUTIERREZ

Appellants/Respondents

Jeffrey S. Leon, Jason W.J. Woycheshyn and William Bortolin, for the Respondent/Applicant

Joseph Groia and Martin Mendelzon, for the Appellants/Respondents

HEARD at Toronto: September 26, 2016

VARPIO J.

REASONS FOR JUDGMENT

A. OVERVIEW

[1] This is an appeal from the decision of Newbould J. dated October 28, 2015 on an application under s. 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16 (“OBCA”) and a further decision dated December 21, 2015 dealing with costs. The application judge:

a. Found that the respondents on the application had oppressed the applicant shareholder “Margarita”;

b. Ordered certain of the respondents to purchase her shares in the subject corporation for $4.25 million; and

c. Awarded costs to Margarita in the amount of $889,858.21.

[2] The application materials disclosed that the Appellant Juan Arturo Gutierrez (“Arturo”) was the father of the appellant Juan Guillermo Gutierrez (“Juan”) and the Respondent Margarita Castillo. Unfortunately, Arturo passed away between the hearing of the application and the hearing of this Appeal.

[3] In the 1980’s, Arturo emigrated from Guatemala with his family. He started business enterprises that, inter alia, shipped fruit from Latin America to Canada. Over time, his business grew and his companies are now worth considerable sums of money. These businesses include the Appellants Xela Enterprises Ltd. (“Xela”), Tropic International Limited (“Tropic”), Fresh Quest Inc. (“Fresh Quest”) and the numbered Alberta Company. Although he was not always a majority shareholder in these enterprises, Arturo typically retained controlling interest. Juan, Margarita and/or Margarita’s husband are/were all shareholders and/or officers of some of these companies at various times.

[4] As can happen in closely-held family companies, relations between the non-corporate Appellants and the Respondent soured. Margarita thus brought an application seeking relief under s. 248 of OBCA, also known as an oppression application. The application was in respect of, inter alia, the affairs of Tropic.

[5] Margarita currently owns 44% of Tropic as well as portions of other companies involved in the family dispute. In April 2010, the Appellants proposed that Xela purchase Margarita’s Tropic shares for $3.52 million. Xela also offered to purchase Arturo’s and Juan’s shares at a similar share price. Arturo and Juan accepted the offer. The Appellants gave Margarita 10 days to consider the offer before it expired. Margarita asked for information regarding the valuation of the shares but the Appellants did not provide same. Ten days lapsed and the offer expired. It should be noted that by this point, Margarita’s relations with the Appellants had already been strained for some time.

[6] On April 28, 2010, Arturo and Juan held a special meeting of Tropic and voted to remove Margarita as a director and officer. Margarita was not aware of this meeting or its results until June 8, 2010.[^1]

[7] The application judge both case managed the matter and heard the application. The respondents raised a variety of issues in the case. The application judge found that:

1. A trial was not necessary to adjudicate the matter;

2. The respondents other than 696096 Alberta Ltd. had engaged in oppressive conduct towards Margarita as per s. 248 of the OBCA;

3. As a remedy, Arturo, Juan and Xela should jointly purchase Margarita’s interest in Tropic for $4.25 million; and

4. The respondents other than 696096 Alberta Limited must pay Margarita $889,858.21 in costs.

[8] The respondents/appellants contend that the application judge erred in that:

1. He failed to order that the issues on the application should be directed to a trial;

2. He should not have found that Margarita’s interests as a shareholder of Tropic were unfairly disregarded;

3. He wrongly determined that the fair value of Margarita’s shares in Tropic was $4.25 million; and

4. His award of costs was not fair, reasonable or within the reasonable expectations of the Appellants. If the Appellants prove to be unsuccessful on their appeal of the substantive issues contained herein, they seek leave to appeal the costs as a separate ground of appeal.

[9] For the reasons that follow, I would dismiss the appeal in its entirety.

B. THE STANDARD OF REVIEW

[10] The Supreme Court of Canada addressed the standard of review in Housen v. Nikolaisen 2002 SCC 33, [2002] 2 S.C.R. 235. On a pure question of law, an appellate court is free to replace the opinion of the trial judge with its own. Thus, the standard of review on a question of law is that of correctness (at para. 8). Findings of fact are not to be reversed unless it can be established that the trial judge made a “palpable and overriding error” (at para. 10). Questions of mixed fact and law are subject to the “palpable and overriding error” standard unless it is clear that the trial judge made an error of law or principle that can be identified independent of the judge’s application of the law to the facts of the case. If the error of law is extricable from the questions of mixed fact and law in issue, it must be reviewed separately on a standard of correctness (at paras. 36-37).

[11] The leading case on the oppression remedy is BCE Inc. Re, 2008 SCC 69, [2008] 3 S.C.R. 560 wherein the Supreme Court of Canada described the fact-specific nature of oppression remedy cases at paragraph 59:

Second, like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.

[12] Section 248(3)(n) of the OBCA states:

(3) In connection with an application under this section, the court may make an interim or final order it things fit including, without limited the generality of the foregoing…

(n) an order requiring the trial of any issue.

[13] The Supreme Court of Canada has held that a discretionary decision of a lower court will be reversible where that court misdirected itself or came to a decision that is so clearly wrong that it amounts to an injustice. Reversing a lower court’s discretionary decision is also appropriate where the lower court gives no or insufficient weight to relevant considerations: Penner v. Niagara Regional Police Services Board, 2013 SCC 19, [2013] 2 S.C.R. 125 at para. 27. A similar test has been applied by the Federal Court and the Nova Scotia Court of Appeal: Canadian Supplement Trademark v. Petrillo, 2010 FC 421; Roué v. Nova Scotia, 2013 NSCA 94 at para.13

[14] Although not binding upon us, the Manitoba Court of Appeal has stated that a Court’s decision to consider a written application record (as opposed to ordering viva voce evidence) is an exercise of discretion and a question of mixed fact and law, reviewable on the “palpable and overriding” standard of review: Danylchuk v. Wolinsky, 2007 MBCA 132, 287 DLR (4th) 646 at para. 36; Zhang v. Chik, 2012 MBCA 28, 94 BLR (4th) 10 at para. 3; Katz v. Babkat, 2012 MBCA 68, 2 B.L.R. (5th) 258.

[15] Thus, given the foregoing (especially the heightened level of fact specificity inherent in oppression remedy cases), considerable deference must be paid to the application judge’s determination that the instant application ought not to have been converted into an action.

[16] With respect to the costs appeal, in Frazer v. Haukioja, 2010 ONCA 249, 101 O.R. (3d) 528, the Court of Appeal stated at para. 75:

A trial judge has extremely broad discretion in the awarding of costs, which is entitled to a very high degree of deference and will not to be taken lightly by reviewing courts. A reviewing court can only review a trial judge's award of costs where he or she has considered irrelevant factors, failed to consider relevant factors, or reached an unreasonable conclusion. And finally, a reviewing court will not interfere with a trial judge's disposition on costs on the grounds that the members of the appellate court would have exercised their discretion differently: Canadian Pacific v. Matsqui Indian Band, [1995] 1 S.C.R. 3 at para. 39.

[17] The application judge’s decision with respect to costs will thus be reviewed with a “high degree of deference.”

C. ISSUES

[18] In suggesting that the application judge erred in failing to convert the Application to an action, the Appellants argue that:

1. The application judge failed to provide reasons for making the decision that no trial was necessary in the circumstances;

2. A trial is necessary, given the disputed evidence regarding the factual matrix underlying the alleged oppression;

3. Margarita’s shares in Tropic ought not be purchased by the Appellants. Instead, even if oppressive conduct was found, she should remain as a shareholder in Tropic. This argument was explicitly raised for the first time in oral argument;

4. The application judge erred in determining whether it is appropriate to include expenses of a Tropic’s subsidiary, (“XGL”), in the valuation of Tropic shares;

5. The application judge erred in preferring the Respondent’s treatment of a transfer price agreement between Tropic and a related company, Fresh Quest (which affected the valuation of Tropic);

6. The application judge erred when, in calculating fair value for Margarita’s shares, he preferred capitalization rates used by the expert of one party over the other (he preferred the Appellants’ rate) and should have ordered a trial in order to make that determination; and

7. The application judge should not have used Xela’s $3.25 million offer to purchase as a floor for valuing Margarita’s shares.

D. THE DECISION OF THE APPLICATION JUDGE

[19] The application judge decided that he did not need to convert the application into an action since:

a. There were no relevant, material facts at issue; and

b. He did not require an action to determine credibility of witnesses.

[20] The Appellants argued that the oppression application was merely a part of a larger web of corporate interrelations that is the subject of a $400 Million action currently before the Courts (the “Xela Action”). The Xela Action involves control of corporate interests as between the individual Appellants and their relatives (the “Cousins”). It also involves companies related to Arturo and his offspring (the “Avicola Group”). The Appellants alleged that Margarita conspired with the Cousins to weaken the Appellants’ position in the Xela Action. As a result, the Appellants contended that the Xela Action and instant application overlap as regards these important material facts:

1. Whether Margarita’s reasonable expectations regarding her role as a director and shareholder of Tropic were altered by her alleged conduct in the Xela Action; and

2. Whether Margarita had adequate knowledge of Xela’s offer to purchase Margarita’s Tropic shares such that the Appellants’ timeline and failure to provide information was not oppressive.

[21] The Appellants submitted that there is substantial overlap between the Xela Action and the subject matter of the oppression action. They argued that when the Xela Action is heard, there will be considerable conflicting testimony as regards Margarita’s actions. This evidence will in turn help determine Margarita’s reasonable expectations as regards Tropic. Margarita’s reasonable expectations form a necessary consideration for determining whether or not the oppression remedy ought to be granted as per RE: BCE Inc. Accordingly, the appellants submitted that a trial is necessary in order to determine the nature and impact of Margarita’s actions.

[22] The application judge considered this argument and held at paras. 44 to 48 of his judgment:

[44] In my decision of July 3, 2014 I did not accede to a request of the respondents that the application of Margarita regarding Tropic should go to trial to be dealt together with her application regarding Xela. Rather, because it was not clear at that stage whether the Tropic and Xela issues in the application could or could not be severed, I permitted the applicant to proceed with her application relating to Tropic and permitted the respondents to contend on the hearing of the application that the Tropic and Xela issues could not be severed and should proceed together to trial.

[45] Having heard the evidence, I am satisfied that the applicant's claim that she is entitled to an order requiring her Tropic shares to be purchased can be dealt with separately from her claim for relief relating to her interest in Xela. There are a number of reasons for this.

[46] The allegations made by the respondents against Margarita regarding her alleged damage caused to Xela include no allegations that her alleged activity caused any damage to Tropic or to Fresh Quest. The statement of claim against her and the Cousins for in excess of $400 million includes no such allegations and Tropic and Fresh Quest are not referred to. The evidence of the alleged conduct referred to on behalf of the respondents on the hearing of this application, apart from being nearly entirely speculation and innuendo based on no cogent evidence, all relate to the claims that Margarita has been assisting the Cousins who have deprived Arturo of his one-third interest in the Avicola Group, which is entirely separate from Tropic and Fresh Quest.

[47] On his cross-examination, Arturo stated that what Margarita did with the Cousins was not relevant to her claim with respect to her shares in Tropic as the two things were separate matters. On his cross-examination, Juan stated that information regarding Tropic was irrelevant to what the Cousins were interested in, being Xela information. I accept that the two issues are separate. What Margarita is alleged to have done with the Cousins to harm Arturo's interest in the Avicola Group cannot affect her rights as a shareholder of Tropic.

[48] I further find that it is possible on the evidence to determine if there has been conduct on the part of the respondents towards Margarita that gives rise to a right of relief and if so what that relief should be. [Emphasis added.]

[23] Further, the application judge held at para. 103 (when discussing the valuation of Margarita’s shares and the possible applicability of a minority discount):

…Even if the dislike of Arturo and Juan toward Margarita was valid, which on the evidence before me is speculative at best as to alleged “wrongdoing”, it is in relation to the dispute with the cousins and as admitted by Arturo, has nothing to do with Tropic. [Emphasis added.]

[24] The application judge further dealt with Margarita’s alleged misconduct towards her family, at paras. 49 to 67. Within that passage, the application judge described how Margarita’s reasonable expectations existed irrespective of her alleged conspiracy with the Cousins:

[54] There can be no doubt that Margarita was entitled to expect honesty from her father Arturo and her brother Juan in their dealings with her interest in Tropic. Her secret removal as a director at a special meeting of shareholders in April 2010 of which she had no notice and then not being told for some eight months later after a number of prodding questions from her lawyer about the financial affairs of Tropic and Fresh Quest completely disregarded her interests as a director of Tropic. Arturo's explanation that it was bad enough for Margarita to be removed as a director of Xela at the same time and that he did not want to give her two pieces of bad news at once was no excuse, even if true. He admitted that he did [sic] deliberately did not tell her of her removal as a director of Tropic. [Emphasis added.]

[25] At paragraph 56 of his judgment, the application judge listed other specific grounds of oppression that existed irrespective of any disputed evidence including:

a. The Appellants’ failure to provide information regarding the basis for valuation;

b. The Appellants’ attempts to have Margarita sign a Fresh Quest line of credit; and

c. Other demands on behalf of the Appellants that Margarita advance funds to Fresh Quest as a result of her unwillingness to sign said line of credit.

[26] The application judge then summarized the effect of the actions undertaken by the Appellants in regards Tropic and stated:

[67] In my view of the evidence, and I so find, the actions of the respondents other than 696096 Alberta Ltd. (Margarita’s holding company) as discussed were individually and cumulatively oppressive. The actions were not taken in good faith and were abusive. They were oppressive to Margarita’s interests as a director and shareholder of Tropic.

E. THE NEED FOR A TRIAL

[27] In January of 2014, the Supreme Court of Canada released its judgment in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87. Justice Karakatsanis, writing for the Supreme Court in Hryniak, held as follows (at paras. 1 to 2):

Ensuring access to justice is the greatest challenge to the rule of law in Canada today. Trials have become increasingly expensive and protracted. Most Canadians cannot afford to sue when they are wronged or defend themselves when they are sued, and cannot afford to go to trial. Without an effective and accessible means of enforcing rights, the rule of law is threatened. Without public adjudication of civil cases, the development of the common law is stunted.

Increasingly, there is recognition that a culture shift is required in order to create an environment promoting timely and affordable access to the civil justice system. This shift entails simplifying pretrial procedures and moving the emphasis away from the conventional trial in favour of proportional procedures tailored to the needs of the particular case. The balance between procedure and access struck by our justice system must come to reflect modern reality and recognize that new models of adjudication can be fair and just.

[28] Accordingly, Courts have begun to cast a more critical eye towards ensuring that the procedural mechanisms used to resolve disputes are the most efficient methods available. The governing legal principle, flowing from Hryniak, is that summary procedures can and should be used, unless the forensic machinery of a trial is required to fairly and justly dispose of the case. This principle emerges from the general rule of proportionality that governs all aspects of civil procedure, and presumably applies equally to applications as it does to motions for summary judgment.

[29] A trial does not automatically follow because one party denies the allegations of the other. That would require a trial for every piece of contested litigation. Consideration must be given to the substance of the alleged dispute, and whether it needs a finding of credibility. The judge may also conclude that the facts are not really in dispute, or that that the disputed aspects of the facts are not relevant or material to the question to be decided. A disagreement as to the conclusions that should be drawn on the facts is not a material disputed fact and needs no trial.

[30] The OBCA contemplates such proportionality in that it authorizes a complainant to pursue the oppression remedy by way of application:

248. (1) A complainant and, in the case of an offering corporation, the Commission may apply to the court for an order under this section.

[31] Prior to Hryniak, the Courts attempted to breathe life into that legislative direction. In Gordon Glaves Holdings Ltd. v. Care Corp. of Canada, the Ontario Court of Appeal stated at paragraph 30:

The statute authorizes this proceeding to be brought by application, not action. As with any application the court will require the trial of an issue only if there is good reason to do so and no determination can properly be made on the application record. A common example of such a circumstance is a credibility conflict between witnesses.

[32] Thus, post-Hryniak, it would appear obvious that the Courts ought to prefer adjudicative mechanisms that permit the most efficient resolution of disputes in oppression remedy cases. Such a view mandates that the use of applications is preferred where reasonably possible.

[33] With regard to this appeal, the application judge correctly identified the applicable legal principles. He then applied those principles to the evidence before him and concluded that a viva voce trial was not necessary to resolve any issues in the application. In particular, (as referred to in more detail below) he found that issues relating to Margarita’s conduct as alleged in the Xela Action were not relevant to the oppression remedy and that the essential facts in relation to oppression were not in dispute. Also, with respect to the valuation issue, it was conceded in the appeal before us that there was no issue of credibility as between the experts and the application judge was able to determine which evidence to rely upon based on the written reports.

[34] The decision of the application judge is correct in law and his exercise of discretion in the application of that law to the facts was not undermined by any palpable or overriding error. He gave sufficient weight to the relevant factors and did not misdirect himself in any material respect. The conclusion he reached was fully open to him based on the facts and is consistent with the “cultural shift” described in Hryniak and the underlying legislative purpose of the oppression remedy. His reasons are sufficient to show the route he reached in coming to his conclusions, to let the Appellants know why they were unsuccessful, and to allow for appropriate appellate review. There is no injustice caused to any party. I see no basis to interfere.

F. THE FINDING OF OPPRESSION

[35] The application judge concluded that a trial was not necessary to decide the issues in the oppression action. That conclusion was substantially influenced by his determination that issues relating to Margarita’s alleged “Xela conduct” were not relevant to the oppression remedy.

[36] As noted above, the oppression remedy is governed by s. 248 of the OBCA. Section 248(2) states:

(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.

[37] Once oppressive conduct is found to have occurred, Courts have broad powers to craft a remedy. Section 248(3) of the OBCA states:

(3) 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,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

[Emphasis added.]

[38] In RE: BCE Inc., the Supreme Court decided that a party must establish two preconditions before they can seek oppression remedy relief:

1. Does the evidence support the reasonable expectation asserted by the claimant? And

2. Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest? (at para. 68)

[39] The Appellants rely upon Naneff v. Con-Crete Holdings Ltd., (1995) as authority for the proposition that a Court may look to family background in order to establish a party’s reasonable expectations. In Naneff, the family patriarch built successful businesses. His son Alex was a shareholder and an officer of the companies in question. A family dispute arose over Alex’s lifestyle (outside his dealings with the companies) and Alex was removed as an officer of the company as a result.

[40] At para. 20 of Naneff, the Court quoted Lord Wilburforce in Ebrahimi v. Wesbourne Galleries Ltd., [1973] A.C. 360 (H.L.) wherein Lord Wilburforce stated:

The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The "just and equitable" provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. [Emphasis added.]

[41] Courts may thus consider familial discord when examining the oppression remedy in the case of family-held companies. Counsel for the Appellants then took this Court to para. 31 of Naneff as support for the notion that familial actions can inform reasonable expectations as defined by RE: BCE Inc.:

The importance of the first of those considerations is that Alex knew that until his father died or retired he could under no circumstances have any right to have or even to share absolute control of the business. Therefore, under no circumstances could Alex's reasonable expectations include the right to control the family business while his father was alive and active. The second consideration is important because, while Alex expected that his father would give him an equal share in the control of the business upon his death or retirement, that expectation was based upon his belief that his father would continue to be bountiful to him in the future. It should have been apparent to Alex that he could not expect that paternal bounty to continue if his father for good reason or bad no longer considered him to be a dutiful son. It would have been quite unrealistic of Alex to expect that his father would continue to be bountiful to him if his family ties were severed. Alex knew that the reason for his father giving him one-half of the equity in the family business was his father's desire for his sons to work with him in his business. He must also have known that it would be impossible for him, Mr. Naneff and Boris to work together in the business as a family if the family bonds ceased to exist. It is for those reasons that Alex's reasonable expectation must be looked at in the light of the family relationship. [Emphasis added.]

[42] In paras. 14 and 15 of Naneff, however, the Court also limited the breadth of its reliance on familial discord:

Before turning to a consideration of the remedies granted to Alex I think this review of the background should be completed by the following extract from the reasons for judgment given by Blair J. (at p. 251) [Blair J. wrote the decision of the Divisional Court in Naneff]:

The desire -- understandable and genuine as it may be -- to chastise and correct the actual and perceived failing of a son or brother in his personal life, is not a basis for ignoring the duties and obligations which the parent and sibling owe in their corporate capacities to the son and brother in his corporate capacity. In circumstances such as these, the strictures of the O.B.C.A. and of corporate law override the family desires. In their corporate capacity as directors they are required to act in good faith and in the best interests of the company, and not for some extraneous purpose . . . [references omitted].

Here, the Naneffs may have felt that their interests as a family in dealing with Alex's perceived failings and the interests of the Rainbow Group in this respect were one and the same. They are not. Alex's personal life had no adverse effect on his business/company life.

I agree that family differences can never justify oppression under s. 248 of the O.B.C.A. [Emphasis added.]

[43] Family circumstances and motivations will thus affect the imposition of the oppression remedy in closely-held family corporations if those family differences affect the corporate interests in question. Contrary to counsel’s assertion that such a principle would throw the commercial bar into chaos, consideration of oblique family differences in oppression remedy proceedings would cause a Court to consider irrelevant evidence and thus prolong proceedings that are, by their very nature, both difficult and arduous. Courts must only decide matters based on relevant material evidence lest the system get bogged down in irrelevant immaterial animosities.

[44] The application judge considered the correct legal principles. He examined the relevant and undisputed facts before him. He applied the law correctly and found, based upon those relevant and undisputed facts, that Margarita’s alleged disloyalty in the Xela Action had no bearing on the Appellants’ duties towards Margarita in her capacity as officer and shareholder of Tropic. His conclusion that the Appellants’ conduct as regards Margarita and Tropic amounted to oppression irrespective of her alleged actions as regards Xela is correct in law and supported by the evidence before him. I see no reviewable error.

G. VALUATION/REMEDY ISSUES

[45] The Appellants also contend that the remedy imposed by the application judge was improper in that:

a. Margarita’s shares in Tropic ought not be purchased by the Appellants. Instead, even if oppressive conduct was found, she should remain as a shareholder in Tropic;

b. The application judge erred in determining whether it is appropriate to include expenses of a Tropic’s subsidiary, XGL, in the valuation of Tropic shares;

c. The application judge erred in preferring the Respondent’s treatment of a transfer price agreement between Tropic and a related company, Fresh Quest (which affected the valuation of Tropic);

d. The application judge erred when, in calculating a fair share price, he preferred capitalization rates used by the expert of one party over the other (he preferred the Appellants’ rate) and should have ordered a trial in order to make that determination; and

e. The application judge should not have used Xela’s $3.25 million offer to purchase as a floor for valuing Margarita’s shares.

Share Purchase as a Remedy

[46] The Appellants suggested in oral argument that even if oppressive conduct occurred, the application judge should not have ordered that the Appellants purchase Margarita’s shares. Simply put, this position is untenable and unsupported by the evidence. All parties agree that the relationship as between Juan, Margarita and the late Arturo was (and remains) toxic. To expect Margarita to remain as a minority shareholder in Tropic would invite further discord and corporate conflict. It would serve no purpose. Ordering the removal of Margarita from Tropic was within the jurisdiction or power of the court and was the only fair and just remedy once oppressive conduct was found to have occurred.

Fair Value vs. Fair Market Value

[47] In order to appreciate the application judge’s findings on valuation issues, one must first examine the differences between fair market value and fair value. In Glass v. 618717 Ontario Inc., 2012 ONSC 535, 100 B.L.R. (4th) 35, Brown J. (as he then was) indicated the following at para. 246 as regards valuations:

A helpful summary of the particulars underlying the application of the “one true rule” can be found in the article by Hunter and Pearce, “Fair Value” – A Common Issue with Surprisingly Sparse Canadian Authority:

The following basic principles appear to be well-established by the authorities:

4. Complicating the court’s task is the frequently expressed admonition that judges should exercise caution in attempting to mix and match portions of competing expert reports and thereby cast themselves in the role of performing their own valuation. As the trial judge put it in the Brant Investments case:

In arriving at my valuation I do not propose to go through the valuation exercise followed by the experts, substituting my own conclusion as to the basic ingredients for theirs. The wide disparity exhibited by them in the application of their technique does not inspire me with any confidence in the result which I would achieve as an amateur in its application.

5. Market value “is the highest price expressed in money obtainable in an open and unrestricted market between knowledgeable, prudent, and willing parties dealing at arm’s length, who are fully informed and under no compulsion to transact”. However, “market value” is not equivalent to “fair value”, although…fair market value can be an important part of the fair value determinate depending on the circumstances.

6. Fair value is a value that is “just and equitable” – one which provides “adequate compensation (indemnity), consistent with the requirements of justice and equity.” One important implication of the distinction between market and fair value is that, in general, no minority discount can be applied in determining “fair value”…

[48] The decision described by Brown J. above refers to Anderson J.’s decision in Re: Brant Investments Ltd. (1987), 60 O.R. (2d) 737 (Ont. H.C.).

[49] The application judge recognized and applied these principles. At paragraphs 72 to 76 of his decision, the application judge outlined the difference between fair value and fair market value, as well as the importance of each to this case:

Fair value is not the same as fair market value, but rather is a value based on principles of equity. In Glass v. 618717, 2012 ONSC 535 at para. 246 Brown J. (as he then was) quoted with approval:

Market value “is the highest price expressed in money obtainable in an open and unrestricted market between knowledgeable, prudent, and willing parties dealing at arm’s length, who are fully informed and under no compulsion to transact”. However, “market value” is not equivalent to “fair value”, although … fair market value can be an important part of the fair value determinate depending on the circumstances.

Fair value is a value that is “just and equitable” – one which provides “adequate compensation (indemnity), consistent with the requirements of justice and equity.” One important implication of the distinction between market and fair value is that, in general, no minority discount can be applied in determining “fair value”…

The issue therefore is the fair value of Margarita’s Tropic shares that is to be paid to her.

Each side engaged an expert valuer to provide a market value evaluation of the Tropic shares. Mr. Farley Cohen was retained by Margarita. Mr. Errol Soriano was retained by the respondents. Both are highly qualified expert valuers. Both prepared an en bloc fair market valuation of Tropic using a valuation date of December 31, 2010.

As in many cases, Mr. Cohen and Mr. Soriano have reached quite different conclusions. Mr. Cohen estimates the fair market value of Margarita’s Tropic shares as between $5.2 and $5.6 million. Mr. Soriano estimates the fair market value of Margarita’s shares as $0.9 million or $2.6 million depending on whether the XGL adjustment transferring liabilities to Tropic should be recognized.

Margarita contends that it would be inequitable for Arturo and Juan to assert a lesser valuation of Tropic shares than the $8 million en bloc valuation that was the basis for the Xela offer in April 2010 that they directed Xela to make and which they accepted. If not for the respondents’ oppressive conduct in withholding information from her, Margarita could have taken advantage of that same offer whether or not it reflected fair value at the time. The respondents say that Margarita refused the offer and initiated expensive and lengthy proceedings and that it would be inequitable to permit a party to reject an offer, put everyone through the expense of a lengthy legal proceeding to try to get more, and then ask that she at least be able to accept the offer made and rejected 5 years ago. This position of the respondents ignores their failure to provide Margarita with appropriate financial information which I have held unfairly disregarded her interests. It also ignores the evidence of Arturo given on his cross-examination that he would still have Xela buy Margarita’s shares at the price offered in 2010 if she were willing to do so. [Emphasis added]

[50] The application judge described the expert’s differing approaches to fair market value at paragraphs 83 and 84:

Brown J. in Glass, supra, adopted the admonition that judges should exercise caution in attempting to mix and match portions of competing expert reports and thereby case themselves in the role of performing their own valuation, with support from Anderson J. in Brant Investments as quoted.

The experts differed on several assumptions, the most important as I see it being the use of a transfer price agreement made by Fresh Quest with related companies, the applicability of the XGL transfer of losses to Tropic undertaken in June, 2010 and an appropriate capitalization rate to be used. I will deal with these.

[51] It is clear from the reasons of the application judge that he intended to use fair market value as one of the bases for a finding of fair value. This approach is entirely consistent with that adopted in Glass.

“Mix and Match”

[52] With regard to the purchase of Margarita’s shares, the Appellants’ counsel submitted that the application judge “mixed and matched” portions of disparate expert reports and, in so doing, cobbled together a valuation of Margarita’s shares that did not accord with the principle that a justice should not substitute her or his own expert valuations for those tendered into evidence. This concern applies to the transfer pricing dispute, the XGL dispute and the capitalization rate dispute.

[53] As a starting point, it must be noted that counsel indicated that the valuators were cross-examined on their opinions and that the application judge had copies of the transcripts at his disposal.

[54] Counsel for the Appellants also conceded in oral argument before us that there was no issue as to the credibility of the valuators. This concession is of particular importance as the Appellants cannot therefore rely upon the need to determine credibility as a basis for converting the application into an action.

[55] A review of these grounds of appeal demonstrates that the application judge did not “mix and match” inappropriately but, instead, chose as between competing positions which is entirely consistent with Glass.

Transfer Pricing

[56] The parties’ valuators disagreed regarding the treatment of a transfer pricing agreement as between Tropic and related companies. The Appellants’ valuator preferred an approach that effectively lowered Tropic’s value (and thus the value of Margarita’s holdings therein) while Margarita’s valuator adopted an approach that increased Tropic’s value.

[57] In deciding that he preferred Margarita’s position, the application judge stated:

[88] Mr. Soriano, with some relatively minor adjustments, accepted the income generated by Fresh Quest under the TPA in carrying out his capitalized cash flow valuation of Fresh Quest. He concluded that the methodology employed to establish the terms of the TPA was consistent with the definition of fair market value employed in his report. On this basis, he concluded that to the extent the TPA terms were reflected in the prices charged for the transactions, no adjustment was required in his calculation of the fair market value of Fresh Quest’s equity using a capitalized cash flow approach.

[89] Mr. Cohen chose not to rely on the income derived by Fresh Quest under the TPA. His view was that the related party transactions resulting from the TPA between the Fresh Quest Group and Xela would not necessarily occur if Fresh Quest was operated by a third party. He noted that in exchange for the profit share split between Fresh Quest and LAP, LAP provided only an indemnity to Fresh Quest in respect of any losses that were created by events that adversely impact revenues due to quality issues, spoilage and natural disasters. There has been only one payment in respect of this indemnity, which was limited to approximately 50% of the estimated total loss, or $540,000, whereas LAP had received $10.228 million as a result of receiving 80% of the profits earned by Fresh Quest after its 2.5% profit margin

[93] Without going into all the details of the two experts regarding this transfer pricing issue, I agree with the basic position of Mr. Cohen. The issue is what a third party buyer would pay for the Fresh Quest business and what income it thought it could achieve. If the buyer did not want to pay 80% of the residual profits of Fresh Quest to LAP, a Barbadian company that provided administrative services to the farm companies in Honduras and Guatemala, the U.S. tax authorities would have no difficulty if Fresh Quest started retaining more of its income rather than paying it to LAP. The fact that Fresh Quest paid out in excess of $10 million to LAP and got only one payment of $500,000 for spoiled produce on one occasion supports the notion accepted by Mr. Cohen that the TPA would likely not be continued by a third party purchaser. The fact that Xela management was able to transfer 80% of the residual profits of Fresh Quest to LAP, a subsidiary of Xela in Barbados that would not be subject to U.S. tax, presumably because it was tax advantageous to Xela, does not in itself mean that he TPA reflected fair market value, which is defined to be the highest value that an arm’s length party would pay.

[94] As a result of his conclusions about the TPA, Mr. Cohen applied a profit margin to Fresh Quest’s historical average annual revenues derived from looking at operating profit margins for fresh fruit and vegetable wholesalers. Mr. Soriano did not comment on the source used by Mr. Cohen. I see no reason to question Mr. Cohen’s imputed profit margins he used in arriving at the earnings to be capitalized.

[58] Clearly, the application judge considered both positions and chose the one that was most just. He did not insert himself into the role of valuator. Instead, he chose the valuation method that most accurately reflected Tropic’s fair market value. This approach is consistent with Glass.

XGL Adjustment

[59] The parties’ experts also disagreed on the applicability of the XGL Adjustment. Again, the motion judge examined the positions of the parties, and then approved the method he found to be most just in the circumstances:

[95] The XGL adjustment made on April 12, 2011 by journal entry effective May 31, 2010 was made after the effective date of the appraisals of December 31, 2010 that both valuers have used. To accept this adjustment as Mr. Soriano did was to impermissibly accept and rely on hindsight evidence of something that occurred after the effective date of the valuation. It is a basic principle of valuation that a valuer may not rely on hindsight evidence post the valuation date and that events that were not known as of the valuation date are not relevant to determination of fair value on the valuation date. See Glass, supra at para. 246. Thus even if the XGL adjustment was otherwise proper, it should not have been taken into account in arriving at a fair market valuation effective some months before the adjustment was made and known.

[96] So far as a fair value is concerned, it would be very unfair to Margarita to recognize the XGL adjustment. It was made only because Margarita had brought an application to be paid a fair value for her Tropic shares and it was intended to decrease the value of Tropic and thus the amount that might be ordered to be paid to her. The adjustment had not been made before Arturo and Juan had agreed to sell their Tropic shares to Xela, or before the valuation by Mr. Badham was made that preceded that sale. The adjustment was not made in good faith, as I have held, and was oppressive. It should not be reflected in the amount to be paid to Margarita for her Tropic shares.

[99] Mr. Cohen points out that in Mr. Soriano’s report he has omitted adding back the break fee portion of the entry, totaling approximately $465,000, which was also booked in Tropic. Mr. Cohen is of the opinion that if the adjustments were inappropriate, Mr. Soriano has underestimated the value of Tropic with respect to the XGL adjustment by at least a further $465,000 over and above Mr. Soriano’s figure of $3.65 million allocated to Tropic in the XGL adjustment. Mr. Soriano put the fair market value of Margarita’s Tropic shares at $900,000 including the XGL adjustment and at $2.6 million excluding the XGL adjustment. This difference of $1.5 million would increase by 44% of $465,000 or $200,640 on Mr. Cohen’s analysis for an upward adjustment of Mr. Soriano’s valuation of Margarita’s Tropic shares by approximately $1.7 million on the assumption that the XGL adjustment should not be recognized.

[60] The application judge examined the evidence before him, considered the relevant case law and applied the law to the undisputed facts. He did not enter the valuation fray, but instead chose the most just result from two competing experts. Again, he applied the principles in Glass correctly.

Capitalization Rate

[61] Regarding the capitalization rate applied, the application judge sided with the Appellants’ expert:

[100] Mr. Cohen used a multiple of ranging from 5 to 6 times to apply to the maintainable EBITDA for Fresh Quest that he concluded was in a range of $1.7 to $2.2 million. This multiple was based on his review of multiple transactions involving grocery wholesalers and food wholesale/distribution companies and on offers made between 2004 and 2007 for the entire Fresh Quest Group. Mr. Soriano used what he called a buildup method, or a weighted average cost of capital method, in determining his multiple.

[101] Mr. Soriano was critical in the use by Mr. Cohen of multiples derived from offers made some three years prior to the valuation date and before the financial crisis of 2008 to acquire the entire Fresh Quest Group as he viewed the risks to Fresh Quest alone higher than the risks to the Fresh Quest Group as a whole. He concluded that the appropriate multiple would be less than 5 to 6 times and he adopted capitalization rates based on multiples of 3.4 to 4.7 to be applied to his maintainable EBITDA of Fresh Quest.

[102] There is something in the criticism of Mr. Soriano to the multiples used by Mr. Cohen. The entire Fresh Quest Group for which the offers were made was different from just Fresh Quest itself and the comparable transaction used by Mr. Cohen could be looked at as being not entirely comparable. If the multiples of 3.4 and 4.7 derived by Mr. Soriano were to be applied to the maintainable EBITDA of Fresh Quest as adopted by Mr. Cohen, that would result in an en bloc fair market value of Tropic of $8.7 to $9.5 million, or $3.83 to $4.1 million for Margarita’s 44% interest.

[62] Again the application judge preferred one methodology over another and did not generate his own valuation as per the concerns in Glass.

The Use of the April 2010 Offer

[63] Finally, with respect to the allegation that the application judge was precluded from using Xela’s offer to purchase Margarita’s Tropic shares as a valuation floor for fair value, in my view, the application judge was well within his discretion to so find. As he stated in paras. 76 and 77 of his judgment, Margarita was unable to act upon the offer (which offer was ultimately accepted by Juan and Arturo) as a result of the Appellants’ oppression. As stated in paragraph 76 of his reasons, “[i]f not for the respondent’s oppressive conduct in withholding information from her, Margarita could have taken advantage of that same offer whether or not it reflected fair value at the time.” Accordingly, the application judge’s baseline approach was the only fair way to value Margarita’s shares since failure to set such a floor would have allowed the Appellants to profit from their own oppressive conduct. This use of the April 2010 offer thus constitutes no error.

Conclusion

[64] After deciding which methodologies to use when determining fair market value and after considering whether or not to apply a minority discount (which was not argued on this appeal), the application judge then determined the fair value of Margarita’s Tropic shares by stating:

[106] In the end, and adopting the approach of Anderson, J. in Brant, I have concluded that in all of the circumstances, the fair value of Margarita’s 44% of Tropic is $4.25 million. Arturo, Juan and Xela are jointly ordered to pay Margarita this amount.

[65] Thus, the application judge correctly chose as between competing theories on three disparate issues when determining fair market value of Margarita’s shares. He then used those findings as a basis for determining fair value while considering other relevant factors (such as Xela’s offer to purchase). Again, I see no error in this approach.

[66] Accordingly, I would dismiss the appeal as it pertains to remedy and valuation issues.

H. COSTS AWARDED BY THE APPLICATION JUDGE

[67] The application judge awarded costs to the Respondents in the total of $889,858.21. The Appellants seek leave to appeal this amount stating that:

1. The application judge erred in stating that it was not his function to “second guess” counsel on the time spent unless the time complained of was plainly excessive;

2. The work done by the Respondent’s counsel was not appropriately delegated to the lowest-cost timekeeper;

3. The application judge awarded costs that were not incidental to the proceeding; and

4. The application judge awarded expert disbursements that were excessive and disproportionate.

[68] The costs awarded were substantial and the comment about not “second-guessing” requires some consideration. Accordingly, leave to appeal the costs award is granted but the appeal is nevertheless dismissed for the reasons that follow.

[69] First, the statement by the application judge about not “second-guessing” the amount of time spent by counsel in the matter must be viewed within the context of his reasons as a whole. This was not an element dismissed out of hand by the application judge. He considered the amount of time spent by counsel and, without examining it microscopically, found it to be reasonable. I see no error in that approach. Indeed, I agree that the amount of costs ordered in respect of counsel’s time was reasonable and appropriate in the circumstances.

[70] Second, the Appellants’ current counsel were not always counsel of record. When they submitted their Bill of Costs, counsel for the Appellants did not submit any time for original counsel. Accordingly, it is almost impossible for the Appellants to indicate with certainty what an appropriate quantum of costs would have been since they themselves were not able to advise this Court of the total amount of time expended by both sets of Appellants’ counsel.

[71] Third, a review of the Respondent’s Bill of Costs does not suggest that work was hoarded by senior people at an inappropriate rate. This matter was a serious, complex and hotly-contested piece of litigation that involved a voluminous record, 19 days of cross-examination, two days of hearing and apparently considerable back and forth between counsel. Such work is undoubtedly expensive and requires the work of senior counsel. The Appellants should therefore not have been surprised by the Respondent’s Bill of Costs.

[72] Fourth, upon review of the record and the Bills of Cost submitted, there is nothing to suggest that the costs sought were anything but incidental to the proceeding.

[73] Fifth, the application judge fully explained that the Respondent’s expert faced difficulties in that the Appellants would not furnish the expert with relevant documents in a timely fashion. Accordingly, the Respondent’s expert had to spend considerable time in his efforts “starting and stopping” work which might otherwise have been accomplished more efficiently in one sitting. Further, the complexity and magnitude of the case was such that the expert fees charged were not inappropriate.

[74] Finally, the application judge rightly considered the fact that the Respondent had made a more favourable Rule 49 Offer to the Appellants two weeks prior to the hearing in ordering substantial indemnity costs from the date of that offer.

[75] The application judge’s discretion with respect to costs is entitled to considerable deference. The application judge considered the relevant factors. I see no error in principle. The costs awarded were reasonable in all the circumstances and there is no basis for interfering with the award.

I. DISPOSITION and COSTS OF APPEAL

[76] In the result, for the foregoing reasons, I would dismiss the appeal in its entirety. The Respondent has been wholly successful and is entitled to her costs.

[77] Counsel for the Appellants submitted a bill of costs in the amount of $35,355.44 while counsel for the Respondent submitted a bill of costs in the amount of $76,096.47. The Appellants submitted that, in the event they lost the appeal, costs should be fixed in favour of the Respondent, at no more than $35,355.44.

[78] All parties agreed that the matter was complex, serious and important. Both sides spent approximately the same amount of time preparing the matter (approximately 150 hours for the Appellants and 160 hours for the Respondent). Despite these similarities, two factors appear to drive the disparity of costs for the parties: the Respondent’s counsel had higher hourly rates and the Respondent’s senior counsel devoted more time (relatively speaking) on the case than did senior counsel for the Appellants. I take no issue with this disparity given the aforementioned complexity, seriousness and importance of the case. The bills of cost do not suggest any inappropriate duplication of effect by the Respondent’s counsel.

[79] Accordingly, costs are awarded in the amount of $76,096.47 inclusive of HST fees and disbursements to the Respondent payable by the Appellants within 30 days from today’s date.

___________________________ VARPIO J.

I agree:___________________________

MOLLOY J.

I agree:__________________________

DAMBROT J.

Date of Release: December , 2016

CITATION: Castillo v. Xela Enterprises Ltd., 2016 ONSC 6088

DIVISIONAL COURT FILE NO.: 065/16 DATE: 2016-12-19

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

MOLLOY, DAMBROT and VARPIO JJ.

BETWEEN:

XELA ENTERPRISES LTD., TROPIC INTERNATIONAL LIMITED, FRESH QUEST, INC., 696096 ALBERTA LTD., JUAN GUILLERMO GUTIERREZ and JUAN ARTURO GUTIERREZ

Appellants

– and –

MARGARITA CASTILLO

Respondent

REASONS FOR JUDGMENT

VARPIO J

[^1]: It should be noted that Tropic did not hold regular meetings and that Tropic’s business affairs were discussed at Xela meetings. Margarita was aware of the Xela meeting wherein she was removed as Tropic’s director but was unaware that her removal from Tropic would be discussed.