DIVISIONAL COURT FILE NO.: 707/22 DATE: 20231006
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
D.L. Corbett, Nishikawa and Schabas JJ.
BETWEEN:
DON BERNIER Appellant
– and –
DEBORAH KINZINGER, VEL MICULINIC, 1057247 ONTARIO INC., SKILCOR FOOD PRODUCTS INC., 1612363 ONTARIO INC., and 5013361 ONTARIO INC. Respondents
COUNSEL: R. Bevan Brooksbank and Mani Kakkar, for the Appellant Jason Squire, for the Respondents
HEARD at Toronto (by videoconference): March 28, 2023
REASONS FOR DECISION
D.L. Corbett J.
[1]. Don Bernier appeals from the judgment of L.A. Pattillo J. dated March 23, 2022 (2022 ONSC 1794) (the “Decision”), dismissing his oppression application under s. 248 of the Ontario Business Corporations Act, RSO 1990, c. B.16 (the “OBCA”).
[2]. Mr Bernier claimed to be a shareholder in Skilcor Food Products Ltd. (“Skilcor”) and in La Riberie Inc. (“La Riberie”). The application judge found that Mr Bernier “was not a shareholder, beneficial or otherwise, in either Skilcor or La Riberie” at the material time, and for that reason dismissed the application.
Summary and Disposition
[3]. The application judge found as a fact that the parties entered into an agreement prior to September 2010, effective December 31, 2008, by which Mr Bernier acquired a 9% interest in the “consolidated group” (as defined below). A portion of the consolidated group was sold in 2013, and proceeds distributed. About four years later, the balance of the consolidated group was sold, and the parties were unable to agree on what, if anything, Mr Bernier was entitled to from the proceeds. The application judge found that the sale of the first portion of the consolidated group in 2013 had the effect of rescinding Mr Bernier’s share acquisition in the consolidated group by mutual consent, and so Mr Bernier was not a shareholder of the remaining portion of the consolidated group at the time of its sale – and thus was not entitled to any sale proceeds.
[4]. The application below was fought primarily on the issue of whether Mr Bernier ever acquired an interest in the consolidated group. It was not pleaded or argued below that Mr Bernier acquired an interest in 2008 that was rescinded in 2013 by mutual agreement. Further, the application judge’s finding – that there was mutual rescission – is apparently based on the application judge’s conclusion that rescission was an implicit corollary of the 2013 sale.
[5]. I would allow the appeal. In my view it was procedurally unfair to rest the decision below on a theory of the case that was neither pleaded nor argued. While I agree with the application judge that it was Mr Bernier’s onus to establish that he was a shareholder at the time of the 2017 sale, that did not create an onus for Mr Bernier to rebut unpleaded, unargued defences. Mr Bernier established that he acquired a 9% interest in the consolidated group, and this was sufficient – on the pleadings, evidence and arguments in this case – to establish that Mr Bernier was a shareholder of the consolidated group in 2017.
[6]. Further and in any event, I see no basis in either law or fact for the conclusion that a sale of a portion of the consolidated group vitiated Mr Bernier’s shareholding in the balance of the group. This conclusion does not flow by operation of law, and the record below is inconsistent with a mutual intention to rescind Mr Bernier’s acquisition of an interest in the consolidated group. Therefore, for the reasons that follow, I would set aside the judgment below, and in its place I would grant judgment for Mr Bernier to the effect that he was a beneficial owner of 9% of the remaining portion of the consolidated group at the time of its sale, and is entitled to proceeds of disposition in accordance with that shareholding (less the deferred purchase price of $400,000, plus interest, subject to adjustments). I would refer the case back to the Commercial List of the Superior Court of Justice in Toronto to decide remaining issues concerning the quantum to which Mr Bernier is entitled.
Jurisdiction and Standard of Review
[7]. Jurisdiction over this appeal lies in the Divisional Court pursuant to s. 255 of the OBCA. An “appellate standard of review” applies. Questions of law are reviewable on a correctness standard. Questions of fact are reviewable on the standard of palpable and overriding error. Mixed questions of fact and law are reviewable on the deferential standard that applies to questions of fact, except to the extent that they disclose an extricable question of law, which is reviewable on a correctness standard. See: Housen v. Nikolaisen, [2002] 2 SCR 33. A trial court’s findings respecting contractual terms are generally questions of fact or of mixed fact and law reviewable on a deferential standard: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, para. 50.
[8]. Procedural fairness is reviewed in this court on a standard of correctness, using the factors set out in Baker v. Canada (Minister of Citizenship and Immigration), 1999 699 (SCC), [1999] 2 SCR 817. On an appeal, fairness arguments are subject to an appellate standard of review: Law Society of Saskatchewan v. Abrametz, 2022 SCC 29.
Background Facts
[9]. The background facts (largely uncontested) are set out in paras. 7 – 36 of the Decision. Only a brief summary is required here. Skilcor was founded in the late 1960’s by Ms Kinzinger’s father. Ms Kinzinger joined the business in 1987 and became its sole beneficial shareholder in the early 1990’s. Mr Bernier was hired as Executive VP of Skilcor in 2005. Also in 2005, Ms Kinzinger and her husband, Mr Miculinic, founded La Riberie, which established manufacturing facilities for Skilcor’s meat business.
[10]. In 2006, Ms Kinzinger acquired beneficial control of another food product business, Northbud Distributors Inc. (“Northbud”). A minority shareholder of the acquired company (Peter Clarke) continued his 30% interest in Northbud. Ms Kinzinger’s beneficial interest was 60%, and Bernier was given 10% of Northbud, so the shareholdings in Northbud were:
Ms Kinzinger: 60% Mr Clarke 30% Mr Bernier 10%
Bernier was gifted the Northbud shares, but subsequently it was agreed that he would pay $200,000 for the shares, but that his compensation would be increased over a five-year period to cover the acquisition cost and associated income taxes.
[11]. In late 2007, the parties began exploring merger of the food businesses of Skilcor, La Riberie and Northbud. These discussions were complicated by the fact that Skilcor had assets unrelated to the consolidated meat business of the three companies, and Clarke and Bernier only held shares in one of the three companies (Northbud).
[12]. Skilcor’s accountant opined that Mr Clarke’s 30% interest and Mr Bernier’s 10% interest in Northbud would work out to a 9% interest and a 3% interest, respectively, in the merged entity. Ms Kinzinger considered that these shareholdings would be problematic: Mr Bernier was to be the CFO of the merged entity and Mr Clarke would be reporting to Mr Bernier. Ms Kinzinger and Mr Bernier agreed that Mr Bernier’s interest would increase to 9% of the merged entity, to match Mr Clarke’s interest, and Mr Bernier would pay $400,000, plus interest, for the additional 6% interest in the merged company.
[13]. By late 2010, Ms Kinzinger was frustrated with the lack of progress in merger discussions and decided not to proceed. In late 2010 and early 2011, she discussed her decision with Mr Bernier, who agreed. They agreed to market and sell Northbud on its own. This was done, and in August 2013, Northbud’s assets were sold to a third party, following which Northbud was wound up and its net assets distributed to its shareholders. As a result of the sale of Northbud, Mr Clarke ceased his involvement in Skilcor and La Riberie.
[14]. Back in September 2010, when merger discussions were still underway, Ms Kinzinger wrote an email to Mr Bernier summarizing a number of points that had been agreed between them, which Ms Kinzinger said she “wanted to diarize… as our memories may be getting a bit weak after all this time.” The entire text of the email is set out at para. 17 of the Decision. Paragraph 2 of the email reads as follows:
- In turn, whether we completed the merger or not, we agreed these shares would role [sic] over to 3% of the total company (Consolidated group) at Dec 31, 2008 and I further agreed to increase your total company position from 3% to 9% effective December 31, 2008. You agreed to pay for this increase at the time the company was sold at a value of $400,000 plus interest.
[15]. In response to a follow-up email from Ms Kinzinger in mid-October 2010, Mr Bernier wrote that “everything is fine.”
[16]. Events after the sale of Northbud are set out in detail at paras. 23 - 36 of the Decision. The critical facts, for the purposes of this appeal, are as follows. Skilcor and La Riberie were sold in October 2017, four years after Northbud was sold. The parties were unable to agree upon what, if anything, Mr Bernier was entitled to receive from the sale proceeds pursuant to the terms summarized in para. 2 of the email of September 2010.
The Issues Below
[17]. The application judge accurately characterized the issues before him as follows, at paras. 37-39 of the Decision:
Bernier submits that the September 1, 2010 email amounts to an agreement between the parties that he was a 9% beneficial shareholder in Skilcor and La Riberie at the time of the sale in 2017. He agrees that the value of his 9% interest is reduced by $400,000 owed for his increased position (3% to 9%) plus accrued interest.
The respondents submit that Bernier was never a shareholder of Skilcor or La Riberie. They further submit the September 2010 email does not amount to [an] agreement. In their view, the evidence does not support an objective intention to enter into binding legal relations. Nor have all essential terms of the agreement been reached.
The respondents further submit that the parties’ subsequent conduct, and particularly the sale of Northbud’s assets in 2013 and its subsequent winding-up, overwhelmingly demonstrates that the September 2010 email was not intended to be legally binding.
Notable from this list, for this appeal – “mutual rescission” was not one of the parties’ issues.
The Findings Below
(a) The Parties Had An Agreement
[18]. The application judge found as follows (at para. 42 of the Decision):
Kinzinger and Bernier entered into an oral agreement whereby Bernier would receive a 9% interest in the “Consolidated group” which at the time was clearly understood by the parties to comprise the food assets of Skilcor, together with La Riberie and Northbud. The essential terms of the agreement were that Bernier would roll-over his 10% interest in Northbud for which he would receive a 3% interest in the Consolidated group as of December 31, 2008. Further, Bernier’s 3% interest would be increased by Kinzinger a further 6% (i.e. from 3% to 9%), again as of December 31, 2008. For the additional 6% of equity, Bernier would pay $400,000, plus interest, due at the time the “company” was sold (the “Agreement”).
This is a factual finding that was open to the application judge on the record before him. It discloses no palpable and overriding error. Fundamental to this finding, the “consolidated group” included “the food assets of Skilcor” and not all of Skilcor’s assets. The application judge emphasized this finding at para. 47 of the Reasons:
It is clear from the record and I find that Bernier was at all times aware that the non-food assets of Skilcor were not part of the Agreement…. I find it was never a term of the Agreement that he would receive a 9% beneficial shareholding in Skilcor.
[19]. This leads to the following conclusions, as found by the application judge:
(a) Mr Bernier acquired a 9% interest in the consolidated group as of December 31, 2008.
(b) Mr Bernier contributed his 10% shareholding in Northbud and agreed to pay a further $400,000, plus interest, for his 9% shareholding in the consolidated group.
(c) The payment described in (b) was due upon sale of the consolidated group.
(d) The “consolidated group” included Northbud, La Riberie, and the “food assets” of Skilcor.
[20]. All of these findings were available on the record and there is no basis for this court to interfere with them.
(b) The Contractual Finding Does Not Dispose of the Liability Issue
[21]. The contract, as found by the application judge, was that Bernier acquired a 9% interest in the “consolidated group” as of December 31, 2008. The fact that the parties agreed to this transaction does not mean that this transaction was consummated formally. The application judge noted this distinction at para. 46 of the Reasons:
The fact that the parties reached the Agreement concerning Bernier receiving 9% of the Consolidated group as defined, sometime prior to 2010 does not, however, resolve the issue of whether, at the time of the sale of Skilcor’s food assets and La Riberie in 2017, Bernier was a shareholder of those companies.
[22]. As a matter of law, the application judge was correct in finding that the 2010 Contract did not determine whether Bernier was a shareholder of the “consolidated group” at the time of the 2017 transactions.
(c) Mutual Rescission of the Contract
[23]. The application judge then found that, although there had been a contract pursuant to which Mr Bernier acquired a 9% interest in the “consolidated group”, this contract was rescinded by mutual agreement:
On the facts of this case, I am satisfied and find the parties subsequent agreement to sell the assets of Northbud and distribute the proceeds to the shareholders, including Bernier, rescinded the Agreement. (Decision, para. 53)
[24]. The application judge provided detailed reasons for this conclusion at paras. 53 – 61 of the Decision. However, they all turn on one crucial finding:
… the Northbud sale deprived Bernier of any equity contribution to the new “group” and therefore no entitlement to an interest. (Decision, para. 56)
The respondents put this finding more colourfully in argument before this court: they submit that Mr Bernier no longer had “any skin in the game” after the Northbud sale.
Issues on Appeal
[25]. The appellant states that mutual rescission was not an issue raised by or argued by the parties before the application judge. It was a “novel legal theory” applied by the application judge, which “escaped the rigours of the adversarial process”. This, the appellant argues, raises issues of procedural fairness and substantive propriety of the application judge’s finding that the agreement had been rescinded.
[26]. The appellant also argues that, on the merits, there was no proper basis for finding mutual rescission. The application judge found mutual rescission on the basis of the sale of Northbud which, he found, undermined the basis of the prior agreement to provide the appellant with a 9% interest in the “Consolidated Group.” The appellant argues that this analysis ignores a key term agreed between the parties – that the appellant’s interest was granted regardless of whether amalgamation of the “consolidated group” ever took place. The intent was to give the appellant an owner’s interest in growing the “consolidated group” and this intent was not displaced by sale of Northbud prior to sale of the rest of the businesses.
[27]. The respondent argues that the application judge correctly found that the onus lay on the appellant to establish that he was a shareholder after the sale of Northbud. It was open to the application judge to conclude that this onus was not discharged in light of the mutual rescission of the agreement to provide the appellant with an interest in the consolidated group. There was no unfairness in deciding the case on the issue of mutual rescission, since it is simply an aspect of the appellant’s onus to prove his case. On the merits, the respondent argues that after the sale of Northbud, the appellant “had no skin in the game” and thus was not entitled to an interest in the balance of the “consolidated group”.
Issue 1 – Procedural Fairness
[28]. It was the appellant’s onus to show that he was a beneficial shareholder, the foundation of his claim to be entitled to a portion of the proceeds of sale of Skilcor and La Riberie. He led evidence that his interest arose from his agreement to contribute his shares in Northbud and to pay $400,000, plus interest, for a 9% interest in the consolidated group.
[29]. In response, the respondents took the position that there was never an enforceable agreement to provide the appellant with an interest in the consolidated group. The dealings between the parties rose no higher than an unenforceable “agreement to agree”. Both parties led evidence of dealings both before and after the alleged agreement in support of their positions on whether there was ever an enforceable agreement. The respondents did not take the position – in their evidence or in their arguments – as a primary or alternative argument – that there was an enforceable agreement, but that this agreement was terminated by mutual rescission.
[30]. An application judge’s interpretation of a contract is entitled to considerable deference in this court. However, when an application judge decides a matter on a basis that was not anchored in the pleadings, evidence, positions and submissions of the parties, principles of procedural fairness overtake principles of contractual interpretation: Union Building Corporation of Canada v. Markham Woodmills Development Inc., 2018 ONCA 401, para. 13. The following passage from the Court of Appeal’s decision in Rodaro v. Royal Bank (2002) 2002 41834 (ON CA), 59 OR (3d) 74, para. 62 – was stated in respect to unargued theories of liability, but applies equally to unargued defences:
In addition to fairness concerns which standing alone would warrant appellate intervention, the introduction of a new theory of liability in the reasons for judgment also raises concerns about the reliability of that theory. We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process. We simply do not know how Spence J.'s lost opportunity theory would have held up had it been subject to the rigours of the adversarial process. We do know, however, that all arguments that were in fact advanced by Mr. Rodaro and were therefore subject to the adversarial process were found wanting by Spence J.
[31]. I appreciate that there is no formal statement of defence in an application. However, the parties filed extensive materials, including factums, and nowhere was the issue of mutual rescission mentioned. None of the cases relied upon by the application judge on this point were put to him by the parties. The application judge did not have the benefit of full argument from the parties on the impact of the sale of Northbud on the share acquisition agreement. In all of these circumstances, the application judge’s findings on the issue of mutual rescission are not entitled to deference in this court, and we are required to take a fresh look at the issue: Rodaro v. Royal Bank (2002) 2002 41834 (ON CA), 59 OR (3d) 74.
Issue 2 – No Mutual Rescission
(a) Context: Mr Bernier Had Plenty of “Skin in the Game”
[32]. Mr Bernier was hired by Ms Kinzinger as Executive Vice-President of Skilcor in 2005. From the time of his hiring until his departure after the sale of the consolidated group (by which time Mr Bernier was the president and CEO of the consolidated group), Mr Bernier was a key senior executive, working with the respondents to grow and, ultimately, sell the respondents’ business.
[33]. As found by the application judge, as stated above, Mr Bernier was given a 10% interest in Northbud. Effective December 31, 2008, Mr Bernier contributed his 10% interest in Northbud for a 3% interest in the consolidated group, and he acquired a further 6% in the consolidated group in exchange for $400,000, to be paid, with interest, at the time of sale of the consolidated group. The parties agreed that this deal would be effective “whether we completed the merger or not” (emphasis added). The figure of $400,000 was calculated on the basis of the value of the assets of the consolidated group. What is the effect of this transaction? Mr Bernier, as a key senior manager, would share in the increase in value of the business he was helping the respondents to grow. In reliance on this arrangement, Mr Bernier stayed in the business working for the respondents until Northbud was sold in 2013, and the balance of the consolidated group was sold in 2017.
(b) Context: These Parties Did Not Reduce Their Agreements to Formal Documents
[34]. It is apparent from the record that these parties liked and trusted each other. Ms Kinzinger was more diligent about formalizing their arrangements. It was she who sent the email to Mr Bernier in 2010, setting out the terms of their agreement in simple, straightforward language. Mr Bernier did not even respond to this email initially, and after Ms Kinzinger followed up with him he confirmed his agreement in a short email saying, “Deb everything is fine”.
[35]. Given this history, it should be no surprise that the parties did not address formally how the sale of Northbud would affect the share acquisition agreement, or how distribution of proceeds from the Northbud sale would be taken into account on distributions after sale of the balance of the consolidated group. There is not one contemporaneous word in the record suggesting that, as a result of the sale of Northbud, Mr Bernier would no longer be a shareholder in the rest of the consolidated group. There are contemporaneous communications in the record that show that Mr Bernier considered himself to be a 9% shareholder of the unsold consolidated group, and little to the contrary from the respondents – either to Mr Bernier or to anyone else.
(c) The Sale of Northbud Did Not Undermine the Acquisition Agreement
[36]. In argument before us, counsel for the respondents submitted that the acquisition agreement was undermined by the sale of Northbud because Mr Bernier no longer “had any skin in the game” once he was paid for his Northbud shares. This argument is factually incorrect. First, Mr Bernier had an obligation to pay $400,000 plus accumulated interest. That obligation is “skin in the game”. Second, Mr Bernier had worked in the consolidated group for five years since the effective date of the acquisition agreement, helping to build the value of the business, in reliance on the acquisition agreement. That work is “skin in the game”. Third, Mr Bernier was a beneficial shareholder as a result of the acquisition agreement. The agreement itself, and Mr Bernier’s entitlement under it, was “skin in the game”. Fourth, following the sale of Northbud, Mr Bernier loaned most of the net proceeds he received back to the consolidated group. The application judge noted that Mr Bernier received a promissory note and was entitled to “good interest” on these loans (Decision, para. 59). Those points are not inconsistent with a shareholder loan, and the treatment of interest pending sale would suggest otherwise: when Mr Bernier raised the issue of being paid interest on an ongoing basis, the respondent Mikulinic demurred on the basis that the consolidated group’s commercial lender would be unhappy if the group started paying interest to shareholders. In support of this conclusion, the application judge noted that Mr Bernier “was never a shareholder of Skilcor” despite having found that Mr Bernier had a beneficial shareholding of 9% on the consolidated group.
[37]. If Mr Bernier had received 9% of the net proceeds of sale of Northbud, instead of 10%, that structure would have fit perfectly with the share acquisition agreement. But he did not. He received 10% - his actual shareholding in Northbud and not his beneficial interest in the consolidated group. How significant is this point? The share acquisition agreement was predicated on the following points. The 10% interest in Northbud (for which Bernier paid nominal consideration of $200,000) was worth 3% of the consolidated group. The agreed price was $400,000 for another 6% of the consolidated group. On these terms, the $400,000 payment, plus a 1% reduction in Northbud was the consideration for 9% the rest of the consolidated group. The argument that, by his conduct, Mr Bernier agreed to forego his beneficial interest in the rest of the consolidated group turns on this 1% of Northbud. As noted above, these parties did not arrange their affairs with sufficient rigour to invest such consequences on 1% of the value in Northbud.
Conclusion
[38]. The application judge quoted Chitty on Contracts, 4th ed. (London: Sweet and Maxwell, 2021, para. 25-030, as follows:
A recission of the contract will also be implied where the parties have effected such an alteration of its terms as to substitute a new contract in its place. The question whether a recission has been effected is frequently one of considerable difficulty, for it is necessary to distinguish a rescission of the contract from a variation which merely qualifies the existing rights and obligations. If a rescission is effected the contract is extinguished; if only a variation, it continues to exist in an altered form. The decision on this point will depend on the intention of the parties to be gathered from an examination of the terms of the subsequent agreement and from all the surrounding circumstances. Recission will be presumed when the parties enter into a new agreement which is entirely inconsistent with the old, or, if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it. [Footnotes omitted] (Decision, para. 50)
This passage states the law correctly.
[39]. The passage from Chitty highlights the procedural unfairness of deciding this case on the basis on an unargued ground. There was no express contract to rescind the agreement. The question of whether subsequent events rescinded, varied, or left the agreement essentially intact, is, at best, of “considerable difficulty” in this case. The parties did address this “considerable difficulty” before us, and we are persuaded the original agreement can be implemented, as originally agreed, with only minor adjustments.
[40]. The application judge has defined the “consolidated group.” That finding stands and does not require variation of the agreement.
[41]. Mr Bernier received 10%, rather than 9%, of the net proceeds of Northbud. On a final accounting of his 9% interest in the consolidated group, he has received an advance of 1% more than he was entitled to – something that can be accounted for easily enough with a minor adjustment.
[42]. Mr Bernier is required, of course, to pay the $400,000, plus interest.
[43]. If these calculations are run, Mr Bernier can be paid in accordance with his 9% beneficial interest in the consolidated group, as agreed effective December 31, 2008.
[44]. The respondents provided an incentive to Mr Bernier to grow the consolidated group. He stayed with the company and did that. He should be paid in accordance with the deal. The one minor adjustment required to carry out the agreement does not “go to the root” of the agreement.
Remedy
[45]. On the issues raised by the parties, as set out in the application judge’s decision, Mr Bernier was a beneficial shareholder of the consolidated group and is entitled to be paid his share of the sale proceeds. The parties agreed to bifurcate damages and liability. I would therefore direct that the case be remitted to the Superior Court of Justice (Commercial Court) to determine damages in accordance with these reasons. Costs of the appeal shall be payable to the appellant by the respondents fixed at $21,000, inclusive, payable within thirty days. I would direct that the costs to date in the court below be in the discretion of the court deciding the damages issues.
“D.L. Corbett J.”
I agree: “Nishikawa J.”
I agree: “Schabas J.”
Date of Release: October 6, 2023