COURT OF APPEAL FOR ONTARIO DATE: 20231018 DOCKET: COA-22-CV-0254

Roberts, Favreau and Copeland JJ.A.

BETWEEN

Jaden Pereira Applicant (Appellant)

and

TYLT Technologies Inc., c.o.b. as TYLTGO and Aaron Paul Respondents (Respondents)

Counsel: Kevin J. Scullion, for the appellant John Ormston, for the respondents

Heard: April 14, 2023

On appeal from the judgment of Justice Michael J. Valente of the Superior Court of Justice, dated September 30, 2022.

Favreau J.A.:

A. Overview

[1] The appellant, Jaden Pereira, appeals a judgment dismissing his application for an oppression remedy under the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended (the “CBCA”).

[2] Mr. Pereira was the founder of Tylt Innovations Inc., which was the predecessor to the respondent TYLT Technologies Inc., also known as TYLTGO. After he brought the respondent Aaron Paul into the business, Mr. Pereira and Mr. Paul reincorporated the company federally, expanded the business and obtained new investors. Just over one year after the reincorporation, Mr. Pereira was fired from TYLTGO, removed as a director, and, pursuant to the terms of the company’s constituting documents, made to sell his unvested shares at a fraction of their value.

[3] Mr. Pereira brought an application for an oppression remedy pursuant to s. 241 of the CBCA. The application judge dismissed the application on the basis that, given the terms of the agreements between the parties, Mr. Pereira did not have a reasonable expectation that his position with TYLTGO would continue indefinitely. On appeal, Mr. Pereira argues that the application judge erred in only considering his status and expectations as an employee and in failing to consider his expectations as a shareholder.

[4] I would allow the appeal and remit the matter back to the Superior Court to be decided by way of a trial. The oppression remedy is an equitable remedy. It focuses on what is fair in the circumstances of any given case, having regard to an applicant’s reasonable expectations. In determining Mr. Pereira’s reasonable expectations in this case, the application judge took an overly narrow approach by focusing primarily on the language of the documents signed by the parties, rather than all the circumstances, including Mr. Pereira’s role in founding the company and the events that led to Mr. Pereira’s termination and the buy back of his shares.

B. Factual Background

(1) The original corporation

[5] In August 2018, when Mr. Pereira was a student at the University of Waterloo, he and a former partner incorporated Tylt Innovations Inc. They came up with the idea of creating a business that performed the last-mile delivery services for merchants and fulfillment centres using gig economy couriers. Mr. Pereira owned 51% of the shares and his former partner owned 49% of the shares. After two months, the original partner decided to leave the business. Mr. Pereira bought his former partner’s shares and was a 100% owner at that point. In January 2019, Mr. Pereira dropped out of school and worked full time on the business.

[6] In July 2019, Mr. Pereira met Mr. Paul, who joined the business. Mr. Paul had the technical skills required to run the business and Mr. Pereira was the face of the corporation and managed its operations. In August 2019, Mr. Pereira transferred 42.5% of his issued common shares to Mr. Paul and retained the balance of 57.5% of the common shares for himself.

[7] On January 30, 2020, Mr. Pereira and Mr. Paul entered into a shareholder agreement that they found on the internet. The 2020 shareholder agreement included a provision that Mr. Pereira and Mr. Paul’s shares were to vest over time until August 1, 2020. On that date, the shares were to be fully vested, provided that Mr. Pereira and Mr. Paul each continued to be employed by the corporation.

(2) The formation of TYLTGO and the stock restriction agreement

[8] Mr. Pereira and Mr. Paul looked for ways to grow the business and get more investors. In May 2020, the corporation was accepted into the Y Combinator Program, which is based in Silicon Valley, California. The Y Combinator Program invests in new businesses and helps them pitch their ideas to American investors. As a condition of investing $150,000 USD in the business, the Y Combinator Program required that the corporation be reviewed by a lawyer of Y Combinator’s choice to ensure that it was suitably structured to attract investors. As part of this process, Mr. Pereira and Mr. Paul retained Kyle Lavender, an Ontario lawyer.

[9] Mr. Lavender recommended that Mr. Pereira and Mr. Paul re-incorporate their company as a new federal corporation. They agreed to this suggestion, and incorporated TYLTGO. As part of this process, they transferred their ownership interests from the prior corporation to TYLTGO, retaining the same ownership percentages as in the previous corporation. At this point, Mr. Pereira and Mr. Paul remained the sole shareholders and directors of TYLTGO.

[10] As part of his work, Mr. Lavender prepared a new shareholder agreement and other documents, including a stock restriction agreement. Mr. Pereira and Mr. Paul signed these documents around May 26, 2020.

[11] The stock restriction agreement included a vesting provision for the common shares that was similar in concept to the vesting provision in the prior shareholder agreement for Tylt Innovations Inc. The vesting provision stipulated that 25% of each of Mr. Pereira’s and Mr. Paul’s respective common shares were to vest on July 31, 2020, with the balance of the shares vesting in 25% increments over the following three years, to be fully vested by July 31, 2023.

[12] In addition, the stock restriction agreement also included a provision stipulating that, in the event of a “triggering event”, TYLTGO had “the right, but not the obligation” to purchase all the unvested shares of the terminated shareholder at a price per share of $0.0001, as may be adjusted for stock splits or other matters. The stock restriction agreement defined a “triggering event” as including the termination of a shareholder “for any reason, whether with or without cause and including the death or permanent disability of the Shareholder, or any voluntary resignation of such employment or engagement by the Shareholder”.

[13] In September 2020, Mr. Pereira and Mr. Paul accepted Mr. Lavender’s recommendation that they sign employment agreements. The employment agreements included termination clauses.

[14] On the application, Mr. Pereira gave evidence about verbal assurances he claims Mr. Paul and Mr. Lavender gave him about the stock restriction agreement and employment agreement he signed. He claims that they told him that the agreements were needed to instill confidence in prospective investors, but that they would not change the roles he and Mr. Paul played in TYLTGO. In addition, Mr. Pereira said that Mr. Paul assured him that any changes to the corporate structure would be made collectively and not imposed unilaterally. He believed Mr. Paul “had his back”.

[15] In the fall of 2020, through the Y Combinator Program, Mr. Pereira met with Sumon Sadhu, who was an entrepreneur in the tech industry. Mr. Sadhu conducted due diligence on TYLTGO, with his colleague Khaled Hussein, after which he invested $1 million in the company.

[16] As a condition of this investment, Mr. Sadhu required that he have a representative on TYLTGO’s board and that he be entitled to appoint its chair. Mr. Sadhu appointed Mr. Hussein as his representative. Thereafter, Mr. Pereira, Mr. Paul and Mr. Sadhu formed the three-member board, with Mr. Pereira as CEO.

(3) Mr. Pereira’s termination

[17] As described by the application judge, “[s]oon after the Sadhu investment was completed, allegations of senior management interpersonal conflict and mismanagement arose, most of which involved [Mr. Pereira] in his role in the Corporation”. However, the application judge did not make any findings regarding whether allegations of conflict and mismanagement against Mr. Pereira were founded.

[18] In any event, at the point when these issues arose, Mr. Sadhu and Mr. Hussein proposed that Mr. Pereira step aside as CEO. Mr. Pereira initially rejected this proposal, but ultimately agreed to it. Mr. Paul then replaced Mr. Pereira as CEO. As found by the application judge, there was a conflict in the evidence over whether this change was meant to be temporary or permanent.

[19] In late August 2021, Mr. Pereira took a one week leave of absence. Upon his return, Mr. Paul and Mr. Hussein voted as a majority of the board of directors to terminate Mr. Pereira’s employment. They also exercised repurchase rights under the stock restriction agreement, and bought Mr. Pereira’s unvested shares for what the application judge described as “a fraction of their true value”.

[20] In late October 2021, Mr. Paul and Mr. Hussein further voted to remove Mr. Pereira as a director of TYLTGO and replaced him with Adnan Ali, who was the head of engineering at that time.

C. The Application Judge’s Decision

[21] Following his termination and the repurchase of his unvested shares, Mr. Pereira brought an oppression application pursuant to s. 241 of the CBCA against Mr. Paul and TYLTGO. The application judge dismissed the application.

[22] In his decision, the application judge stated that it was not his role to determine whether Mr. Pereira was wrongfully terminated from TYLTGO or the true value of his unvested shares. Rather, his role was to decide whether Mr. Pereira had been oppressed pursuant to the CBCA and, if so, what remedies were appropriate.

[23] After reviewing the evidence and the parties’ evidence, the application judge found that he was not satisfied that Mr. Pereira had established that it was reasonable for him to expect that he would not be terminated given the terms of the stock restriction agreement. As such, his analysis focused primarily on the issue of whether Mr. Pereira had established that his alleged verbal understanding with Mr. Paul that he would never be terminated would supersede the strict terms of the stock restriction agreement:

I cannot accept that [Mr. Pereira] was so naïve to believe that his oral agreement with [Mr. Paul] would trump the provisions of the Stock Restriction Agreement that include his covenant that any prior agreement, discussion and understanding merge with the terms of the Stock Restriction Agreement are in effect superseded by it. I reject any such naivety on the part of [Mr. Pereira] because he acknowledged that it was his expectation that the Corporation would one day be profitable. In my view, commensurate with that goal is the acknowledgement that difficult management decisions must be made. Although [Mr. Pereira] likely did not believe that the terms of the Stock Restriction Agreement would need to be enforced at the time of his signature because of his then bond with [Mr. Paul], he must have appreciated that [Mr. Paul’s] support was not unconditional just as his support of [Mr. Paul] was not without terms. If [Mr. Pereira] perceived his partner to be a liability to the Corporation’s success, I cannot accept that he would continue to support him to the detriment of the business he conceived and sought to grow and prosper.

Therefore, I reject that [Mr. Pereira] reasonably expected [Mr. Paul’s] support of his position in the Corporation to be unconditional. But even if [Mr. Pereira] had this actual expectation, based on the evidence before me, I find that [Mr. Pereira’s] expectation that his employment would not be terminated was not objectively reasonable. [Emphasis added.]

[24] The application judge also held that, because there was no evidence that Mr. Paul conspired with Mr. Sadhu and Mr. Hussein to terminate Mr. Pereira’s employment, he was “prepared to accept [Mr. Paul’s] evidence that he acted to ensure the interests of [TYLTGO] were protected and advanced”.

[25] The application judge acknowledged the harsh consequences for Mr. Pereira but stated that these consequences would be attenuated as the corporation grew:

I acknowledge that for [Mr. Pereira] one particularly stinging consequence of his termination is that not only were his unvested shares lost but the remaining shareholders’ holdings, including those of [Mr. Paul], proportionately increased by virtue of [TYLTGO’s] purchase of [Mr. Pereira’s] unvested shares. I note, however, that [Mr. Pereira] along with [Mr. Paul] bargained for this result. In any event, the current percentage increase may indeed be temporary in the event that the Corporation issues additional shares from its treasury to new shareholders as the corporation grows.

[26] Finally, the application judge concluded his analysis by commenting that he was concerned that a finding of oppression in this case would mean that a verbal agreement could supersede the clear terms of a written agreement between the parties:

While I acknowledge that conduct that may be oppressive in one case may not be in another, I am nonetheless concerned (and comment in obiter) of the potential negative consequences for commercial practice were I have found that a private oral agreement trumps written commercial agreements upon which third parties rely to invest. Fortunately, based on the facts of this case, these consequences need not be considered.

D. Principles that Apply to the Oppression Remedy

[27] Section 241 of the CBCA gives a complainant, which includes shareholders and directors, the right to bring an application for an oppression remedy. Pursuant to s. 241(2) of the CBCA, what may amount to oppression conduct is defined broadly as follows:

If, on 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 a result,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

(c) the powers of the directors of the corporation or any of its affiliates are or have been 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, the court may make an order to rectify the matters complained of.

[28] On an application for an oppression remedy, s. 241(3) of the CBCA gives the court broad remedial powers, including the power to make an order setting aside a transaction and compensating an aggrieved person.

[29] Directors of a corporation owe a fiduciary duty to act in the best interests of the corporation: s. 122(1)(a) of the CBCA; BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, at para. 36. In BCE, at para. 40, the Supreme Court confirmed that, in considering the best interests of a corporation, directors may look at the interests of shareholders and employees, amongst others.

[30] In addition, at para. 45 of BCE, the Court stated that “the oppression remedy focuses on harm to the legal and equitable interests of stakeholders affected by oppressive acts of a corporation or its directors”. Also, “oppression is an equitable remedy” which “seeks to ensure fairness”; giving the court “broad, equitable jurisdiction to enforce not just what is legal but what is fair”: BCE, at para. 58. This requires the court to look at business realities, and not just at “narrow legalities”: BCE, at para. 58. Further, per BCE, at para. 59, oppression is fact-specific inquiry:

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.

[31] In BCE, at para. 56, the Court held that determining whether to grant the oppression remedy under s. 241(2) of CBCA involves a two-part inquiry. First, the party seeking a remedy must establish that there has been a breach of their reasonable expectations. Second, if a breach of reasonable expectations is established, the court must be satisfied that the conduct at issue amounts to “oppression”, “unfair prejudice” or “unfair disregard”.

[32] With respect to the first part of the test, which is the relevant issue on this appeal, an applicant seeking an oppression remedy “must identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held”: BCE, at para. 70. The concept of reasonable expectation is “objective and contextual”: BCE, at para. 62; Baylin Technologies Inc. v. Gelerman, 2021 ONCA 45, at para. 49. In addition, conduct found to be oppressive need not be unlawful because the oppression remedy “is focused on concepts of fairness and equity rather than on legal rights”: BCE, at para. 71. Finally, in BCE, at para. 72, the Court identified the following factors as useful to determining the existence of a reasonable expectation:

Factors that emerge from the case law that are useful in determining whether a reasonable expectation exists include: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders. [Emphasis added.]

E. Analysis

[33] Mr. Pereira’s primary argument on appeal is that the trial judge erred in focusing on whether he had a reasonable expectation that he would continue as an employee of TYLTGO indefinitely, rather than considering his reasonable expectations as a director and shareholder of the company.

[34] I agree that the application judge approached the issue of Mr. Pereira’s reasonable expectations too narrowly. While his statement of the legal principles was correct, his application of those principles to the circumstances in this case is antithetical to the equitable nature of the oppression remedy: see Menillo v. Intramodal Inc., 2016 SCC 51, [2016] 2 S.C.R. 438, at paras. 11, 84. Rather than considering what was fair and reasonable in the circumstances of this case, he focused primarily on the strict terms of the written agreements between the parties which permitted the termination of Mr. Pereira’s employment without cause and the purchase of his unvested shares at a very significant discount. In so doing, the application judge failed to consider Mr. Pereira’s expectations as one of the founders of this small company: see BCE, at paras. 74, 109. More fundamentally, he failed to apply the legal framework established in BCE.

[35] As reviewed above, in determining whether the court should grant an oppression remedy, the first part of the inquiry requires the court to determine the applicant’s expectations and whether they were reasonable: see also Menillo, at paras. 8-9. In this case, the application judge described Mr. Pereira’s expectations in terms that made them sound inherently unreasonable without looking at the context in which he held those expectations. The application judge then failed to consider whether Mr. Pereira’s expectations were reasonable having regard to the list of factors set out in BCE.

[36] The application judge described Mr. Pereira’s expectations in terms that made them sound unreasonable, without considering whether they could be described in more objectively reasonable terms given the factual context. In his affidavit, in addressing his understanding of the purpose of the vesting provisions, Mr. Pereira stated that he would “obviously be with the company well beyond three years”. In addition, when addressing the employment agreement, he stated that he expected his employment “would continue as long as [he] wanted” because he was the founder of the company and its majority shareholder. He also stated that he expected that he would remain an owner of the company unless he chose to leave, and that these are decisions that he and Mr. Paul would make together.

[37] Based on this evidence, the trial judge described Mr. Pereira’s expectation as being that he would be with the company indefinitely. The trial judge held that it was unreasonable for Mr. Pereira to expect to hold a position with TYLTGO indefinitely, given the wording of the stock purchase agreement. However, in focusing on Mr. Pereira’s expectation that he would be with TYLTGO indefinitely, the application judge failed to consider what this meant in the factual context of this case. It may be unreasonable for Mr. Pereira to expect that he would be with TYLTGO forever, but given his role as one of the founders of the company, it may not be unreasonable for Mr. Pereira to expect that he would continue as an officer, director and/or shareholder of TYLTGO for some period of time, at least until his shares fully vested, unless his continued role in TYLTGO was harmful to the corporation or not in the company’s best interests. While Mr. Pereira gave an indefinite temporal term to his expectation, at the very least the application judge should have considered whether it was objectively reasonable for Mr. Pereira to expect that he would continue in his role at TYLTGO until his shares were fully vested. In the circumstances, the trial judge should have sought to characterize Mr. Pereira’s expectations more narrowly in a manner consistent with the factual context, and to then assess whether they were objectively reasonable having regard to the factors enumerated in BCE.

[38] Instead, having characterized Mr. Pereira’s expectation as being that he would be with TYLTGO indefinitely, the application judge did not consider the factors referred to in BCE, at para. 72, in determining whether Mr. Pereira’s expectations were objectively reasonable. Rather, he focused on the language of the agreements between the parties, which is only one of the relevant factors.

[39] For example, as referred to above, he gave no consideration to Mr. Pereira’s role in founding TYLTGO and his history with the corporation. As held in BCE, at paras. 74 and 75, in considering the reasonableness of an applicant’s expectations, the size and nature of the corporation are relevant as is the relationship between the “claimant and the other corporate actors”. While TYLTGO was seeking to expand and obtain additional funding, it was nevertheless still a small corporation. Mr. Pereira was the founder of its predecessor, and one of two of its original founders. The application judge failed to consider these circumstances in deciding whether Mr. Pereira’s expectations were reasonable.

[40] Similarly, the application judge gave no consideration to whether the decision to remove Mr. Pereira as an officer and director and to divest him of his unvested shares was “the fair resolution of conflicting interests between corporate stakeholders”: BCE, at paras. 81-88. On the application, Mr. Pereira and Mr. Paul gave evidence regarding the circumstances leading to Mr. Pereira’s termination. There was conflicting evidence on this issue. Mr. Pereira disagreed that he had in any way acted improperly. In contrast, Mr. Paul gave a few examples of Mr. Pereira’s behaviour that he considered inappropriate. The application judge did not seek to resolve the conflicts in the evidence nor did he address the issue of whether there was any justification for Mr. Paul’s view that it was in TYLTGO’s best interest for Mr. Pereira to be dismissed from the company. Instead, as mentioned above, he simply said that there was no evidence that Mr. Paul, Mr. Sadhu and Mr. Hussein conspired to remove Mr. Pereira. However, as part of the inquiry of whether it was fair and reasonable to remove Mr. Pereira from his position and divest him of his shares, it was relevant to consider whether Mr. Pereira’s conduct justified such a termination. In other words, it was relevant to consider whether it was in the best interests of TYLTGO to divest Mr. Pereira of any further role in the company and of all his unvested shares.

[41] The failure to consider the size and nature of TYLTGO, the relationship between the parties, including Mr. Pereira’s role as a founder of the company, and whether Mr. Pereira’s termination and divestment were a fair resolution of the conflict between the parties are only examples of the factors the application judge failed to consider. They are not meant to be exhaustive, but are meant to demonstrate that the application judge erred in principle in his approach to determining whether the respondents’ conduct was oppressive and warranted a remedy.

[42] Ultimately, I would allow the appeal on the basis that the application judge erred in law in his application of the oppression remedy. Specifically, he improperly focused on whether the respondents’ conduct was lawful rather than on whether it was equitable, or, put differently, he failed to consider whether it was fair and reasonable in the circumstances of this case for Mr. Pereira to be removed as a director and for his shares to be bought back at a deeply discounted price.

F. Remedy

[43] The matter was originally brought as an application. It does not appear that the parties requested that the matter be converted to a trial. However, it is evident that in order to properly adjudicate the issues between the parties, the court will have to make findings of fact, including findings of credibility regarding the circumstances under which Mr. Pereira’s role at TYLTGO was terminated and his shares were bought out. As a general rule, if the determination of the issues, including issues of credibility, cannot properly be made on the application record, then the application should be converted to a trial: see Gordon Glaves Holdings Ltd. v. Care Corp. of Canada Ltd. (2000), 48 O.R. (3d) 737 (C.A.), at para. 30.

[44] In the circumstances of this case, with the agreement of the parties [1], this matter is remitted back to the Superior Court to be decided as a trial. It will be up to the trial judge to determine whether some of the evidence can be received in the form of the affidavits already filed on the application.

G. Disposition

[45] The appeal is allowed. The matter is remitted back to the Superior Court to be decided by way of a trial in accordance with these reasons.

[46] As agreed between the parties, costs of the appeal are fixed at $7,500 plus disbursements and HST, and costs of the application below are fixed at $17,000, plus disbursements and HST. As further agreed between the parties, these amounts are to be paid after the completion of the trial to the party who succeeds at trial.

Released: October 18, 2023 “L.B.R.” “L. Favreau J.A.” “I agree. L.B. Roberts J.A.” “I agree. J. Copeland J.A.”

[1] At the hearing of the appeal, counsel for the parties agreed that if the court allowed the appeal, the matter should be remitted back to the Superior Court to proceed as a trial.