Court File and Parties

COURT FILE NO.: CV-16-1164800CL DATE: 20170412 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

IN THE MATTER OF SPECTRUM HEALTH CARE (GP) INC. AND IN THE MATTER OF SPECTRUM HEALTHCARE EMPLOYEECO INC.

BETWEEN:

LORI LORD Applicant – and – CLEARSPRING SPECTRUM HOLDINGS L.P. (as successor in interest to CALLISTO CAPITAL III L.P.) and CLEARSPRING CAPITAL PARTNERS (US) II L.P. (formerly CALLISTO CAPITAL (US) III L.P.) Respondents

Counsel: Robert Staley, Alan Gardner, and William A. Bortolin, for the Applicant Arthur Hamilton and Jed Blackburn, for the Respondents

HEARD: March 17, 2017

F.L. Myers J.

The Application

[1] Lori Lord seeks to enforce her rights under an agreement referred to among the parties as the Governance Agreement. She asks the court to enforce the agreement or, alternatively, for relief pursuant to the oppression remedy under s. 248 of the Business Corporations Act, RSO 1990, c. B. 16. The respondents seek to stay the application pending arbitration under s. 7(1) of the Arbitration Act, 1991, SO 1991, c. 17. In the event that the application is stayed, the parties disagree as to whether the court should grant an injunction to preserve Ms. Lord’s rights under the Governance Agreement pending the outcome of the arbitration.

[2] For the reasons that follow, Ms. Lord is entitled to the relief that she seeks either by way of specific performance of the Governance Agreement or by way of an oppression remedy to enforce her reasonable expectations established under that agreement. Ms. Lord is not a party to any arbitration agreement as is required for the respondents to stay this proceeding pending arbitration. Ms. Lord has not agreed to arbitrate her claims and she cannot be compelled to do so. Accordingly, there is no need to consider whether an interlocutory injunction is required to preserve Ms. Lord’s rights pending arbitration.

The Facts

Spectrum

[3] SPECTRUM HEALTHCARE LIMITED PARTNERSHIP carries on business providing home health care services. SPECTRUM HEALTH CARE (GP) INC. is an OBCA corporation that is the general partner of the limited partnership. The business of the Spectrum limited partnership is carried on by its corporate general partner.

[4] All of the common shares of the corporate general partner of Spectrum are held by SPECTRUM HEALTHCARE EMPLOYEECO INC. The shareholders of Employeeco are Ms. Lord’s holding company, the two respondents, and a further Clearspring entity that holds a relatively small amount of Employeeco shares.

[5] Clearspring manages a number of private equity funds each consisting of individual groups of investors. The funds are controlled and managed by the Clearspring principals through their operating company Clearspring Management Inc.

[6] Clearspring and its funds formerly operated under the name Callisto.

[7] Ms. Lord holds 27% of Employeeco through her holding company. Clearspring funds hold the remaining 73%. The two Clearspring respondents hold the majority of shares of Employeeco between them. As noted above, there is a third Clearspring entity that holds a small piece of Employeeco. It is neither a party to the Governance Agreement nor to this litigation.

[8] Ms. Lord was the founder and CEO of the Spectrum business. Clearspring bought the majority interest in the business from Ms. Lord and her former co-founder (or the entities through which they held their interests).

The Unanimous Shareholders Agreement

[9] The shareholders of Employeeco have entered into a unanimous shareholders agreement made as of February 22, 2012. It provides for the management of Employeeco and its wholly owned subsidiary - the corporate general partner of Spectrum. As one would expect, Clearspring entities, being the shareholders holding the majority interest, have the right to nominate the majority of the members of the boards of directors of Employeeco and the corporate general partner of Spectrum. The shareholders agreement provides that the boards of directors of both Employeeco and the corporate general partner of Spectrum shall be composed of five directors or more. Ms. Lord’s holding company has the right to nominate two of the five directors on each board. The Clearspring shareholders have the right to nominate three directors on each corporation.

[10] Under the shareholders agreement, each side is entitled to remove any director nominated by it and to fill any vacancies that arise among its nominee positions.

[11] Article 1.7 of the shareholders agreement provides that it is the paramount agreement among its parties. In the event of any inconsistency between the shareholders agreement and any agreement among the parties, or some of them, the terms of the shareholders agreement govern.

[12] The shareholders agreement can only be amended in writing by all of the shareholders. This is both a statutory requirement, applicable to unanimous shareholders agreements, and is reflected in article 5.2 of the shareholders agreement itself.

[13] Article 5.11 of the shareholders agreement provides that “any dispute, claim, question, or difference” that “arises out of or in relation to this Agreement or any breach thereof” must be submitted to arbitration.

[14] The parties agree that under the competence-competence principle repeatedly endorsed by the Court of Appeal and the Supreme Court of Canada, the question of whether a dispute is arbitrable under an arbitration agreement is to be decided by the arbitration tribunal and not by the court. Unless the matter is obvious, the court is not to interpret the arbitration agreement to determine if a dispute falls within its terms. In this case, as I will discuss below, there is no dispute at all under the shareholders agreement. The dispute concerns the interpretation of the Governance Agreement. I do not need to interpret any question under the shareholders agreement. Moreover, there is no inconsistency between the shareholders agreement and the Governance Agreement on the facts of this case. Both plainly operate.

[15] The Applicant in this case is Ms. Lord. She is not a party to the shareholders agreement. She holds her shares of Employeeco through a holding company that is a party to the shareholders agreement. In her personal capacity Ms. Lord has no standing to invoke the shareholders agreement or to claim under it. The respondents argue that Ms. Lord is effectively doing just that by purporting to advance claims personally that are truly derivative claims concerning the rights of her holding company as shareholder of Employeeco and its subsidiary, the corporate general partner of Spectrum. This is an issue that the court will assess below.

The Dispute as to the Makeup of the Spectrum Boards of Directors

[16] James Walker and Graham Savage initially founded the predecessor of Clearspring Management Inc. to create the business of Clearspring. In 2003, Savage left Clearspring and Joseph Shlesinger joined Mr. Walker. In 2007, Lawrence Stevenson also joined Messrs. Walker and Shlesinger. Clearspring Management Inc. created a number of funds which raise capital from private investors to invest in portfolio companies. Clearspring Management Inc. works closely with the management team of its portfolio companies. For each portfolio company, a member of Clearspring’s senior management is assigned the lead management responsibility. Mr. Walker has had responsibility for Clearspring in relation to its investment in Spectrum.

[17] In November, 2012, Mr. Walker resigned as a director, officer, and employee of Clearspring Management Inc. in order to pursue other activities. However, he remained a shareholder and hence a principal owner of the Clearspring fund management business. At the time, Mr. Walker and Clearspring entered into an agreement governing the terms of Walker’s exit. Section 7 of that agreement recognized that although he was separating himself from Clearspring, Mr. Walker continued to hold Clearspring`s lead asset management position in respect of its investment in Spectrum.

[18] While the shareholders agreement calls for there to be five directors on the boards of directors of each of Employeeco and Spectrum’s corporate general partner, in fact, to date, both boards have been comprised of no more than three members. Initially, Ms. Lord, Mr. Walker, and Blake Sumler sat as directors of the two corporations. Clearspring nominated Messrs. Walker and Sumler. Mr. Sumler resigned from both boards in March, 2013. Ms. Lord then opposed having any of the other Clearspring principals on the boards of Employeeco or the corporate general partner of Spectrum. While this dispute played out, from March, 2013 until April, 2014, there were only two members of the Spectrum boards of directors; namely Ms. Lord and Mr. Walker. Ms. Lord and Clearspring could not agree on a third nominee. Clearspring and Ms. Lord eventually agreed that Jim Probert, Clearspring’s Chief Financial Officer, would be appointed to the third board seat.

[19] It strikes me as significant that even before the disputes arose in this application, Clearspring was very sensitive to Ms. Lord’s concerns as to its nominees on the boards of directors of the Spectrum companies. In para. 27 of its factum, Clearspring notes that after Mr. Sumler resigned, “the parties began negotiating a replacement.” Clearspring was not under any obligation to negotiate with Ms. Lord on a replacement for its board nominee. Under the shareholders agreement, Clearspring had a clear right to appoint a replacement as it saw fit. Nevertheless, Clearspring recites in its factum:

Lord was opposed to any of the [Clearspring] principals joining the boards, and ultimately would only agree to Jim Probert (“Probert”), the Chief Financial Officer of [Clearspring], who had no prior board experience.

[20] Such was the degree of Clearspring’s desire to accommodate Ms. Lord that it was willing to negotiate for over one year before ultimately acceding to her demand that none of the other principals of Clearspring be nominated to the Spectrum boards and that someone with no board experience would be the Clearspring nominee. I make no value judgment on Clearspring’s decisions as to how to get along and balance it relationships with the management and other shareholders of its portfolio companies. That is Clearspring’s business alone. I recite these facts to explain the derivation of the reasonable expectations advanced by Ms. Lord in this application.

Resolving the Board Dispute and Walker’s Amended Exit Agreement

[21] On April 21, 2014, Mr. Walker and Clearspring entered into amended terms governing the ongoing nature of their relationship. None of Spectrum, Ms. Lord, or her holding company are parties to this agreement. But, Mr. Walker kept Ms. Lord apprised of the negotiations at least as they affected Ms. Lord’s desire to ensure that, even as Walker moved further away from Clearspring, he would maintain the lead asset manager position for Clearspring at Spectrum.

[22] Clearspring agreed to continue Mr. Walker’s asset management position. Paragraph 14 of the amended exit agreement between Mr. Walker and Clearspring provides for Mr. Walker’s ongoing role with Spectrum on behalf of Clearspring as follows:

Spectrum . Walker shall have the right to make all decisions acting reasonably and in the best interests of Fund III limited partners in respect of any matter relating to Fund III's investment in Spectrum Health Care Limited Partnership (and its related entities, collectively "Spectrum"). The Callisto Parties agree to execute and deliver (or cause the execution and delivery of) on behalf of Fund III and Callisto Capital US (III) Spectrum Inc. the Spectrum Governance Agreement attached as Exhibit "C", contemporaneously with the execution and delivery of this Agreement. Walker shall continue to bill Fund III for reasonable out-of-pocket expenses incurred in the asset management of Spectrum and the Callisto Parties shall ensure that Walker is reimbursed promptly (and in any event within 45 days of invoicing) for all such expenses. It is agreed that any resignation of Walker from the board of directors of Spectrum will not affect his rights hereunder (including the right to receive Fee Income or Carried Interest).

The Governance Agreement

[23] The Governance Agreement is attached as a schedule to the amended exit agreement between Mr. Walker and Clearspring. However, it is simply attached as a schedule with Clearspring agreeing with Mr. Walker that it would execute or cause the Clearspring entities who are parties to the Governance Agreement to execute it. The Governance Agreement is a separate agreement among its parties, including Ms. Lord. Clearspring argued that the arbitration clause in the amended exit agreement between it and Mr. Walker ought to apply to disputes under the Governance Agreement. However, the Governance Agreement is a stand-alone contract among different parties than the exit terms between Mr. Walker and Clearspring. Ms. Lord is not a party to the amended exit agreement between Mr. Walker and his former Clearspring partners. She cannot be bound by its terms.

[24] The Governance Agreement is a very brief letter agreement. The letter agreement is addressed to Clearspring Management Inc. As each Clearspring fund is comprised of its own group of investors, Clearspring Management Inc. is not the ultimate owner of the Clearspring funds’ majority interest in Spectrum (except to the extent that it may hold positions in each any of its funds). The investors in each fund are the ultimate, indirect owners of their respective fund’s investments. Clearspring is in the business of promoting and managing funds. It controls the funds and how the funds manage their investment in Spectrum. While Ms. Lord owns an interest in Spectrum indirectly through her holding company`s beneficial ownership of shares of Employeeco, Clearspring Management Inc. and its principals do not own, directly or indirectly, the majority shares or interest in Spectrum. This matters because a conversation then between Ms. Lord and Clearspring Management Inc. is truly a conversation among the controllers rather than among the owners of Spectrum. Similarly, an agreement between them is an agreement among those who control the management of the beneficial interests in Spectrum rather than the shareholders of the corporations that comprise Spectrum.

[25] The full body of the Governance Agreement provides:

This letter sets out our agreement regarding Spectrum Health Care LP and its related entities (collectively, "Spectrum").

(a) Jim Walker shall continue to have the right to make all decisions acting reasonably and in the best interests of the limited partners of Callisto Capital Fund III LP and Callisto Capital (US) III LP (together "Fund III"), in respect of any matter relating to Fund III's investment in Spectrum.

(b) If Jim Walker dies or becomes incapacitated so that he can no longer act in this capacity, then a replacement with the same decision making authority will be appointed upon the written agreement of Callisto and Lori Lord, each in their respective sole discretion.

(c) As soon as is practicable after the signing of this letter the necessary shareholders resolutions will be signed so that the members of the board of directors of each of the general partner of Spectrum and Spectrum Health Care Employeeco Inc. (together, the "Boards") will be Jim Walker, Jim Probert and Lori Lord. By its execution of this letter Callisto acknowledges and agrees that [Walker] can sign those resolutions on behalf of Callisto. Lori Lord will sign on behalf of her holding company that holds her equity interest in Spectrum.

(d) if Jim Probert resigns or otherwise ceases to be on the Boards then:

(i) if that occurs within one year of the date of this letter in circumstances where either (A) he continues to be employed by Callisto or (B) he ceases to be on the Boards not due to death or long-term disability, then a replacement director will be appointed as a Callisto nominee as agreed by Callisto and Lori Lord, in their discretion, acing reasonably, and

(ii) in all other circumstances, a replacement director will be appointed as a Callisto nominee, which director shall be a professional employee of Callisto other than one of Messrs. Prosperi, Shlesinger and Stevenson or, if Lori Lord, in her reasonable discretion, objects to such nominee, then such director shall be an individual selected by, but at arm's length from the principals of, Callisto.

(e) If a replacement to Jim Walker is appointed pursuant to (b) above, then that replacement shall be immediately elected to the Boards as a Callisto nominee.

[26] Although the letter agreement was addressed to what is now Clearspring Management Inc., the signatories of the Governance Agreement are:

(a) The two respondents being Clearspring’s funds that together hold 64.2% of Employeeco; (b) Lori Lord; and (c) Spectrum and Employeeco.

[27] The Governance Agreement is not a unanimous shareholders agreement. Lori Lord’s holding company that holds her shares of Employeeco is not a party to the Governance Agreement. Neither is the third Clearspring entity that holds approximately 9% of the shares of Employeeco. The Governance Agreement could not lawfully and does not amend the shareholders agreement.

[28] Reading the words of the Governance Agreement alone, it is an agreement between the ultimate principals of Spectrum to which the Clearspring majority shareholders of Employeeco and Employeeco itself subscribed, in which the ultimate controllers agree to deal with their investments in certain ways. First, they agree that Mr. Walker will continue to have the right to make all decisions for Clearspring as to the management of its investment in Spectrum. In doing so, he is to act in the best interests of Clearspring. There is no provision to remove Mr. Walker from this position. However, if he dies or becomes incapable of acting, then Ms. Lord is given a veto right over the nominee proposed by Clearspring. As it relates to Mr. Walker’s replacement, Ms. Lord’s discretion is unfettered. She may exercise her veto in her sole discretion. The parties agreed, in para. (e) of the Governance Agreement, to elect to the board whomever is chosen to replace Mr. Walker by Clearspring and Ms. Lord.

[29] Paragraph (c) of the Governance Agreement provides for the appointment of Mr. Walker, Ms. Lord, and Mr. Probert as the directors of Employeeco and the corporate general partner of Spectrum. The paragraph confirms Mr. Walker’s right to sign the necessary shareholder resolutions on behalf of the Clearspring entities in his capacity as Clearspring’s asset manager.

[30] Paragraph (d) of the Governance Agreement provides that if Mr. Probert ceases to be on the boards of directors within one year and he continues to be employed by Clearspring or if his cessation was not due to death or incapacity, then Ms. Lord and Clearspring will agree on a successor, each acting reasonably. But if Mr. Probert ceases to be a director after one year has passed or for any other reason, then Clearspring agreed that it will appoint as its nominee director one of its professional employees other than three listed senior principals. Moreover, Clearspring has agreed that if Ms. Lord objects to its employee nominee, then it will nominate a person who is independent of Clearspring.

[31] Comparing the positions of Mr. Probert to Mr. Walker under the Governance Agreement is instructive. A detailed provision was negotiated to deal with Mr. Probert ceasing to be on the boards of directors of the two Spectrum corporations. Ms. Lord’s input into his replacement is somewhat more limited than her unfettered veto over the replacement of Mr. Walker as Clearspring’s asset manager. The provisions dealing with Mr. Walker are simple, clear, and powerful. In my view, the obvious implication from the fact that the parties made arrangements for Mr. Walker to remain as Clearspring’s asset manager until he dies or becomes incapacitated is that Clearspring agrees that it will not remove him as their asset manager otherwise. The possibility of a change was specifically dealt with for Mr. Probert. The parties would not have overlooked this possibility for the more important role of Mr. Walker as both a director and the Clearspring asset manager.

[32] Once again, it is no part of the role of the court to second guess the manner in which Clearspring chooses to manage its investments for its own purposes. But it cannot be ignored that Clearspring agreed to place very significant limitations on what might be considered the single most important attribute of majority shareholder authority – the right to nominate a majority of the members of the board of directors of the company. It is apparent that Ms. Lord has serious concerns about Clearspring’s principals. She did not want them to be on the boards of the Spectrum companies. She plainly expressed her distrust of Clearspring to Mr. Walker and he conveyed Ms. Lord’s distrust of them to Clearspring and its counsel on Ms. Lord’s behalf during the negotiations of the Governance Agreement. It is equally plain that she has no such concerns about Mr. Walker. Her deep trust in him is patent. For its part, and notwithstanding its rights under the shareholders agreement, Clearspring agreed to put the control of its funds’ investment in Spectrum in Mr. Walker’s hands permanently, to put Mr. Walker on the boards of directors of the two Spectrum corporations, and to give Ms. Lord very significant veto rights concerning the identities of any future replacements of Mr. Walker as asset manager/director and Mr. Probert as a director.

[33] The resolutions that put these provisions into effect recited that the boards were to consist of five members and then appointed the three agreed upon members. Thus, the parties made clear through their conduct, as I have already found, that the Governance Agreement did not amend the shareholders agreement. It couldn’t. It just affected how the ultimate controllers behaved towards each other.

[34] In the view of Clearspring, as set out at para. 29 of its factum, the purpose of the Governance Agreement was to appoint Probert to the two Spectrum boards of directors while confirming that Walker’s lead asset management responsibilities for Spectrum on behalf of Clearspring would remain unchanged. I am cognizant that a party’s subjective intention as to the meaning of a contract or any of its terms is inadmissible. Moreover, apart from understanding the basic factual matrix underlying an agreement, absent ambiguity, extrinsic evidence is generally not available to try to explain the meaning of contract terms. In argument, both parties relied on considerable extrinsic evidence concerning the negotiations leading up to the execution of the Governance Agreement. As I find nothing ambiguous about the terms of the Governance Agreement, that evidence and argument is inapt. However, once again, the same facts may be relevant to the issue of whether Lord held a reasonable expectation as a result of the Governance Agreement and the course of negotiations. Accordingly, the evidence about the parties’ course of conduct is admissible at least for that issue.

[35] Earlier drafts of the Governance Agreement were much longer, more formal contractual documents. Ms. Lord and Mr. Walker initially suggested that the Governance Agreement amend the shareholders agreement to reduce the size of the boards to three and to give the Governance Agreement priority over the shareholders agreement. Clearspring rejected these changes and called its rejection its “bottom line.” Ms. Lord did not accede to the bottom line. The parties were briefly deadlocked in their negotiations. Walker expressed concern that Clearspring was trying to keep its “options open to screw around with [him].” Ultimately, the business people decided to scrap the approach of having a lengthy, formal contract document. They decided to just make the Governance Agreement a simple letter agreement based on four business points that had originally been set out by Clearspring management in an email dated March 28, 2014 as follows:

1. Jim Walker will have continued asset management role with Spectrum – no changes to current situation
2. Jim Probert will be appointed to the board of directors as a [Clearspring] nominee
3. In the event that Jim Walker can no longer serve on the Board of Directors, Lori Lord and [Clearspring] will agree on a replacement nominee for Jim Walker
4. The Spectrum Board will consist of Lori Lord, Jim Walker and Jim Probert.

[36] With the final addition of the terms dealing with replacing Mr. Probert discussed above, Clearspring’s business points became the Governance Agreement.

Clearspring Changes its Approach

[37] On December 1, 2016, Clearspring’s shareholding funds served notices under the shareholders agreement removing Mr. Walker as their nominee to both Spectrum boards of directors. They also served notices nominating Claude Lamoureux, Zak McIsaac, and Jim Probert as their nominees on the two boards. To effect these changes, they served notice of a special meeting of the shareholders of Employeeco to be held December 12, 2016. They invited Mr. Walker to resign as a director before the meeting. They also invited Ms. Lord to name a second nominee to be elected to the board at that meeting. Clearspring noted in argument that Ms. Lord’s nominee could be Mr. Walker if she wishes to keep him on the board.

[38] Ms. Lord did not attend the Employeeco shareholders’ meeting to prevent the meeting from having a quorum. The parties are therefore at a stalemate and have agreed to maintain the status quo pending the outcome of this litigation.

[39] By nominating three members of the boards of directors, Clearspring is no longer willing to cause its shareholding entities to vote as agreed in the Governance Agreement. Moreover, by causing the majority shareholder companies to nominate new nominees, Clearspring is resiling from its agreement that only Jim Walker would control the Clearspring investments. By removing Mr. Walker from the board of directors of Employeeco, it is resiling from the makeup of the boards set out in the Governance Agreement. While the Governance Agreement does not say that Mr. Walker will remain a director forever, it is implicit in his appointment in the Governance Agreement, his control of the investment for Clearspring, and the fact that his replacement is to go on the board. Clearspring was at pains to protect its rights to nominate Mr. Probert and his replacement under the Governance Agreement. Mr. Walker’s continuity for as long as he was able and wished to continue is the necessary intendment of his appointment to the boards and his perpetual management of Clearspring’s investment as agreed in the Governance Agreement.

[40] Clearspring argues that the shareholders are simply exercising their rights under the shareholders agreement. The Governance Agreement did not and could not alter those rights. Moreover, if the Governance Agreement purports to alter the shareholders agreement, the priority clause in the latter makes the former provisions invalid. Finally, Clearspring argues only an arbitrator can engage in an interpretation of the priority clause or any clause in the shareholders’ agreement. Therefore the dispute cannot be resolved in the court. It rightly notes that the characterization of a dispute as “oppression” does not prevent it from being arbitrable if the substance of the dispute properly falls under an arbitration agreement.

[41] A substantial amount of the evidence presented in this case deals with complaints by Clearspring concerning the conduct of Mr. Walker. The allegations are all somewhat dated and are somewhat overblown at first blush. However, they are ultimately irrelevant. This is not a lawsuit by Clearspring against Mr. Walker for breach of his duties to Clearspring. Rather, this case involves an assessment of whether Clearspring is entitled to cause its funds that hold the majority shareholdings in Employeeco to act contrary to Clearspring’s obligations under the Governance Agreement. If Clearspring is not limited by the Governance Agreement from causing its majority shareholder funds to exercise their rights under the shareholders agreement, then Clearspring does not need to prove that it has any grounds to change its asset manager and its nominees to the boards of directors of Employeeco and the corporate general partner of Spectrum. On the other hand, if the Governance Agreement binds Clearspring to the limits on the exercise of its funds’ rights to which it and they agreed, then the existence of concerns regarding the quality of Mr. Walker’s performance is similarly of no consequence. I accept that Clearspring believes that it was acting reasonably for the protection of its rights or interests as it sees them. I accept equally that Ms. Lord remains deeply distrustful of Clearspring and does not want it to change the status quo . But there is no need to go further down the road assessing the allegations levelled at Mr. Walker. Clearspring has the right to act as it wishes or it does not have that right regardless of what I might find about Mr. Walker’s conduct. Even under the oppression remedy, the allegations are not relevant to the issue of whether Ms. Lord has a reasonable expectation or whether she is unfairly prejudiced by Clearspring resiling from the Governance Agreement. She does not need to prove bad faith and Clearspring does not need to prove its good faith. In my view, the allegations against Mr. Walker may well reflect the underlying business concerns that are prompting Clearspring’s actions. The ebbs and flows in the level of tension between Mr. Walker and Clearspring have been motivating factors throughout the relationship between Spectrum and Clearspring. Apart from providing some colour however, the details of those issues are ultimately neither helpful nor relevant to the resolution of the issues in this proceeding.

Analysis

Breach of Contract

[42] In my view, the principal legal issue is straightforward. Clearspring is in breach of the obligations in the Governance Agreement. The only defence to these breaches is if the Governance Agreement is unenforceable because it is in conflict with the shareholders agreement.

[43] I agree with Mr. Staley that I am not being called upon to interpret or resolve any issue under the shareholders agreement. Only an arbitrator could do that. Nor do I see how the Governance Agreement could be in conflict with the shareholders agreement. The shareholders agreement subsists and has not been amended. The maximum size of the boards of directors is five directors. Each side has the right to nominate and remove the agreed upon number of directors. The Clearspring majority shareholders signed on to a letter addressed to its principals, Clearspring Management Inc., in which they agreed with Ms. Lord as to how they would each go about exercising their entitlements to manage and utilize their respective companies’ undoubted rights. There was no amendment to the shareholders agreement and no change at all to the parties’ legal rights under that document. Appointments to the board of Employeeco, as agreed, are still made by the appointing shareholders. Ms. Lord’s holding company and the Clearspring fund with 9% of Employeeco are not parties to the Governance Agreement and cannot be bound by it. But the principals are. Nothing stops the principals from changing the Governance Agreement and agreeing to elect five directors or more if they wish to do so. Instead, the principals agreed among themselves as to how they would exercise their undoubted rights.

[44] Much like a discussion of the equitable doctrine of promissory estoppel, the parties recognized the existence of their legal rights and one party agreed not to exercise its formal rights. Ms. Lord relied on that agreement and Clearspring now wants to deviate from its promises.

[45] I do not see this analysis as engaging in any form of interpretation or application of the shareholders agreement. There is no conflict to which the priority clause in the shareholders’ agreement could apply. Nothing in the shareholders’ agreement purports to bind Ms. Lord or to prevent Clearspring from undertaking contractual duties to her. The Governance Agreement reflects the agreement of the ultimate principals’ as to how they will act and cause their shareholding companies to vote when called upon in future. It is analogous to an estoppel or perhaps a voting rights agreement. It is not inconsistent with the shareholders agreement; rather, it is premised on the shareholders’ agreement standing side-by-side along with it.

[46] Clearspring argues that when one reads Ms. Lord’s Notice of Application and parts of her counsel’s factum, it is clear that she is moving as a shareholder of Spectrum. They argue that her bringing this application in her personal name is a colourable effort to hide that she is really moving on behalf of her holding company as a shareholder under the shareholders agreement. I do not agree. The parties are very sophisticated players engaged in very complex corporate structures. In these Reasons I have grossly simplified the myriad of entities and legal machinations that comprise Spectrum’s corporate structure. The overlapping general partnership structures at play at the Clearspring and Spectrum levels are very complex. Working through the volumes of corporate materials filed so as to understand the who’s who and the what’s what among the parties was a very complicated task. The parties had top flight corporate counsel engaged in negotiating and drafting the Governance Agreement. They readily understood that identifying the parties to an agreement is not a minor technical matter that can be overlooked or approached haphazardly. Clearspring made an agreement with Lori Lord – the person, the CEO, the ultimate owner of the economic interest represented by her holding company’s shareholdings in Employeeco. Clearspring’s principals knew that they had work to do repairing their relationship with Ms. Lord because she did not trust them. Corporations do not trust; people do. The parties left two of the five shareholders out of the Governance Agreement, namely, Ms. Lord’s holding company and a Clearspring entity with a small shareholding interest that could not affect any outcome. That could not have been an oversight. The parties turned their minds to whether they would amend the unanimous shareholders agreement and agreed not to do so. There is no reason to conclude that parties to the Governance Agreement were included (or left out) other than deliberately. Ms. Lord wanted veto rights over Clearspring’s board nominees in order to resolve their year long dispute. Clearspring wanted to bind Ms. Lord as to the nature of the vetoes that it was giving to her. The letter was addressed to the controlling Clearspring management entity and bound the corporations who could fulfill the principals’ agreement. Of course Ms. Lord was dealing with her investment in Spectrum. But she was doing so in her personal capacity. She personally obtained veto rights and concessions that she could rely upon and enforce under a contract personally.

[47] Clearspring did not argue strongly that the remedy for its breaches should be damages rather than an injunction to enforce the Governance Agreement. Damages would not be an adequate remedy in my view. It is nearly impossible to articulate, let alone calculate, the losses that might flow from the loss of Ms. Lord’s rights under the Governance Agreement. It is trite law that the board of directors manages the business and affairs of a corporation. Changing the balance of power at the board could have huge effects or none at all depending on what happens. Losses could mount or profits could increase. But how could one prove, with any real certainty, whether losses were incurred that would not have been incurred in any event or that profits, if obtained, would not have been larger, had the board remained as set out under the Governance Agreement? The makeup of the board of directors is absolutely fundamental to the ongoing management of the business and affairs of the corporation. However, there is little way to translate a change from on high into dollars and cents on the ground. Proof of damages in a case such as this is well-nigh impossible. Moreover, the analogy to promissory estoppel is actually quite apt. Equity will enforce a promise to refrain from exercising one’s legal rights, even in the absence of consideration, as long as there is detrimental reliance by the opposite party. Here there was consideration. There is an express contract. Reliance was not in issue. It would be unfair and unreasonable to confine Ms. Lord to a remedy in damages in all the circumstances in my view.

Oppression

[48] While I could stop after enforcing the Governance Agreement, there are additional facts to be found in relation to the oppression remedy that is also claimed by Ms. Lord. As this matter may well be reviewed, I should make the relevant findings so as to try to avoid the need for a re-hearing in the event that an appellate court disagrees with my conclusions concerning the Governance Agreement.

[49] I recognize that one could argue that I have implicitly made a determination that the priority clause in the shareholders’ agreement does not apply to render the Governance Agreement unenforceable. I do not see how that could be since the shareholders have no right to void an agreement entered into by non-parties e.g. Ms. Lord. There is law that the court need not send a matter to arbitration if findings are obvious. Here, as I noted above, there is no basis to force Ms. Lord to arbitrate in any event. If I am finding implicitly that the priority clause in the shareholders’ agreement does not void the Governance Agreement it does strike me as obvious. Even if an arbitrator looked at that issue, she will not be able to deal with the real issues under the Governance Agreement as breaches of that agreement are not subject to arbitration. The possible conflict with the shareholders agreement is an inconsequential red herring in my view.

[50] If I am wrong in that view however, even if the Governance Agreement offends the shareholders agreement and is void or unenforceable against the shareholders of Employeeco, Ms. Lord still has an oppression remedy available to her and only to her. She argues that even if an arbitrator were to hold the Governance Agreement to be unenforceable against the majority shareholders, in fact, especially if an arbitrator were to hold the Governance Agreement to be unenforceable, Clearspring’s conduct is unfairly prejudicing Ms. Lord in breach of her reasonably held expectations.

[51] In BCE Inc. v. 1976 Debentureholders, [2008] 3 SCR 560, 2008 SCC 69, the Supreme Court of Canada discussed the oppression remedy. At para. 58 of the decision, the Court confirmed that the oppression remedy is an equitable remedy that “ gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair.” The Court noted, at para. 62, that the oppression remedy deals with expectations rather than rights and obligations. Parties’ rights and obligations, by statute or contract, are enforceable in their own right. It is non-legal or super-legal expectations that are the focus of the oppression remedy. That is why I found above that the oppression remedy most particularly lies for Ms. Lord if the Governance Agreement is found to be void or unenforceable. She does not need an oppression remedy if she can rely on contractual rights (as I have found).

[52] The oppression remedy starts with a claimant who holds an unmet expectation. Someone must subjectively have an expectation. However, not every hope, wish, or expectation, no matter how strongly held, will be actionable. The oppression remedy will only protect a person’s expectation if it is also reasonable. That is, a hypothetical reasonable person, viewing the matter objectively, must accept the reasonableness of the expectation held by the claimant.

[53] In Ernst & Young Inc. v Essar Global Fund Ltd et al, 2017 ONSC 1366, Newbould J. disagreed with a case in which I also provided this starting point for an oppression analysis. At footnote 5 of his Reasons, Newbould J. wrote:

The Essar Defendants contend that a party must have a subjective expectation, relying on a statement of Justice Myers in Couture v Toronto Standard Condominium Corp. No. 2187, 2015 ONSC 7596 at para. 58. The authority that Myers J. referred to for this statement says no such thing, and I do agree with it. As stated in BCE , the expectation held must have been reasonably held and the evidence of that may take many forms. As stated in Ford, there is no requirement that there be testimony from claimants as to their expectations.

[54] As I read this, any apparent disagreement between Newbould J. and me is semantic rather than substantive. Newbould J. seems to equate the requirement for there to be a subjective or personally held expectation with the issue of how the expectation is to be proven. I have not weighed-in on that issue.

[55] It is perfectly clear from BCE that before a person can claim an oppression remedy, he or she must actually, subjectively, i.e. personally, hold an expectation. For example, at para. 63 of BCE , the Court wrote:

[63] Particular circumstances give rise to particular expectations. Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context: see 820099 Ontario ; Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These expectations are what the remedy of oppression seeks to uphold.

[56] That is, a stakeholder must personally (i.e. subjectively) have an expectation and actually rely on it before it even gets to the question of whether that expectation is also objectively reasonable.

[57] I do not read Justice Newbould’s decision as disagreeing with the proposition that there must be a stakeholder who personally holds an unmet, reasonable expectation. In the case that was before Newbould J., the applicant was a court appointed monitor acting in a representative capacity. The monitor had no subjective or personal expectation of its own as it was not personally a stakeholder in the relevant corporation at the relevant time. I agree that the case law does not require expectations to be proven through an individual’s direct testimony. I have no issue with a representative plaintiff proving the expectations of those whom it represents by leading evidence establishing an inference as to those stakeholders’ subjective and reasonable expectations. Expectations can be proven through inference like any other fact. Ultimately, Newbould J. and I both read BCE as providing that there must be a stakeholder who holds an unmet, reasonable expectation. We agree as well that the stakeholder’s expectation and its reasonableness can be proven by inference.

[58] At para. 67 of BCE , the Court instructs that even proof of an unmet, reasonable expectation is not enough to establish oppression: “ Even if reasonable, not every unmet expectation gives rise to claim [for oppression].” The statute provides a remedy only when the consequence of the act or omission that violates a reasonably held expectation is sufficiently unfair to meet one of three further descriptions. The Court explained:

The section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen, at pp. 81‑88. The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeho lders.

[59] The Supreme Court also listed in BCE a number of the most common sources for reasonable expectations. Formal corporate documents and legal arrangements are the most ready source of expectations for those who deal with a corporation. If the Governance Agreement did nothing else legally, its very purpose was to create expectations in Ms. Lord as to how Clearspring would control the exercise of its funds’ rights going forward. These expectations formed the basis of the settlement of the one year board impasse that arose on the resignation of Mr. Sumler. They were also agreed upon to help Clearspring build trust and strengthen its relationship with Ms. Lord even as its own ongoing relationship with Mr. Walker continued to decline. Ms. Lord quite reasonably expected Clearspring to fulfill its obligations under the Governance Agreement and, in my view, it would be an unfair consequence to her if Clearspring could resile from its commitments by causing its funds to act contrary to the agreed upon provisions of the Governance Agreement without first negotiating changes to that agreement with Ms. Lord. If Clearspring’s rejection of a term of the Governance Agreement amending the shareholders agreement was intended to make the obligations that it was undertaking in the Governance Agreement unenforceable by Ms. Lord, there could well be a good faith issue. But I do not need to go there as there is no doubt from the terms of the Governance Agreement and the contemporaneous correspondence that all parties intended to enter into binding commitments. It readily follows therefore that if the Governance Agreement is unenforceable, Ms. Lord’s reasonable expectation that Clearspring would live up to its word is being unfairly prejudiced and therefore the oppression remedy lies.

Interlocutory Injunction

[60] For completeness only, I note that if I had stayed the matter for arbitration, I would have granted an injunction prohibiting the respondents from acting contrary to the Governance Agreement in the interim. While a change in the board of directors of a corporation need not always amount to irreparable harm, in this case, the applicant would be stripped of the rights that she negotiated that let her veto Clearspring’s power to cause its funds to nominate the majority of the members of the two relevant boards of directors. The respondents seek to act so as to undermine Ms. Lord’s rights under the Governance Agreement. This, coupled with the inherent difficulty of “unscrambling the egg” or undoing steps to be taken by boards constituted without heed to Ms. Lord’s rights under the Governance Agreement, amply satisfy the definition of irreparable harm – or harm that is not readily compensated in damages. In the unusual circumstances of this case, where the CEO, who is the ultimate owner of a minority shareholder, has negotiated concessions from the majority shareholders so that the CEO/minority investor has effective control of the makeup of the boards of directors, there is no way to measure, quantify, or readily prove causation of any losses, were Clearspring to take control of the Spectrum boards of directors in breach of its commitments in the Governance Agreement. As such, the balance of convenience would weigh in favour of preserving the status quo prior to the alleged breach pending the outcome of any arbitration (if one was required).

Remedy

[61] Ms. Lord is entitled to an order enforcing the Governance Agreement in accordance with its terms and alternatively under the oppression remedy. Order to go as sought in para. 92 of Ms. Lord’s factum.

Costs

[62] Ms. Lord seeks $190,000 in costs all-in. Clearspring agrees that the quantum is reasonable. But, it expressed the view that, as the majority investor in Spectrum, it is inclined to decrease the temperature rather than seeking last licks by a costs award. Mr. Hamilton acknowledges that Clearspring’s material contained some incendiary elements, but so too did Ms. Lord’s, he submits. He says that he tried to encourage Ms. Lord to keep the matter less personal.

[63] I am not in a position to assess “who started it.” Ms. Lord has been wholly successful on the merits and she is properly requesting costs. There is no legal reason to deviate from the normative approach under which costs are presumptively payable to the winner. Whether Ms. Lord ultimately demands payment is a matter for her and Clearspring to discuss. Costs are payable forthwith to the Ms. Lord by the two respondents jointly and severally in the amount of $190,000 inclusive of disbursements and taxes.

F.L. Myers J.

Released: April 12, 2017

COURT FILE NO.: CV-16-1164800CL DATE: 20170412 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: LORI LORD Applicant – and – CLEARSPRING SPECTRUM HOLDINGS L.P. (as successor in interest to CALLISTO CAPITAL III L.P.) and CLEARSPRING CAPITAL PARTNERS (US) II L.P. (formerly CALLISTO CAPITAL (US) III L.P.) Respondents

REASONS FOR JUDGMENT F. L. Myers, J. Released: April 12, 2017