Court File and Parties
COURT FILE NO.: CV-18-00590588-00CL DATE: 20180731 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
STEPHEN ZALMAN BALOFSKY Applicant – and – ERIC HOWARD BALOFSKY and CLIFTON PLASTICS LTD. Respondents
AND BETWEEN:
ERIC HOWARD BALOFSKY Applicant by Counter-Application – and – STEPHEN ZALMAN BALOFSKY and CLIFTON PLASTICS LTD. Respondents to the Counter Application
Counsel: Matthew B. Lerner and Christopher Yung, for the Applicant and respondent for the Counter application, Stephen Zalman Balofsky Anton M. Katz, the Respondent and Applicant by Counter-Application, Eric Howard Balofsky
HEARD at Toronto: June 14, 2018
Reasons for Judgment
S.F. Dunphy J.
[1] Rueben and Rosalind Balofsky founded Clifton Plastics Ltd. in 1978. They hoped this small plastics manufacturing business might provide a living for themselves and their two sons after them. It has done so, but a rift between their two children has put that dream at risk.
[2] Rosalind passed away in 1990 and Reuben was incapacitated by severe dementia in June 2016 following his full retirement in his late 80’s in November 2014. Their two sons Eric and Stephen are now deadlocked and unable to cooperate in managing the company going forward.
[3] Conflicts seldom erupt from out of the blue. Whatever its origins, the conflict between these two brothers was crystallized in February 2013 when Stephen unilaterally excluded his brother Eric from the business. Rueben as father and president of the company attempted to keep the peace between his sons by continuing to pay Eric. This kept a lid on things until Rueben’s retirement from the business precluded him from continuing to pay Eric’s salary. For three years thereafter, Eric stepped in on his own and caused Clifton Plastics to continue to pay his salary using his signing authority. This situation prevailed until Stephen succeeded in opening a new bank account (although without the authority of a directors’ resolution) thereby shutting Eric out completely.
[4] Stephen brought this application seeking relief from what he claims to be the oppressive actions of his brother Eric in causing Clifton Plastics to continue to pay him for the three years after Rueben retired. He relies upon the oppression remedy of s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 or, in the alternative, the equitable winding-up provisions of s. 207 thereof. Eric brought a counter-application seeking an accounting of monies received by his brother from the corporation after his de facto ouster and damages for wrongful dismissal.
[5] The business of Clifton Plastics is not a large one. It has provided a modest living for the Balofsky family over the years and currently provides a living to four other non-family employees. Judging by the volume of documents in the record and the large number of issues zealously pursued by the parties in affidavits and on cross-examination, this litigation has consumed resources quite out of proportion to the size and value of the business the parties are fighting over.
[6] Despite their differences, and to their credit, the parties have begun inching towards a common-sense resolution of this deadlock. They are in agreement that the applicant Stephen will purchase Eric’s shares. They are in agreement that the price will be the fair market value of Eric’s shares without minority discount to be established by a chartered business valuator if they are unable to agree. They also agree that the court will appoint that business valuator if the parties are unable to agree on him or her. They agree that this repurchase will settle all the issues raised in these two applications. What they disagree about is what credit Stephen as purchaser ought to be entitled to in relation to what he claims are shareholder advances to Eric being the three years of remuneration Eric arranged to pay himself after Rueben retired. Stephen quantifies these alleged advances at $261,355.98. If not repaid prior to his purchase of Eric’s shares, Stephen asks for an order allowing him to offset this amount as against the purchase price otherwise payable. Eric, for his part, disputes that there is a shareholder loan to be repaid at all and denies that Stephen should be entitled to any offset.
[7] Since Eric is a 50% shareholder of Clifton Plastics and would be entitled to 50% of the value of the assets of the company (including the value of the shareholder loan if ordered repaid) on winding-up, the dispute thus boils down to a claim to reduce the price to be paid by Stephen for Eric’s shares by just over $130,000.
[8] The oppression remedy is an inelegant remedy to resolve a deadlock such as this where there is plenty of blame to go around. Eric cannot have reasonably expected to treat his shares in Clifton Plastics as an annuity providing him a guaranteed annual income in perpetuity without regard to contribution while Stephen had no justification to run roughshod over Eric’s rights as a shareholder, senior officer and director either. The situation should have been dealt with earlier and both parties bear some blame for the consequences of failing to do so.
[9] While the oppression remedy seems ill-suited to the situation, it is nevertheless clear that the equivalent of a corporate “divorce” is called for - a conclusion fully supported by the (albeit incomplete) agreement of the parties. Section 207 of the OBCA provides the court with the necessary jurisdiction to bring that separation of interests about on just terms.
[10] I am giving effect to the gist of the parties’ agreement that Eric’s shares shall be purchased by Stephen, finding that the value of his shares shall be fixed without minority discount as one half the value of the corporation. I also find that such purchase price shall be established without regard to the alleged shareholder loan Stephen claims is owed by Eric. However, in recognition of the disparity of contributions to the business by the two brothers, in particular, since Rueben has become incapacitated, I order that the price payable for Eric’s shares shall be reduced by $35,000 from the value otherwise determined on equitable grounds. There shall be no costs of this application or counter-application which are both otherwise dismissed. My detailed reasons and disposition follow.
Factual Background
[11] Clifton Plastics is a small family-run plastics manufacturer that was founded in 1978 and operates out of leased premises in Mississauga, Ontario. It currently has five active employees including the applicant Stephen Balofsky.
[12] Stephen and Eric are equal shareholders and directors of Clifton Plastics. Stephen is Secretary Treasurer while Eric is Vice President. They have each held these positions since a corporate reorganization and estate freeze in 1993.
[13] As a result of that reorganization, Eric and Stephen each hold 50 common shares and 400 Class A shares and the titles of vice president and secretary/treasurer respectively. That same reorganization named their father Reuben president and left him with 200 Class A shares plus promissory notes from each of his sons. The Class A shares have a redemption value of $1 per share and may or may not be voting [1].
[14] Eric is now 65 years of age and is seven years older than Stephen. Reuben is now in his early 90’s and has been incapacitated by severe dementia since June 2016. No formal declaration of incapacity has been made, but both Stephen and Eric agree that their father has been incapacitated since June 2016.
[15] I have been invited by Stephen to infer that Reuben may have been under a degree of incapacity prior to June 2016. I decline to make any such ruling. Stephen was happy enough to recruit his father’s signature in June 2015 for the purpose of requisitioning a shareholder meeting in an (unsuccessful) attempt to oust his brother Eric as a director. Stephen’s evidence in support of a date for Reuben’s incapacity earlier than June 2016 is weak and equivocal. Even if Reuben were losing capacity in the months prior to June 2016 that would not, in any event, imply that every action taken by him was taken without capacity.
[16] I decline to find that any relevant actions taken by Rueben (the last relevant actions being in April 2016 referred to below) were undertaken without mental capacity.
[17] Among the hotly contested issues in this litigation has been the intentions of Reuben as expressed by him to one or the other of his sons prior to his loss of mental capacity in June 2016. From reading the accounts of both sons, I am persuaded that Reuben was heartbroken by the rift between his sons and tried as best he could to prevent that rift from growing still deeper. He clearly attempted to find ways of satisfying both and tried to avoid open conflict with either.
[18] I attach no weight to the evidence of either Stephen or Eric as to words or intentions allegedly expressed by Rueben to one in the absence of the other. I do not mean thereby to imply that either witness has been deliberately misleading or dishonest. Credibility and honesty are not the same thing. I am nevertheless persuaded that both were at least partially blind to the degree of their father’s anguish over the rift in the family. Through a combination of Reuben trying to avoid conflict and Eric or Stephen hearing what they wanted to hear, a hopelessly distorted and one-sided picture of what Reuben may have said or intended has emerged from each.
[19] I attach weight only to what Reuben has actually done and documents he actually signed before his loss of capacity in June 2016 as well as inferences that may appropriately be drawn from those objective facts.
[20] The corporate by-laws of Clifton have always required that “deeds, transfer, assignments, contracts and obligations of the Corporation” be signed by two signing officers (s. 11.01), but permitted the Board to direct otherwise for any particular class of obligations. The account documents of the corporation at Royal Bank of Canada require only a single signature with Rueben, Eric and Stephen each being authorized signatories. The original RBC corporate account was operated on this basis for as long as the parties are aware. While the directors’ resolution establishing the RBC bank account has not been produced, I infer that there was one and it was approved by the directors in the usual and ordinary course.
[21] Stephen described himself in this application as the “manager” of the business and claims to have been so appointed by his father in 2007. He may well have been “manager” in his own estimation from 2007 and I have no doubt that since Reuben’s full retirement in November 2014 he has assumed that role de facto. However, he was never validly appointed to that role and the by-laws of the corporation attribute that role to the president (Reuben) or, in his absence or incapacity, to the vice president (Eric).
[22] Article 5.03 of the by-laws attributes to the president the role of chief executive officer of the corporation and, if no general manager is appointed, the role of general manager as well. Article 5.04 of the by-laws provides that the vice-president “shall be vested with all the powers of and shall perform all the duties of the president in the absence or disability … of the president”. Otherwise, the vice-president “shall also perform such duties and exercise such powers as the president may from time to time delegate to him or as the Board may prescribe”.
[23] The Board of Directors has not appointed a new president since Reuben retired in November 2014 or since he became incapacitated in June 2016. It is not clear when the Board of Directors last approved anything given the deadlock that has prevailed this last number of years. It does not appear that Rueben has formally resigned as president or director, but there can be no doubt that he is now incapacitated and unable to fulfill either role. Eric and Stephen continue to hold the same positions as officers as they held in 1993 (Vice President and Secretary/Treasurer respectively). No changes to the officers have been made with corporate authority.
[24] Eric and Stephen both concur that Eric stopped coming into the Mississauga office after February 2013 and that he did so as a result of being told not to come in any more by Stephen. Eric alleges – and I accept – that Stephen told him “never” to return. Apart from a few visits to the Mississauga office after hours, he has not done so.
[25] Stephen claimed that Eric was ineffectual and his work of no value. Eric for his part claims that Stephen demeaned and insulted him before company employees over a considerable period of time. This is not the first nor will it be the last time that similar allegations have been exchanged between warring family members in the context of a family business. There is a paucity of objective evidence to sustain the position of either side.
[26] Given Stephen’s candid admission that Eric stopped coming in because Stephen asked never to return, I see little point in diving deeper into the complex web of subjective impressions and hurt feelings that lies beneath this event. Eric was pushed out in fact by Stephen in February 2013 even if Stephen had no actual corporate authority to do so. There was no directors resolution signed stripping Eric of any office nor shareholder resolution amending the by-laws. Rueben did not authorize or direct this action as president or father.
[27] From February 2013 until November 2014, a sort of armed truce ensued. Rueben, although aged, maintained a presence in the business and wielded authority unquestioned by either son. Eric was paid as before throughout 2013. While Eric and Stephen had always been paid the same salary, the T4 records for 2014 reveal that Reuben picked up a portion (about one-third) of Eric’s salary on his own account. Subject to this, economic parity between the two sons was maintained by Rueben. Stephen was aware of this state of affairs. While perhaps disagreeing with his father, he did not challenge his father’s decisions.
[28] After November 2014, Rueben finally took his well-earned retirement and ceased to take any active role in the business. There was no formal resignation of office though. Unfortunately, he had not succeeded in brokering a peace between his sons and the dispute between them continued to fester.
[29] I shall not linger long on the question of what services if any Eric performed on behalf of Clifton after February 2013 until Rueben’s retirement in November 2014. Eric claims that he continued to advise his father at his father’s home and made a number of ultimately unsuccessful sales visits as well. He notes that his father’s home was also the head office of the corporation and his father often did work from there. Whatever the level of Eric’s active contribution to the business prior to his father’s full retirement, there is little doubt that that his active contribution fell to levels approaching nil afterward November 2014.
[30] After Rueben’s retirement, the gloves came off so to speak. With his father gone, Stephen would not authorize any further pay cheques to be issued to his brother. However, no directors meeting was called to remove Eric as vice president.
[31] Stephen claims that Eric contributed nothing to the business. I disagree. There is no evidence that he declined to perform any duties assigned to him by the president as required of a vice-president. No shareholders resolution removed him as director. He retained all of the considerable potential liabilities of a director. All of the company’s capital continued to be deployed in the business in the usual and ordinary course and Eric remained a 50% owner of that business. While passive in nature, these were nevertheless real and substantial contributions made by Eric even if Stephen’s relative level of contribution was greater due to his active participation in the business.
[32] After a short time, Eric took matters into his own hands and used his undoubted authority over the corporate bank account to sign the pay cheques to himself that his brother would not sign. In this way, Clifton resumed payment to Eric of the same salary Eric had been formerly receiving.
[33] Stephen was well aware of these goings on. He kept track of the cheques written by Eric. He tried to block Eric at the bank, but discovered that he had no ability to do so.
[34] On June 24, 2015 – after about seven months of Eric’s cheque-writing – Stephen persuaded Reuben to requisition a shareholders meeting for July 13, 2015 for the purpose of considering a resolution removing Eric as director.
[35] The shareholders meeting was held on July 13, 2015. There are competing versions of what happened. There is, however, agreement on one key fact: Reuben would not agree to remove Eric as a director. The resolution failed and the status quo continued. Eric continued to arrange for the corporation to pay his salary and benefits and signed the cheques necessary for this purpose on his own. Stephen was fully aware that Eric was doing this. He kept track of the cheques and considered his next move.
[36] It is clear that Rueben was unhappy with this state of affairs and was looking to secure peace between his sons at his own expense if necessary. He had been underwriting a portion of Eric’s salary from his own funds in 2014. On September 3, 2015, he signed an agreement with Eric where he agreed to sign his own house and contents over to Eric should Eric not continue to receive his prior salary and benefits from Clifton. The enforceability of this agreement is not before me and I will not comment upon it beyond noting the undisputed evidence that title to the house was then held by Rueben, Stephen and Eric on a joint tenancy basis and no deed severing that joint tenancy has been registered.
[37] The agreement and Reuben’s refusal to endorse the resolution removing Eric as director does provide a window into his intentions. Rueben was aware that Eric was continuing to be paid as before and wished to find a way for that situation to continue. It did continue for a time. Eric continued to write cheques and Stephen continued to consider his next move. However, despite Rueben’s well-meaning efforts, peace did not break out.
[38] Frustrated in his efforts to remove Eric from Clifton Plastics, Stephen started exploring other options. He consulted the company’s accountants and sought legal advice on how to get his brother out of the business for good. The beneficiary of this intended course of action was of course himself and the propriety of using corporate funds for that purpose is one of the things challenged by Eric in his counter-application. It appears that Stephen used his personal lawyer (at his own expense), but also used the company’s accountant at company expense to assist. The company’s accountant was also used to assist in preparing this application as appears from billing records in evidence.
[39] On March 22, 2016, Stephen gave Eric a signed buy-sell arrangement with a proposed price of $165,000 that was open for acceptance by Eric up until March 31, 2016. Eric was given the choice of buying Stephen’s shares at the stipulated price or selling his own shares at that price to Stephen.
[40] There was a very material catch, even if it was not apparent to Eric at the time.
[41] Stephen’s offer provided that the vendor – whichever of the two that might be - would continue to receive his salary and other remuneration as a director, officer or employee until the Closing date. So far so good from Eric’s perspective. However, the proposed agreement also required the selling shareholder to repay any shareholder loans outstanding at the time of closing. Stephen did not disclose to Eric (and Eric was unaware) that Stephen had caused the company’s accountants to record all of the payments received by Eric since Rueben’s retirement as shareholder advances. The recorded shareholder advances allegedly owing by Eric exceeded the price Eric would receive for his shares had he accepted the offer and agreed to sell his shares to Stephen even if Eric was unaware of that detail.
[42] As crafted by Stephen, accepting the offer would have seen Eric owing his brother money for the privilege of selling his shares to Stephen failing which he had one week to raise the funds necessary to turn the shotgun around and avoid that outcome by buying Stephen’s shares. The offer expired without being accepted.
[43] At about this same time, Eric had his 2015 taxes to look after. It was one thing to write his own paycheques. It was another to make the appropriate source deductions and T4 filings. These had been attended to in prior years when Rueben was at the helm. However, with Reuben retired, Stephen was not about to lend a hand. Rueben was, however, still the president of the company even if he was no longer actively engaged in running it. Once again, Reuben stepped into the breach to attempt to smooth things over. He sent a letter to the CRA on April 28, 2016 with Eric’s 2015 T4 information and a cheque for $19,696.46 for the withholding amounts.
[44] At this point a small digression arises. Clifton Plastics subsequently managed to persuade CRA to refund that amount on the basis that Eric was not in fact an employee at the time. Eric was not a party to that decision that was clearly engineered by his brother. I attach no weight to CRA’s decision either way.
[45] In this same time frame, Stephen enlisted the aid of the company’s accountants to record the payments to Eric in the way most favourable to himself. He instructed the accountants to treat them as shareholder advances to Eric and this was duly done. Stephen claims that this accounting treatment was put in place with his father’s approval. There is some evidence of a single meeting between Eric, the company’s accountant and Reuben in September 2015 where the subject of recording Eric’s salary as a shareholder advance may have been discussed. The evidence of these alleged instructions of Rueben is weak and I do not accept it.
[46] I find it unlikely that Reuben would have approved of such a step, or that he would have approved of it knowing its consequences upon Eric, given his own actions before and after this alleged meeting. Rueben’s disapproval of the way in which Eric was being treated is sufficiently manifest in his agreement of September 3, 2015 (regardless of its enforceability) and his intervention with CRA in April 2016 to cause the withholding amounts to be remitted in respect of Eric’s salary for 2015. These actions are inconsistent with Rueben knowingly agreeing to treat that same salary as a shareholder advance.
[47] I also find that Eric was neither advised of the 2015 decision to characterize his continued salary payments as a shareholder advance nor did he become aware of it prior to September 2017.
[48] Things came to a head in October and November 2017. Stephen alleges that the company began to run out of cash and was missing payments due to critical suppliers. I find this claim to be somewhat dubious. At that time, Stephen was attempting to prevent his brother from writing further cheques by timing deposits and withdrawals carefully (paying suppliers with bank drafts and certified cheques covered with deposits made on a just-in-time basis as far as possible). If any suppliers ended up being paid late, it was more likely a result of Stephen’s attempts to prevent his brother from accessing funds to pay his salary than from any actual financial crisis that can be imputed to Eric’s salary (of which there is no tangible evidence).
[49] On November 10, 2017, Stephen managed to open a new bank account at Royal Bank without Eric’s signature. How he did so without an authorizing directors’ resolution remains unexplained. The by-laws gave him no authority to do so. However, the upshot was that all deposits and withdrawals were thereafter made with a separate bank account that Eric had no access to. Eric has not been paid anything by Clifton Plastics since then.
[50] Stephen claims that the total of Eric’s direct withdrawals from Clifton Plastic’s accounts from November 2014 to November 2017 is $280,503.07 less a refund received from CRA of $19,297.16 for a total of $261,205.91. He characterizes all of these as shareholder advances owing by Eric and payable on demand. Eric did not seriously challenge the figures even if he disputes the characterization. He also claims that even if Stephen prevails on the issue of shareholder advances, no claim can be made for such advances beyond two years after they were made, citing the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. This application was made on January 23, 2018.
Issues to be decided
[51] The following issues arise: (a) Has Stephen been oppressed as a shareholder, officer or director of Clifton Plastics within the meaning of s. 248 of the OBCA by reason of the payments Eric caused Clifton Plastics to make to him after Reuben’s retirement? (b) If Stephen has not been oppressed, are there grounds for ordering Stephen to purchase Eric’s shares under s.207 of the OBCA? (c) If Stephen is ordered to purchase Eric’s shares, what treatment should be afforded to the payments made to Eric after November 2014?
Discussion and analysis
(a) Has Stephen been oppressed as a shareholder, officer or director of Clifton Plastics within the meaning of s. 248 of the OBCA by reason of the payments Eric caused Clifton Plastics to make to him?
[52] Stephen’s claim to oppression is premised on the idea that Eric “misappropriated” corporate funds and that he, as a shareholder, officer and director of Clifton Plastics had a reasonable expectation that Eric would not do so.
[53] There are numerous problems with this characterization of the facts.
[54] Eric worked full time at the company from 1978 accomplishing such tasks as were assigned to him by his father. Stephen’s view, coloured by hindsight and animus, is that these tasks were minor in nature and Eric’s efforts were of little to no value to the company. I attach no weight to those self-serving and ex post facto subjective assessments offered by Stephen.
[55] From the time of the 1993 reorganization onwards, Eric was vice president of a corporation whose by-laws entitled him to manage the corporation should his father the president be unable to do so. Prior to such incapacity, those same by-laws obliged Eric to perform such tasks as the president assigned to him. There is no persuasive evidence that Eric failed to do so or that Reuben was ever dissatisfied with Eric’s efforts. There is certainly no evidence that corporate steps were taken to strip Eric of his office as vice president or from the remuneration that had been paid to the holder of that office over the years – remuneration that had always been the same as that of the secretary treasurer (i.e. Stephen).
[56] Eric has never ceased to be vice president of Clifton Plastics. Following his father’s incapacity in June 2016, Eric had every legal right to assume all of the duties of president of the corporation pursuant to the company’s by-laws. Having been told by his brother – without colour of right – never to return, he did not press his claim. That did not make his claim less legitimate.
[57] Even making allowances for the failure of a family company to observe all of the formalities of corporate governance, I cannot find that Eric has ever been dismissed as vice president. Rueben’s actions in causing Eric to be paid in full long after Stephen had told him to stop coming into the office, in paying part of that salary on his own for a time in what was clearly a (failed) effort to minimize the objections of Stephen, in promising Eric the house should his salary and benefits not be paid (they were so paid until November 2017), in making the CRA source deductions in April 2016 and, most importantly, in declining to vote in favour of Eric’s removal as a director in July 2015 all confirm that there was never a majority of directors or shareholders willing to sanction Eric’s removal at any time. Rueben had the casting vote as director prior to his incapacity and, if his Class A shares are voting as Stephen contends they are, he had the casting vote as shareholder as well. His inaction on these facts was clearly a form of consent. This is all the more so given Stephen’s evident and vocal dissatisfaction and Stephen’s active efforts to freeze his brother out of the company as completely as possible.
[58] Eric did no more nor less than continue the payment of his salary as vice president entirely consistent with past practice. There was never an authorized change to that practice. There was no directors’ resolution altering the remuneration of the vice president. In the circumstances, characterizing the payment of Eric’s salary as a “misappropriation” is simply inaccurate. He continued to hold the office and had at least a prima facie right to continue to be remunerated for it on the same terms as before.
[59] Indeed, if Eric’s contributions prior to February 2013 were as inconsequential as Stephen claims they were, then he can hardly claim that his reasonable expectations were frustrated. The status quo that Stephen accepted while his father was active as president simply continued and the value of Eric’s contributions remained – on Stephen’s telling at least – unchanged before and after 2013.
[60] It should also not be overlooked that Eric’s passive contributions – those of being required to assume such tasks as the president assigned to him plus the assumption of the statutory and other obligations of a director – were in no way impacted by his exclusion from the company’s premises by Stephen after February 2013.
[61] Stephen has essentially treated the company as his own for some time, but without colour of right to do so. I cannot find that his conduct, viewed as a whole, puts him in line to make a claim for oppression. Eric has not refused to contribute – Stephen has taken steps to prevent him from doing so despite having no greater interest in or authority over the company. The difference is material.
[62] Stephen has been frustrated to find that his efforts to force his brother out of the company entirely have not yet been crowned with success. That frustration is not oppression.
(b) If Stephen has not been oppressed, are there grounds for ordering Stephen to purchase Eric’s shares under s. 207 of the OBCA?
[63] Section 207(1)(b)(iv) of the OBCA provides a more appropriate remedy to this situation in my view.
[64] Prior to the incapacity of Rueben in June 2016, the corporation’s governance was dysfunctional, but it was not deadlocked. Rueben was painfully aware of the rift between his two sons. He had the ability to resolve it with his casting vote, but he was unable to bring himself to do so. Rueben’s lack of action was, at the very least, a form of approbation of the status quo. I cannot fault him too severely for having clung to the hope that Clifton Plastics, a company he founded along with his late wife, would be able to continue to provide for both of his sons after he was gone. Unfortunately, fate intervened to strip Rueben of the capacity to intervene for or against either side after June 2016.
[65] After Reuben’s incapacity, the situation has slowly spiralled out of control. The only person with the lawful authority to assume Reuben’s role as president was the vice president, Eric. Stephen, although having only the title of secretary/treasurer took it upon himself to fulfill the president’s role as well. There have been no directors meetings to sanction any actions taken by Stephen. By reason of Reuben’s incapacity, the corporate governance of this small business is now deadlocked and deadlocked in a way that leaves no apparent avenue for resolution short of legal process. The status quo cannot continue.
[66] Eric is now 65 years of age and has not had an active role in the business for five years. Stephen is seven years his junior and has been, de facto at least, the sole managing officer of the corporation for at least the last two years. At this point, there is no realistic prospect of reintegrating Eric into the company he is half owner of.
[67] There is clearly only one practical outcome, an outcome that both protagonists have recognized as the correct one even if they cannot agree on the means by which the end is to be secured: Stephen must purchase Eric’s shares. The only other option would be to cause the company to be formally wound up or sold to a third party if one can be found. That is an outcome that both parties clearly wish to avoid and is not one that would advantage anyone.
[68] I find that it is just and equitable that the corporation be wound up pursuant to s. 207(1)(b)(iv) of the OBCA. I also find that, in connection with that holding, I am authorized by s. 207(2) of the OBCA to make such order as I see fit under s. 207 or 248 of the OBCA. I shall consider what shape such an order shall take in the next section of my reasons.
(c) If Stephen is ordered to purchase Eric’s shares, what treatment should be afforded to the payments made to Eric after November 2014?
[69] Stephen strongly urges me to make an order that Eric must either repay the shareholder advances recorded on the company’s books or, in the alternative, that Stephen be given an equivalent credit for such amount when paying Eric for his shares.
[70] This case has only the most superficial of parallels with the case Stephen has most heavily relied upon: Kummen v. Kummen-Shipman Ltd , (1982) , 16 Man. R. (2d) 412 (Q.B.); aff’d (1983) , 19 Man. R. (2d) 92. In Kummen, the court used the oppression remedy to order one brother to purchase the shares of the other. The main issue in the case was whether a minority discount should be applied. The two brothers had received only a relatively nominal salary for a decade prior primarily because they were unable to agree on any change to their salary. However, after the deadlock emerged, one of the brothers continued to come into the office, but refused to contribute in any meaningful way as he had in the past. The salary received by the selling brother over that period of refusal to contribute was taken into account in fixing the purchase price payable by the other. In the present case, Eric was excluded by Stephen and did not refuse to contribute. He was pushed out and pushed out without corporate authority.
[71] Section 207(2) of the OBCA gives me broad degree of discretion to do justice here. In applying that discretion, I cannot absolve Eric of a share of responsibility for the mess currently reigning any more than Stephen’s unilateral actions can be ignored.
[72] The equities pull in a number of directions here, but the unequal level of contributions between the brothers and the time that has elapsed since Reuben’s incapacity removed the last hope of breaking the deadlock both persuade me that a strictly equal division of value would be inappropriate.
[73] Eric has effectively retreated into his shell, neither asserting his equal rights as a director and officer of a company that he is 50% shareholder of nor taking steps to bring about a common-sense resolution of the deadlock. While both brothers appeared content to continue their simmering combat for as long as they could seek their father’s approval of their respective positions, that avenue has been closed since June 2016. Reuben is no longer capable of fixing this problem. There is no longer a casting vote to turn to.
[74] Stephen’s behaviour has been high-handed in a number of important respects. He clearly has used the company’s resources to some degree to further his own interests against those of his brother. Examples include using the company’s accountants to help prepare a rather deceptive and one-sided shotgun offer in March 2016 and the use of those same accountants to assist in this litigation.
[75] Eric’s counter-application seeks a wider inquiry into other payments Stephen may have received. That is a road that I am not satisfied it is just and equitable to go down. Eric’s application has produced very little more than speculation about abuses that may yet be uncovered without evidence that the exercise will be worth the cost of undertaking it. From my review of the financial statements, the financial margin of manoeuvre available to Stephen even if he were inclined to use it was quite limited in any event.
[76] On the other hand, Eric’s ostrich behaviour has been unrealistic. This is a small family company. He cannot reasonably expect to extract a lifetime annuity from a company he was not contributing to simply because his brother lacked the capacity to force a break to the deadlock outside of court. At some point, the math doesn’t work. Inaction cannot be excused forever. I cannot fail to recognize Stephen’s greater contribution even if I do not approve of his high-handed actions.
[77] In my view, both brothers should have taken an active role in sorting this problem out for the good of the corporation after their father was incapacitated and any hope of internal resolution of the deadlock between them evaporated. Since that time (June 2016), Stephen has clearly carried a heavier load of responsibility than has Eric although Eric’s “passive” contributions were still material. I must also account for the fact that Eric has received considerably less than Stephen from and after November 2017 (when his ability to pay his own salary was lost) and give some consideration to Eric’s long years of service in helping to build the company at his father’s side, including a number of years where Stephen was contributing at a lower level.
[78] There is no precise mathematical formula I can bring to bear to recognize all of these equitable considerations. After considering all of the facts, I have decided that discounting Eric’s shares by $35,000 (relative to a strict 50:50 division of the fair market value of the company – Rueben’s Class A shares having only nominal value) represents a fair outcome.
[79] Accordingly, a Chartered Business Valuator shall be appointed in the manner provided below to fix the fair market value of Eric’s shares of the corporation without minority discount as of July 31, 2018. The price for Eric’s shares to be paid by Stephen will be one-half of the fair market value of all of the shares of the corporation reduced by $35,000. In valuing the company, no value shall be attributed to the shareholder loans allegedly due to the corporation from Eric.
[80] I am going to leave to the parties the task of sorting out how to finalize the accounting of the shareholder loans Stephen has caused Clifton Plastics to record in relation to Eric. Whether recorded as a shareholder loan or remuneration of a senior officer, Eric did receive the funds recorded. This must be accounted for in some fashion. This is the sort of thing that both ought to be able to sort out in a tax efficient manner. However, it must be clear that Eric’s shareholder loans will either be reversed or forgiven at the end of the day unless he consents to a more tax-efficient resolution.
[81] I shall remain seized of the issue of the accounting treatment of Eric’s remuneration after Reuben’s retirement. If the parties are unable to resolve questions arising after 45 days, I will receive written submissions from each side restricted to ten pages each and based on a short agreed summary of evidence showing (i) how Eric has treated remuneration received by him since 2014 on his own tax returns; (ii) precisely how Clifton Plastics has accounted for those same payments on its own tax returns (2014-2017); and (iii) the relative tax consequences to each of Clifton Plastics and Eric of the course of action proposed by each.
Disposition
[82] For the foregoing reasons, I find that it is appropriate to make an order under s. 207 of the OBCA that Stephen shall purchase Eric’s shares on the following terms: (a) The price shall be one-half of the fair market value of all of the company’s shares as of July 31, 2018 less $35,000, such fair market value to be determined without attributing any value to shareholder loans made to Eric that are recorded on the books of the company or the tax consequences of failing to attribute such value; (b) If the price is not agreed between the parties before August 15, 2018, it shall be determined by a Chartered Business Valuator appointed in the following manner: i. The parties shall attempt to agree on the name of the Chartered Business Valuator before August 21, 2018; ii. If no agreement on such name is reached, each party shall nominate one Chartered Business Valuator who shall certify his or her independence from the parties; iii. The parties shall jointly submit to me the two names so nominated along with a copy of the certification of independence of each and a summary of qualifications (CV or similar document) of each candidate by August 31, 2018; iv. As far as reasonably practicable, the names and relevant information shall be provided to me without disclosing which party nominated which candidate; v. I shall select the Chartered Business Valuator from among the names submitted and advise the parties of my decision in writing and without reasons as soon as practicable; vi. The Chartered Business Valuator selected will be given access to all of the books and records of Clifton and Clifton’s accountants and bookkeeper shall be directed to provide their full co-operation with a view to obtaining a decision fixing fair market value within 45 days of the appointment being agreed or confirmed by me; vii. the fees and expenses of the Chartered Business Valuator selected shall be borne by Clifton Plastics but shall be treated for all purposes as a liability of the company as of July 31, 2018 (i.e. valuation date) and shall be paid no later than the time of closing; (c) Closing shall occur no later than 45 days after the decision of the Chartered Business Valuator is rendered which decision shall be final and shall not be subject to appeal or review; and (d) Upon closing, Eric shall transfer all of his shares to Stephen and shall resign as director and officer of Clifton and Stephen shall pay the purchase price by certified cheque or bank draft.
[83] I shall remain seized of the question of the accounting treatment of Eric’s remuneration from 2014 through 2017 as described above.
[84] In all of the circumstances of this case, I am not inclined to make a costs order in favour of either party. Success has been divided in this case. It is regrettable that things were allowed to slide for so long without resolution. I do commend the parties for reaching the agreements they were able to reach at the hearing (which I have incorporated into my order).
S.F. Dunphy J. Released: July 31, 2018
Footnote
[1] There is a dispute as to whether the Class A shares are voting. The Articles provide that “Holders of Class A shares and common shares shall be entitled to one (1) vote for each common share held by them”. Stephen maintains that any ambiguity regarding the voting rights of the Class A shares is due to a manifest error that ought to be rectified by deleting the second instance of the word “common” at the end of the sentence. There is no application to do so before me nor is the outcome of that issue material to this case.