Court File and Parties
COURT FILE NO.: CV-17-581887-00CL DATE: 20180823 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
RE: FIOVO PALUMBO, Applicant AND: RICCARDO QUERCIA, BRAD IMHOFF and BOOTHWORKS INC., Respondents
AND RE: RICCARDO QUERCIA, BRAD IMHOFF and BOOTHWORKS INC., Counter-Applicants AND: FIOVO PALUMBO and NEIL FOSTER and GREGORY SCOTI MARDON, DIRECT INC., HT CONNECT LTD., and PAN EXPOSITIONS MANAGEMENT INC., Counter-Respondents
BEFORE: S.F. Dunphy J.
COUNSEL: Peter W. Carey and Christophe J. Shammas, for the Applicant Fiovo Palumbo and Counter-Respondents Fiovo Palumbo and Pan Expositions Management Inc. Manjit Singh and Sakina Babwani, for the Respondents and Counter-Applicants Riccardo Quercia and Brad Imhoff and Boothworks Inc. Jamie M. Sanderson, for the Counter-respondents Neil Foster and Gregory Scoti Mardon and Direct Inc. and HT Connect Ltd.
HEARD at Toronto: June 25, 2018
REASONS FOR JUDGMENT
1The applicant Mr. Fiovo Palumbo and the respondents Mr. Riccardo Quercia and Mr. Brad Imhoff are founders and equal shareholders in a business known as Boothworks Inc. Prior to being dismissed from Boothworks by his two co-founders, Mr. Palumbo was the primary point of contact at Boothworks for a client who alone represented over 50% of Boothworks’ revenue. This client grew out of a relationship he had developed over a long period of time that preceded the founding of Boothworks by fourteen years.
2Mr. Palumbo was dismissed from Boothworks in 2017 and the circumstances of that dismissal are the basis of this application and counter-application.
3The respondents Mr. Quercia and Mr. Imhoff allege that they feared that Mr. Palumbo might try to leave Boothworks and take the major client with him. Mr. Palumbo on the other hand alleges that when he was sick with cancer, Mr. Quercia and Mr. Imhoff began working together to squeeze him out of the company he helped found and whose continuing success he was so heavily responsible for.
4Whatever the merits of those two points of view, Mr. Quercia and Mr. Imhoff decided that their best alternative was a preemptive strike. They convened the first ever shareholder meeting of the corporation with neither proper notice to nor consent of Mr. Palumbo and removed him as a director and then, wearing their director hats, removed him as an officer and purported to impose the terms of his future “employment” at their discretion. As might have been anticipated, things did not end well.
5Mr. Palumbo remained at Boothworks long enough to wrap up a critical project for the client. At the end of the project, the respondents purported to terminate Mr. Palumbo as an employee for cause. When the respondents informed the client of Mr. Palumbo’s departure and attempted to secure the continued favour of the client, the client responded by severing its relationship with Boothworks instead.
6As a result of these events, more than 50% of Boothworks historic revenue and its dominant rain-maker were gone in the space of a few short weeks. A better example of catching more flies with honey than with vinegar would be hard to conceive of.
7Mr. Palumbo’s application seeks a fair market value purchase of his shares. The respondents commenced a counter-application alleging breach of fiduciary duty and seeking damages for loss of the client. The counter-application respondents include Mr. Palumbo, the company through which he now carries on business (Pan Expositions Management Inc.), two independent contractors who formerly assisted Boothworks in providing services to the major client as well as the principals of those two companies.
8In the result, I have found that Mr. Palumbo’s application should succeed and the counter-application of the respondents must be dismissed.
9Mr. Palumbo had a reasonable expectation that he would not be forced out of the company he had co-founded by a simple majority vote of his partners without compensation. Mr. Palumbo did not solicit the client in question prior to the client acting to sever its relationship with Boothworks and, at all events, there was no legal impediment to his doing so. The client had always awarded its contracts following a bidding process and was in no way precluded from deciding to cease doing business with Boothworks or from considering bids submitted by companies related to Mr. Palumbo after his departure from Boothworks. The client was not, as claimed, the “property” of Boothworks. The counter-applicants’ claim that the client was provided free or undocumented services for which the respondents to the counter-application have responsibility is speculative and unproved.
10My detailed reasons and disposition follow.
Factual background
11Boothworks is a trade show and event management company. They design and build exhibits for clients at such events.
12Boothworks was founded in 2008 by the Mr. Palumbo, Mr. Quercia and Mr. Imhoff. These three came to know each other as employees of C.E.S. Exhibits (1991) Inc., a company involved in much the same business as is now carried on by Boothworks. Mr. Quercia and Mr. Imhoff were both at CES and were friends before Mr. Palumbo arrived.
13CES found itself in severe financial trouble in March 2008. Mr. Palumbo was asked to invest in CES and become a shareholder. He did not agree to do so and instead wished to leave. Evidently, the prospect of the loss of Mr. Palumbo was the last straw. CES closed its doors and went out of business.
14Mr. Quercia, Mr. Imhoff and Mr. Palumbo decided to incorporate Boothworks in April 2007. They each contributed $50,000 of capital. They did not however purchase the business of CES in any formal way. They simply negotiated a lease with the landlord of CES’s premises and Boothworks picked up the business where it had been left off by CES before CES closed its doors as far as they were able.
15Mr. Palumbo had been in the exhibits and display business since approximately 1990. After his employer decided to leave that business, Mr. Palumbo struck out on his own in 2002 with his own company. He joined CES in 2004.
16Mr. Palumbo brought his existing client relationships to CES when he joined. These included a relationship with Ms. Connie Buffone with whom he had been working since 1994. Ms. Buffone’s career advanced and she changed employers. Throughout, she continued to work with Mr. Palumbo and came to know and trust him. They developed a close working relationship. Mr. Palumbo was given the opportunity to bid on contracts as they came up. He was often successful in those bids and they worked together frequently. He knew what she needed and expected and she trusted his ability to deliver.
17In 2003, Ms. Buffone moved to her current employer, the Spin Master. Mr. Palumbo then had his own company. As a toy manufacturer, trade shows are a critical sales event for Spin Master in marketing to retailers. Ms. Buffone’s working relationship with Mr. Palumbo continued after she joined Spin Master in much the same way as before and followed Mr. Palumbo as he moved from his own company to CES and eventually to Boothworks.
18Spin Master would issue RFPs (requests for proposals) or RFQs (request for quotes) to service-providers able to assist in the various big trade shows Spin Master relied upon to reach retail buyers. Proposals would be prepared and submitted by Mr. Palumbo (at CES and then at Boothworks) and, given his reputation, experience and familiarity with the client’s needs, these were very often successful. However, contracts were awarded one proposal at a time.
19According to Ms. Buffone, “Mr. Palumbo is very good at his job and is highly responsive to and understanding of Spin Master’s demands and needs”. He obtained a lot of Spin Master’s business for CES and Boothworks. In fact, Spin Master grew to account for more than half of the revenues of Boothworks and Mr. Palumbo’s sales accounted for about 60% of total sales at Boothworks.
20Spin Master’s business requirements involve a lot of work at various trade shows in the United States. Not having a full-time presence in the United States, Boothworks fulfilled those contracts relying primarily upon contractors. These included a number of casual employees hired locally on a contract basis from time to time and, most importantly, two independent contractors, the respondents Direct Inc. and HT Connect Inc. Mr. Foster is the principal of Direct and Mr. Foster and Mr. Mardon are officers of HT Connect. There is no doubt that it is their skills and experience that was sought-after when Boothworks engaged Direct or HT Connect as independent contractors to assist in fulfilling contracts with Spin Master.
21Over time, these two respondent corporations came to develop a relationship with Spin Master as well because of the experience gained by their principals. While Mr. Palumbo was with Boothworks, they contracted with Boothworks and Boothworks contracted with Spin Master. Their primary point of contact at Boothworks was always Mr. Palumbo and they developed a close working relationship with each other over time in much the same manner as Mr. Palumbo had developed with Ms. Buffone.
22The initial arrangement between the three Boothworks founders was never re-visited after the founding of the company in 2008. The three were equal shareholders, contributed equal amounts of capital and received equal remuneration in terms of salary, benefits and bonus. While they had different formal titles as officers (Mr. Palumbo was formally “Secretary”), no formal directors or shareholders meetings were held.
23Mr. Palumbo became ill with cancer in late 2015. Although given a grim prognosis, Mr. Palumbo went through chemotherapy and radiation treatments and his cancer went into remission. Throughout this period, and despite the treatments being undertaken, Mr. Palumbo continued to work at Boothworks to the best of his ability.
24While the parties disagree as to the cause, there is no doubt that the relationship between the three founders began to deteriorate at about this time.
25When Mr. Palumbo returned from assisting Spin Master at a New York trade fair in February 2016, he was advised that Mr. Quercia and Mr. Imhoff had met with a lawyer and wished to “restructure” a number of agreements at Boothworks. There was mention of a shareholders agreement and agreements to be entered into with Direct and HT Connect. None of these initiatives were proceeded with and Mr. Palumbo does not recall ever seeing the draft shareholders agreement that may have been put together in that era.
26Later in 2016, Boothworks responded to a Spin Master RFP for the 2017 New York Toy Fair. Mr. Palumbo felt that Mr. Quercia and Mr. Imhoff did not provide sufficient support in preparing the proposal. While they disagree with this characterization, their disagreement is at the very least evidence of the decaying relationship between the parties in that time frame. Whatever the truth of the matter, the proposal was completed and the contract was awarded to Boothworks. It was a very large contract for Boothworks.
27When it came time to fulfill the contract that had been obtained, Mr. Palumbo again felt frustrated by the lack of material support provided to him. He felt that Mr. Quercia and Mr. Imhoff were only interested in the revenues Mr. Palumbo brought in from the Spin Master relationship but did not want to make any resources available to support him. In his view, almost all of the resources dedicated to fulfilling the various Spin Master projects apart from his own efforts were obtained by sub-contracting (especially to Direct and HT Connect and the various casual employees hired for each project). The respondents of course disagree. There is no requirement for me to sort out the rights and wrongs of what are essentially business-judgment disagreements. The relevant fact emerging is, once again, that of a decaying relationship that increasingly pitted Mr. Quercia and Mr. Imhoff as allies against Mr. Palumbo in relation to business brought in by Mr. Palumbo.
28In February or March 2017, things came to something of a boil. Mr. Palumbo felt that Mr. Quercia and Mr. Imhoff were acting strangely towards him. He suspected they were hatching something.
29One day Mr. Quercia and Mr. Imhoff confronted Mr. Palumbo claiming to have received a tip from an anonymous caller. Mr. Quercia alleged the caller claimed to fear for her life in coming forward. She is alleged to have claimed that Mr. Palumbo was plotting to leave Boothworks and to take Spin Master with him.
30Mr. Quercia and Mr. Palumbo each have different accounts of what occurred at the meeting although both concur that such a confrontation occurred. Mr. Quercia’s affidavit alleges the incident occurred on March 1, 2017, a date Mr. Palumbo does not dispute.
31As regards the truth of the statements attributed to the caller, Mr. Quercia’s affidavit account is of course entirely hearsay. It is also hearsay of the lowest possible reliability given the anonymous and malicious content of the information conveyed and the lack of any corroborative evidence. I can give it no weight per se. His evidence is, however, admissible to the limited extent it provides evidence of the alleged fact that he received such a call and what he did in consequence.
32Mr. Quercia alleges Mr. Palumbo made some form of admission about the truth of the allegation at the meeting. Mr. Palumbo to the contrary claims that he denied the accusation vociferously and accused Mr. Quercia and Mr. Imhoff of having fabricated the account of the call to try to provoke him in some way. He also claims that this was not the first time Mr. Quercia had made baseless allegations about him regarding Spin Master.
33There is little point in diving more deeply into the conflicting versions of what happened at this meeting. I do not accept that there was any kind of admission made by Mr. Palumbo at the meeting. I see no need to speculate about whether the story of the anonymous tip was a fabrication as claimed by Mr. Palumbo. The relationship between Mr. Quercia and Mr. Imhoff on the one hand and Mr. Palumbo on the other was already strained at that time. If an anonymous tip was ever received, it certainly fell on fertile ground. It makes little difference whether the strain was exacerbated by the alleged tip or had simply reached the point that it motivated the allegation of such a tip.
34It is sufficient to note that (i) this particular outburst was symptomatic of a severely deteriorated relationship between the three founders that saw Mr. Imhoff and Mr. Quercia lining up on one side against Mr. Palumbo on the other; and (ii) there is no evidence that Mr. Palumbo had actually taken any concrete steps to leave Boothworks or to “take” Spin Master with him then or later.
35The relationship between the three did not improve in the weeks that followed. Mr. Quercia caused an attendance log to be kept by staff of days Mr. Palumbo was in the office. The log did not record days working at his home office or on the road and Mr. Palumbo’s success in accounting for so much of the revenues of clients, especially long-standing clients using a competitive bid process such as Spin Master, speaks for itself on the subject of his contributions in that time frame. I have given those allegations no weight. This case does not stand or fall by measuring which founder spent more hours in the office.
36Mr. Quercia and Mr. Imhoff also began to insert themselves more aggressively into the details of the Spin Master client relationship in a way that Mr. Palumbo at least characterized as interference and a departure from past practice. I am satisfied that there was a change from past practice in the way the respondents sought to exercise oversight over Mr. Palumbo’s management of the highly profitable business conducted with Spin Master. The pressure building in the relationship between the founders would not be long in being released.
37In June 2017, Mr. Palumbo was working on a proposal for another Spin Master project scheduled for September in Los Angeles (known as the LA Fall project). Mr. Palumbo once again felt he received insufficient support in preparing the proposal. Under pressure from Ms. Buffone to get the proposal in, Mr. Palumbo submitted the proposal on June 16, 2017. The following Monday (June 19), Mr. Quercia and Mr. Imhoff began to provide critical comments on the already-submitted proposal. They wanted a higher margin. They were critical of aspects of the proposal relating to the independent contractors Direct and HT Connect. The back and forth that ensued caused resentment on Mr. Palumbo’s part to what he characterized as interference to grow to the boiling point.
38Direct and HT Connect sent Boothworks invoices in connection with preparatory work needed for the LA Fall project. Mr. Imhoff’s spouse was working in Boothworks office and declined to pay the invoices. She sent an email to Mr. Palumbo questioning the invoices on June 22, 2017. Over the following days, she raised a number of issues that she said had to be dealt with before she could process them. From Mr. Palumbo’s point of view, the invoices were perfectly normal and in keeping with past practice and the idea of an employee questioning a partner’s authority did not go over well with him. To be fair to her, she appears to have been the “monkey in the middle” doing little more than relaying messages from Mr. Imhoff or Mr. Quercia that neither seemed willing to send to Mr. Palumbo directly. Finally on June 26, 2017, she sent Mr. Palumbo an email relaying a further questions raised by Mr. Imhoff and Mr. Quercia advising that the invoices would have to be re-issued and even then would not be paid until various conditions were satisfied. Among other things, she demanded prior receipt of the signed contract from Spin Master before processing the invoices, a marked and unjustified departure from past practice in Mr. Palumbo’s view.
39The camel’s back finally snapped. At least for a while. Mr. Palumbo’s reaction was a hot one. He replied shortly afterwards (copying Mr. Imhoff and Mr. Quercia):
ARE YOU GUYS FOR REAL…HOW FAR DO YOU WANT TO PUSH ME AND THE CLIENT THAT PAYS YOUR BILLS.
I am advising Spin Master to remove their goods from [Boothworks] effective immediately. I will be in to clean out my office and personal property….PO’s will not be issued to [Boothworks] for LA Fall. Please cancel the job in the WIP.
40While the email written by Mr. Palumbo that afternoon was certainly hot-headed, he did not actually follow up on his threat. He did not clean out his desk. He did not advise Spin Master to remove their goods. He slept on it and the next morning, clearly calmed down. Mr. Palumbo wrote Mr. Imhoff and Mr. Quercia saying “This project will continue as is. I am going to take the high road and clean the slate”.
41Mr. Imhoff and Mr. Quercia were not willing to do so. That they were not willing to de-escalate suggests quite strongly that they saw the June 26 email as offering them an opening that they did not want to pass up. Two days elapsed before Mr. Quercia responded that “there is no going back” to what Mr. Quercia described as “an uncertain and increasingly uncomfortable status quo”. He said that he had received legal advice that “supports your dismissal both as an officer and employee for cause and grounds for suing you for misappropriating the company’s goodwill represented by Spin Master”.
42Things did not improve over the following days as both sides armed themselves with lawyers and prepared the ground for the coming legal war.
43On July 11, 2017, Mr. Palumbo was told via a short email that there would be a shareholders meeting the next day. Mr. Palumbo objected and was told the meeting would proceed with or without him. This was the first ever formal shareholders meeting of Boothworks. There was no formal agenda provided, but there can have been little doubt what was intended. A coup was being prepared that would see Mr. Palumbo on the outside looking in.
44The meeting was held on July 12, 2017, Mr. Palumbo attending by telephone. There seems little doubt that the meeting was not properly called. Mr. Palumbo did not agree to waive requirements for proper notice. There was no compliance with the notice requirements of the By-laws. Mr. Palumbo did, however, attend the meeting by telephone and – properly or no – two of three shareholders voted to remove him as a director. This done, the newly-constituted Board without Mr. Palumbo voted to remove Mr. Palumbo as an officer.
45On July 21, 2017, Mr. Palumbo was given a formal letter and told that he was now an employee with the title of “Account Manager” and that the terms of his employment would be revisited after the completion of the Spin Master 2017 LA Fall project.
46Mr. Palumbo did not respond to or accept the letter of July 21, 2017. He did however continue to work on the LA Fall project as he did not want to leave the client in the lurch. He assumed that his days were numbered at Boothworks. He made it clear that he would stay to finish the LA Fall project Boothworks had committed to do for Spin Master, and finish it for the account of Boothworks. He was true to his word.
47This application was commenced on August 31, 2017, while he was continuing to co-ordinate performance of that contract. The relief claimed in the application included seeking an order that Mr. Imhoff and Mr. Quercia “have acted in an oppressive fashion by, ostensibly, removing [Mr. Palumbo] … as an officer and director of Boothworks and constructively dismissing him from his employment at Boothworks” and an order directing Mr. Imhoff and Mr. Quercia to purchase his shares.
48There is no doubt that all concerned fully understood that Mr. Palumbo would be staying only long enough to wrap up the Spin Master LA Fall project with the dispute regarding the circumstances and consequences of his departure to be the subject of this litigation. I attach no weight whatsoever to positions advanced in legal-type letters sent afterwards purporting to treat Mr. Palumbo as an ordinary employee with an indefinite term. That was mere posturing and was not sincere.
49The LA Fall project was finished on September 11, 2017, but it would take a few more weeks for the wind-down work and the final invoicing to be completed. While this was happening, the world did not stand still. Spin Master continued to issue RFPs and RFQs for upcoming events. Mr. Palumbo duly forwarded these when received to Mr. Quercia and Mr. Imhoff with the suggestion that someone at Boothworks prepare responses because he would not be around to deal with the projects.
50To this point, Spin Master had not learned that Mr. Palumbo would be leaving Boothworks imminently.
51Mr. Quercia attempted to deliver an ultimatum to Mr. Palumbo as his alleged subordinate requiring him to prepare Boothworks’ response to the Spin Master RFP and RFQ failing which he would be terminated for cause. Mr. Palumbo was given one day to comply. This letter was an instance of what I have referred to as legal posturing. There was never a serious expectation on the respondents’ part that Mr. Palumbo would start work on new projects for Boothworks. On October 19, 2017, Mr. Quercia sent Mr. Palumbo a letter formally terminating his employment and alleging cause. The era of acting as if Mr. Palumbo was just an ordinary employee was over.
52On October 25, 2017, Boothworks advised Spin Master of his departure. Spin Master promptly asked for its equipment held in storage by Boothworks to be returned. Boothworks has not been awarded any contracts by Spin Master since then.
53The newly-added respondent Pan-Expositions Management Inc. engaged HT Connect in December 2017 to provide project management services for trade show events. HT Connect had never contracted with Mr. Palumbo directly or with Pan-Expositions prior to that time.
Issues to be decided
54The following issues are raised by the application and counter-application:
(a) Was Spin Master an “asset” of Boothworks? (b) Has Mr. Palumbo breached his fiduciary duties owed to Boothworks? (c) Have the other counter-application respondents breached fiduciary duties owed to Boothworks? (d) Was Boothworks deprived of $394,398.59 from the Fall LA project as claimed? (e) Do the actions of the respondents amount to oppression of Mr. Palumbo? (f) If so, what remedy is appropriate?
Analysis and discussion
(a) Was Spin Master an “asset” of Boothworks?
55A significant premise underlying the position taken by the respondents and counter-application was the idea that Spin Master was somehow an “asset” of Boothworks that they were entitled to “defend”. Given the largely undisputed history of that relationship, this was a strange assumption to have made.
56Spin Master was the product of a largely personal relationship and was never an asset. That relationship was cultivated and developed over fourteen years by Mr. Palumbo before Boothworks was a gleam in the eye of its founders. Mr. Palumbo brought all of his client relationships with him when he co-founded Boothworks in 2008. He did not sell them to Boothworks even if he subsequently used them to Boothworks’ advantage over the years of his association with that company.
57Breaking the Spin Master relationship into its component parts, it consisted of (i) being on the list of persons invited to respond to RFPs and RFQs issued by Spin Master from time to time (some of which were recurring); (ii) having the experience and know-how to complete those RFPs and RFQs in the manner required; (iii) having the credibility and experience to be in contention when the proposals or quotes were reviewed and the decision to award the contract was made; and (iv) having the experience and know-how to actually perform the contract once awarded sufficiently well to be on the list for the next contract.
58That relationship was personal to Mr. Palumbo and was brought with him to Boothworks evolving as it did organically from Mr. Palumbo’s years of working with Ms. Buffone. Boothworks never developed the capacity to replace Mr. Palumbo and retain/earn that relationship. It did not attempt to build bridges to Spin Master after the July shareholders meeting forced Mr. Palumbo out nor did Boothworks ever advise Spin Master of that fact. The two remaining principals of Boothworks did not avail themselves of the chance to develop alternative points of contact during the LA Fall project when they made only a brief site visit. They did not show any signs of attempting to hire a credible replacement for Mr. Palumbo nor did they have the capacity to fill his shoes on their own. They made no effort to negotiate anything serious with Mr. Palumbo to retain him, seizing on Mr. Palumbo’s email as reason enough to push him out, something that they had clearly been considering for some time.
59Spin Master was not an asset of Boothworks that could be lost. It was an opportunity that had to be earned every day on a project-by-project basis. Boothworks lost the capacity to earn further business when it forced out the key person in whom Spin Master had confidence without a back-up plan. Mr. Palumbo was not the property of Boothworks and it was Mr. Palumbo that Boothworks lost, not Spin Master. Absent Mr. Palumbo, Boothworks simply could not credibly compete for Spin Master’s business and it lacked the skills to earn Spin Master’s business.
60The loss of the relationship with Spin Master following Mr. Palumbo’s departure was always an inevitability and fully understood as such by the respondents, a fact that renders their actions to hasten that event instead of seeking to avoid it all the more baffling.
(b) Has Mr.umbo breached his fiduciary duties to Boothworks?
61There is no question that a fiduciary’s duties to the corporation do not cease following departure: Canadian Aero Services Ltd. v. O’Malley, [1974] S.C.R. 592 at para. 25. However, absent a non-competition agreement or other similar restriction, the fiduciary may use his or her own skills and experience and compete with the corporation post-departure providing this is not done unfairly: Aquafor v. Whyte, Dainty and Calder, 2010 ONSC 2733 at para. 47.
62Soliciting business from former clients may be considered unfair depending upon the circumstances, including the circumstances of departure of the fiduciary. The restrictions on soliciting clients of the corporation placed upon a fiduciary who is unfairly terminated by the corporation will not be as strict as those applicable to a fiduciary who leaves voluntarily to pursue that prospect. In all cases, the burden of establishing unfair competition, including solicitation, falls upon the party asserting it.
63I have little difficulty in concluding that the personal nature of the relationship between Mr. Palumbo and Spin Master combined with the circumstances of Mr. Palumbo’s involuntary ouster would place few if any restrictions on his ability to compete with Boothworks for Spin Master’s future business post-departure. Mr. Palumbo brought this relationship with him to Boothworks and did not “sell” it. The relationship, such as it was, was a largely personal one and Spin Master had every right to continue to do business with the individual in whom they had confidence rather than the corporation that they knew lacked the skill and experience needed to do their work after Mr. Palumbo’s departure.
64It makes little concrete difference whether Mr. Palumbo was entitled to compete without restriction for Spin Master’s business after his departure or not. The evidence satisfies me that he made no attempt to solicit Spin Master’s business until after Spin Master independently decided to takes its business away from Boothworks. This did not occur until Boothworks itself advised Spin Master of Mr. Palumbo’s departure on October 25, 2017.
65There is nothing unfair about a post-departure fiduciary competing for business against third parties when the corporation to whom a fiduciary duty is owed is out of the running for that business. Mr. Palumbo did not persuade Spin Master to sever its ties with Boothworks by unfair means. Boothworks did it all by themselves.
66Upon learning of Mr. Palumbo’s departure, Ms. Buffone very swiftly formed the view that Spin Master had to take steps to protect itself. In her words, she had “little confidence that Boothworks would be able to successfully design, manage and build our show rooms” and felt that “none of the two remaining principals were familiar with Spin Master’s day to day business”.
67The assessment made by Ms. Buffone upon learning of Mr. Palumbo’s departure was objectively accurate and is not seriously challenged by the respondents’ evidence. Without Mr. Palumbo, Boothworks could not have earned further contracts with Spin Master and did not expect that it could. It lacked the personnel with the experience and skills to do so.
68Where a customer rejects the services of a corporation because the corporation has lost access to the fiduciary’s expertise or because the customer has a direct relationship with the fiduciary, there is no breach of fiduciary duty: see Aquafor and also Ford v. Keegan, 2014 ONSC 4989 at para. 175.
69Mr. Palumbo did not breach his fiduciary duties to Boothworks to the extent he provided services directly or indirectly to Spin Master after his departure from Boothworks. Spin Master was free to invite Mr. Palumbo to bid on contracts and to award him contracts if it so chose.
(c) Have the other counter-application respondents breached fiduciary duties owed to Boothworks?
70Boothworks submitted that Mr. Foster and Mr. Mardon, through their corporations Direct and HT Connect, breached their fiduciary duties by soliciting business from Spin Master.
71Apart entirely from the disputed question of whether Mr. Foster, Mr. Mardon or either of their corporations actually owed fiduciary duties to Boothworks, the evidence simply does not back up the claimed breach of duty. Neither of the individuals nor their companies had any conceivable duty to continue working as a sub-contractor of Boothworks if they chose not to do so. After learning of Mr. Palumbo’s ouster, they had little rational reason to do so. Their engagement was on a project-by-project basis. The same reasons for rejecting the solicitation claim made against Mr. Palumbo apply with greater force to the other respondents to the counter-application. They were perfectly free to withhold future services from Boothworks and to make plans for the future of their future business.
72There is simply no evidence that these respondents solicited anything from Spin Master. The asserted claim is based almost entirely upon speculation repeated over multiple affidavits.
73I find that this claim is unproved and must be dismissed.
(d) Was Boothworks deprived of $394,398.59 from the Fall LA project as claimed?
74After terminating Mr. Palumbo, Boothworks proceeded to render a further invoice to Spin Master for the LA Fall 2017 project dated December 14, 2017 in the amount of $394,398.59. Spin Master declined to pay the invoice which was not rendered in accordance with their contract with Boothworks. The theory of Boothworks’ case against the counter-application respondents is that they breached fiduciary duties owed to Boothworks by allegedly providing free services to Spin Master at the expense of Boothworks or failed to invoiced to Spin Master properly so Boothworks could be paid.
75The dishonoured invoice rendered by Boothworks was the product of a number of simplistic assumptions and extrapolations based on the initial budget and the margin the respondents assumed would be earned. Essentially, the invoice assumed that actual expenses and hours would correspond to budget and invoiced for any alleged variances from the assumed budget based on the assumed margin. As with battle plans, few budgets survive contact with reality. The budgets in question are no exception. Hours beyond budget are not necessarily the product of “secret” scope changes. The mere fact that totals of hours and expenses made at the end of a complex project do not reflect precisely the number of hours for each aspect of the tasks as projected in advance demonstrates nothing.
76The premise of this exercise amounts to suggesting the respondents had an onus of disproving the invoice as rendered. They do not.
77What emerges from the evidence is that (i) all required accounting of hours and expenses and scope changes were recorded and submitted to Boothworks as required; and (ii) the personnel remaining at Boothworks may or may not have understood enough of what they had before them to submit change orders to Spin Master in a form that could be audited by them and accepted in accordance with the contract. There is no evidence from which I can fairly conclude that any of the counter-application respondents failed to do anything they had a duty to do. All of the reporting and information that was meant to be reported to Boothworks was reported. Boothworks may have lacked the personnel necessary to understand what to do with it – that is not a problem that can be laid at the feet of the counter-application respondents. There is no evidence from which I can conclude that they deliberately declined to record and report matters appropriately. I find that they did not.
78I find that this claim is unproved and must also be dismissed.
(e) Do the actions of Mr. Quercia, Mr. Imhoff and Boothworks amount to oppression?
79The test for establishing oppression under s. 248 of the OBCA has been clarified and largely settled by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69. The oppression remedy is an equitable remedy designed to seek an outcome that is just and equitable by vesting the court with broad discretion to examine the business realities of the situation and not merely the narrow legalities: BCE at para. 58. In exercising that discretion, the court must first consider whether the evidence supports the existence of the reasonable expectations asserted by the claimant and then assess whether those reasonable expectations have been frustrated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest: BCE at para. 68.
80The first step in the analysis is therefore to establish what reasonable expectations of the parties have been established that are relevant to the questions at issue.
81I begin with an examination of the documentary framework in the context of past practice. The by-laws of the corporation in place from the foundation of Boothworks did not guarantee any one of the shareholders a position as officer or director and operated on the usual standard of majority rule. On the other hand, there was no shareholders agreement and the past practice of Boothworks over nine years prior to the July 2017 displays little knowledge of or compliance with the by-laws on the part of the founders. There were never any formal shareholder meetings or even director meetings as such. There is nothing at all unusual or blameworthy in this state of affairs – it is indeed the norm for a large number of small, closely-held corporations. However, this practice and the standard-form or boilerplate nature of the by-laws does not permit me to conclude that I may end my analysis of reasonable expectations there.
82The evidence firmly establishes that the relationship between the three principals prior to 2016 can best be analogized to that of equal partners. Each was paid the same, each contributed the same capital and, regardless of title, none exercised actual authority over another. There is no evidence of majority rule being applied instead of consensus prior to the final clash in 2017.
83From this unbroken pattern over almost nine years I conclude that each of the three principals (including Mr. Palumbo) had a reasonable expectation that, for so long as he remained an equal shareholder in the company they all co-founded, he would be equal in every respect. “Equal” in this context means equal as to remuneration and in corporate authority.
84Given that description of Mr. Palumbo’s reasonable expectations, I must now consider whether the actions of the respondents or any of them have acted in a way that has been oppressive of, unfairly prejudicial to or unfairly disregarded Mr. Palumbo’s interests as a director, officer or shareholder.
85The circumstances of a surprise shareholder meeting, the removal of Mr. Palumbo as an officer and director and the subsequent attempt to impose a unilateral demotion of Mr. Palumbo to subordinate “Account Manager” utterly defeated the reasonable expectations of Mr. Palumbo as I have described them. They are akin to squeezing out a minority shareholder, an action associated with unfair prejudice: BCE at para. 93.
86The main issue that I must decide is whether there are circumstances that mitigate that conclusion on these facts.
87It is clear that the relationship between the principals deteriorated and deteriorated badly over the eighteen months or so prior to Mr. Palumbo’s ouster. The respondents urge me to find that this was entirely the fault of Mr. Palumbo whom they accuse of plotting to imperil the company by plotting to take Spin Master away with him. They characterize their actions as being taken in self-defence.
88I do not agree with that characterization. Leaving aside the heated views and speculation advanced in the voluminous affidavits filed on this application, the objective facts speak more loudly than subjective opinions about them. Mr. Palumbo did nothing to prepare the ground for his departure despite his growing irritation and exasperation at what he perceived to be the self-defeating interference of his erstwhile partners in the Spin Master relationship. Mr. Palumbo may well have threatened to leave from time to time in the heat of the moment when he felt provoked. However, no such threats were ever acted upon. The last such threat made in late June 2017 was explicitly revoked the next day.
89Apart from the lack of direct evidence of Mr. Palumbo taking concrete steps to leave Boothworks and secure Spin Master for his own account, two objective facts point quite strongly to the conclusion that he never seriously intended to do either. Despite the high proportion of revenue and profit contributed by Mr. Palumbo’s client relationships (especially Spin Master), there is no evidence of any attempts on his part to seek to re-visit the principle of equality that had governed the partners’ remuneration from the beginning. As well, as late as October 2017 (i.e. just prior to his departure), Mr. Palumbo forwarded a Spin Master RFP and RFQ to the respondents. Not only did he do so, but he did so without advising Spin Master of his intended departure. While he did ultimately resolve to go into business (through his company) in competition with Boothworks, his actions beforehand reflect a high degree of reticence on his part to do so.
90The actions of the respondents served only to cause further escalation. No attempt was made to negotiate arrangements that might have de-escalated matters. Rather, the respondents’ actions appear when viewed from the outside to amount to nothing so much as an opportunistic seizing of the opportunity presented by the rash words written by Mr. Palumbo in a single email – words that he instantly regretted and sought to retract.
91I conclude that the actions of the respondents in removing Mr. Palumbo as a director and officer of the corporation and in purporting to demote him to a subordinate “Account Manager” were oppressive and unfairly disregarded Mr. Palumbo’s interests as a director, officer and shareholder of Boothworks. He is entitled to relief under s. 248(3) of the OBCA.
(f) If so, what remedy is appropriate?
92The applicant asks for his shares to be purchased by Mr. Imhoff and Mr. Quercia at fair market value without discount. In my view, this is the only remedy that will fairly repair the harm that has been done to Mr. Palumbo. He was treated in a high-handed and unfair manner. However, a purchase of Mr. Palumbo’s shares by Mr. Imhoff and Mr. Quercia must account for factors distinct to the facts of this case:
(a) The valuation will be determined as at July 11, 2017 being the day prior to Mr. Palumbo’s removal as director and officer of Boothworks; (b) The valuation will be without discount and should be therefore based upon one-third of the fair value of Boothworks as a whole as of that time; (c) The value will have regard to my findings in relation to Spin Master (that Spin Master was not an “asset” of Boothworks and that Mr. Palumbo was free to respond to any future RFPs or RFQs) and will assume the imminent departure of Mr. Palumbo; (d) Should the valuator determine the going concern value of Boothworks in those circumstances to be less than its liquidation value, the liquidation value shall be used instead; (e) The value so determined will include the net profits actually earned on the Spin Master LA Fall 2017 project (after direct expenses of the project and the remuneration paid to Mr. Palumbo prior to his departure while working on the project); (f) The value will exclude all costs in relation to this litigation and the cost of legal advice obtained by Boothworks in relation to Mr. Palumbo or his status during 2017.
93While I have found against the respondents in their counter-application, including the aspects thereof relating to the alleged under-billing of the LA Fall 2017 project, I do consider that I ought to take the circumstances of that project into account in the fixing of fair value of Mr. Palumbo’s shares.
94After the July 12, 2017 meeting, Boothworks and Mr. Palumbo needed each other.
95Mr. Palumbo was in no position to simply walk across the proverbial street to continue the project (a factor that corroborates his lack of intention to do so before he was pushed out). It was simply too late in the day to do that, at least not without impacting the quality of delivery of services. Mr. Palumbo’s interest in ensuring continuity on the LA Fall 2017 project was obvious. He clearly did not want a dispute with his partners to harm his clients. This was a matter of professional ethics on his part to be sure, but it was an ethical position supported by a healthy dose of self-interest. If Spin Master were left in the lurch, it would reflect badly upon him might affect his future prospects.
96Boothworks too needed Mr. Palumbo. The LA Fall 2017 project could not be managed without him and it was expected to be a profitable contract. Those profits would not materialize without him.
97The LA Fall 2017 project was a “win-win” situation only for as long as both sides could keep a lid on their dispute. Fortunately, they managed to avoid the fate of the scorpion and the frog crossing the river. The project was brought to a successful end without any fatal stings being delivered.
98My order fixing the fair value of Mr. Palumbo’s shares will attribute to Mr. Palumbo one-third of the actual profit earned on that project after accounting both for direct costs incurred by Boothworks and the remuneration paid to Mr. Palumbo prior to his departure (but after the valuation day). In my view, this is a fair if imperfect outcome. It would be impossible to determine with certainty what profit might have been earned on the project had Mr. Palumbo pursued ever nickel of possible billings with all the diligence he might have employed in prior years. On the other hand, the realization of any profit was only made possible by the enlightened self-interest shown by both sides in getting the project done after their falling-out.
99I am aware that the parties have already had a valuation performed by an independent valuator selected by both. That valuation does not perfectly correspond to the parameters I have set here. It is my hope that the parties will find in these reasons sufficient guidance to work out a fair value for Mr. Palumbo’s shares based upon the valuation that has already been performed. If that hope proves too optimistic, a valuation will have to be performed that corresponds to the guidelines set forth above. However, there is no need to re-invent the wheel and a new valuation ought to be able to build upon the work already done. This case has already consumed too many scarce resources of all parties.
Disposition
100The application has been successful. The applicant is entitled to his costs of the application payable by the respondents on a joint and several basis.
101Mr. Palumbo shall have an order declaring that Mr. Quercia and Mr. Imhoff have acted in a manner that oppressed, unfairly prejudiced and unfairly disregarded the interests of Mr. Palumbo as shareholder, director and officer of Boothworks. They shall be ordered to purchase Mr. Palumbo’s shares at the fair market value determined in accordance with the guidelines discussed above.
102I shall receive written submissions from the parties as to the amount of such fair market value or as to whether further expert evidence is required to determine such fair market value. The applicants’ submissions shall be made by September 30, 2018 and the respondents’ submissions by October 31, 2018, in each case limited to 20 pages exclusive of cases (which need not be attached unless not available electronically).
103I am also dismissing the counter-application with costs payable to the respondents to the counter-application payable by the counter-applicants also on a joint and several basis.
104Submissions as to the amount and scale of costs shall be received on the same timetable as above (parties receiving costs by September 30, 2018 and parties paying costs by October 31). Submissions to be limited to five pages exclusive of any outline of costs. Cases need not be attached unless not available electronically.
S.F. Dunphy J.
Date: August 23, 2018