DATE: 20040213
DOCKET: C40573
COURT OF APPEAL FOR ONTARIO
ROSENBERG, GOUDGE AND CRONK JJ.A.
B E T W E E N:
HRAIR SHAHINIAN
Alan J. Lenczner, Q.C. and Rebecca Jones for the appellant
Applicant (Respondent)
- and -
PRECINDA INC. and PRECINDA LTD.
J. D. Timothy Pinos and Arthur Hamilton for the respondent
Respondents (Appellant)
Heard: January 7, 2004
On appeal from the judgment of Regional Senior Justice Robert A. Blair of the Superior Court of Justice dated August 6, 2003.
GOUDGE J.A. :
[1] This is an appeal by Precinda Inc. from the order of Blair J. declaring that it is in breach of the redemption obligation in its Articles of Amalgamation and that the respondent is entitled to immediate redemption of his 1,600,000 Class X preference shares in the appellant for the sum of $1,600,000.
[2] The respondent acquired his preference shares pursuant to a restructuring of the business affairs of the appellant company. That restructuring was effected through a series of agreements made on January 31, 2002. One of these, the Amalgamation Agreement, established that the redemption rights of Class X preference shareholders were unconditional, requiring only thirty days notice to the appellant. However, in another of these agreements, the Shareholders’ Agreement, the respondent agreed that the appellant was not required to redeem Class X preference shares except in three specified circumstances. The second of these exceptions was the failure of the appellant to remedy a default in the payment of dividends on Class X preference shares. The meaning of that exception lies at the heart of this appeal.
[3] Commencing with the dividend due on September 30, 2002, the appellant refused to pay quarterly dividends to the respondent on his Class X preference shares, although it had the funds to do so, because it was concerned that the respondent was acting in breach of his confidentiality and non-compete obligations to the appellant company.
[4] Blair J. found that there was no evidence of any such breaches and that these non- payments constituted a default in payment as contemplated by the second exception to the restriction on the respondent’s right of redemption. He therefore declared that the respondent was entitled to immediate redemption of all his Class X preference shares.
[5] In this court, the appellant acknowledges that if the second exception applies the respondent has the right to redeem all his Class X preference shares. However, the appellant argues that the exception must be read in the context of the two other exceptions and the other agreements which make up the restructuring. It argues that the respondent’s interpretation of the exception results in a commercial absurdity. The appellant says that the exception is meant to be confined to those circumstances where the appellant, although not insolvent, is sufficiently lacking in funds that it reasonably believes it would not be able to pay its liabilities as they came due if the dividends were paid. The appellant says that since these circumstances do not exist here, Blair J. erred in according the respondent the right to redeem.
[6] For the reasons that follow, we disagree with these arguments. Rather, we agree with Blair J. that the exception properly applies and we would therefore dismiss the appeal.
FACTS
[7] The appellant, Precinda Inc., owns 100 percent of the shares of Precinda Ltd., which is in the business of machining component parts for aircraft engines, power generators, combustion turbines and plastic injection moulding machines. Its key customers include Siemens Westinghouse, Pratt & Whitney, and Rolls Royce.
[8] The business was purchased by John Kololian in 1984. In 1985 he brought his sister, Nairy Shahinian, and her husband, Eddy Shahinian, into the business and in 1987 Hrair Shahinian, Eddy’s brother, the respondent, joined it as well. Each of them acquired shares in the appellant’s predecessor, which were converted into common shares and Class X Preference shares in the appellant company by the Amalgamation Agreement.
[9] By 2001 strains had developed in the working relationships and the restructuring of January 31, 2002 was effected. Kololian would purchase the common shares of the appellant owned by the other three and thereby take sole control of the business. He also agreed to purchase all of the respondent’s Class X preference shares over time in accordance with a schedule. The number of preference shares to be purchased in any given year depended on the financial performance of the business. Quarterly dividends were to be paid on the Class X preference shares at the annual rate of 5.714 percent of the price at which these shares could be redeemed (which was fixed at $1.00 per share). Finally, the respondent agreed to stay on as president of the operating company, Precinda Ltd., until April 30, 2002.
[10] On June 12, 2002 the respondent told Kololian that he would be meeting with a former contact at Siemens Westinghouse to discuss investment and new business opportunities that did not relate to and were not competitive with the appellant. Kololian was upset at this and wanted to know the details of what the respondent would be discussing. The respondent says that he was forthright and invited Kololian to join him but the latter refused.
[11] Then in September Kololian learned that the respondent had also met with former contacts who had brought in Pratt & Whitney and Rolls Royce. He demanded to know what business had been discussed. The respondent again assured him that he was not pursuing any competitive initiatives but refused to disclose the nature of his discussions.
[12] While there was no evidence that the respondent was in breach of his confidentiality or non-compete obligations to the appellant, starting in September 2002 Kololian stopped the appellant’s quarterly dividend payments to the respondent on his Class X preference shares, despite the fact that those dividends were properly declared by the appellant’s board of directors. The company was financially able to pay them and they were in fact paid to the respondent’s brother and his wife, who were also Class X preference shareholders.
[13] As a result, the respondent commenced this application, seeking inter alia a declaration of immediate entitlement to payment of the overdue quarterly dividends and a declaration of entitlement to immediate redemption of all his Class X preference shares.
[14] While Blair J. granted both declarations, only the second is being appealed. The appellant acknowledges that since the quarterly dividends were properly declared and it was financially able to pay them, the dividends should have been paid to the respondent. However, the appellant says that this is all that the respondent is entitled to and that no right of redemption was triggered by the failure to pay.
ANALYSIS
[15] A number of provisions of the agreements that effected the restructuring of January 31, 2002 are relevant to this issue.
[16] First, the obligation to pay quarterly dividends to Class X preference shareholders is provided for in the Articles of Amalgamation, whose terms are found in Schedule 1 to the Amalgamation Agreement. This obligation reads as follows:
- Dividends
Subject to the [Ontario Business Corporations] Act, the holders of the Class X Preference Shares shall in each financial year of the Corporation be entitled to cumulative dividends at the annual rate of 5.714% of the redemption amount per share [$1.00], payable on the Dividend Payment Dates in each year [March 31, June 30, September 30, and December 31] , commencing on March 31, 2002. The holders of the Class X Preference Shares shall not be entitled to any dividends other than as provided for herein.
[17] Second, Schedule 1 also provides for the unconditional right of redemption of Class X preference shares on thirty days notice at the option of the shareholder.
[18] Third, the respondent’s right to have his Class X preference shares purchased by Kololian is found in his Preferred Share Purchase Agreement with Kololian. Both his brother and his sister-in-law have similar agreements covering their Class X preference shares. The purchase schedule depends on the appellant meeting certain financial targets. The Agreement makes clear that Kololian will fund his purchases by borrowings from the appellant and that if these borrowings put the appellant in breach of any of its bank borrowing arrangements, Kololian’s purchase obligations are to that extent reduced.
[19] The key provision for this appeal is Article 3.1 in the Shareholders Agreement of January 31, 2002 between inter alia the appellant, the respondent and Kololian. It reads as follows:
3.1 Restriction on Redemption at the Option of the Holder of Preference Shares.
The Parties agree that Precision [the appellant] shall not be required to redeem at the option of any Shareholder any issued and outstanding Class X Preference Shares or Class Z Preference Shares except in the circumstances of (i) a Bankruptcy Event in Vahan [Kololian], Precision or KK [Precinda Ltd.], (ii) the failure of Precision to remedy a default in payment of dividends on the Class X Preference Shares as prescribed in the Articles, within 60 days of such default, or (iii) the failure by Vahan to complete a particular purchase of Class X Preference Shares as required by, and in accordance with, the Preferred Share Purchase Agreement within 60 days of such particular purchase obligation having arisen (it being agreed that any redemption rights arising under (A) the foregoing clauses 3.1(i), and (iii) shall apply only to that number of Class X Preference Shares in respect of which Vahan’s purchase obligations under the Preferred Share Purchase Agreement have not been fulfilled, and (B) the foregoing clause 3.1(ii) shall apply to all of the Class X Preference Shares in respect of which Vahan’s purchase obligations under the Preferred Share Purchase Agreement have not been fulfilled) [emphasis added].
[20] The appellant’s argument before us is somewhat different from that made before Blair J. In this court, the appellant argues that, read in context, the second exception in Article 3.1 applies only where the failure to pay the dividend is because the company, although not insolvent, lacks the funds to do so. The appellant says that it therefore does not apply in the circumstances of this case. It says that the exception is designed to protect the Class X preference shareholder against the kind of circumstance addressed by s. 38(3) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”). That section reads as follows:
(3) When dividend not to be declared – The directors shall not declare and the corporation shall not pay a dividend if there are reasonable grounds for believing that,
(a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or
(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of,
(i) its liabilities, and
(ii) its stated capital of all classes.
[21] The appellant supports this reading by looking to the first exception in Article 3.1, which is triggered by a bankruptcy event by Kololian, the appellant or Precinda Ltd., and then arguing that the second exception is of similar design, protecting against the situation where the appellant is running out of funds.
[22] The appellant argues that the second exception cannot be viewed as analogous to a mortgage provision that renders the entire debt due and payable if an interest payment is missed. It says that the quarterly dividend on Class X preference shares cannot be viewed as interest on the outstanding purchase price of those shares because these dividends are specified to be cumulative dividends, and there is therefore no obligation to declare a dividend each quarter. Hence there is no obligation to pay such a dividend each quarter. The appellant acknowledges that if not paid, the rights of Class X preference shareholders to these dividends would accumulate and would ultimately be owing at least on windup.
[23] Finally, the appellant says that unless the second exception is confined as it proposes, the result is a commercial absurdity. By missing a single dividend payment the appellant becomes obliged to redeem all Class X preference shares regardless of its financial ability to do so. The appellant says that no rational business person in Kololian’s position would have agreed to such a provision.
[24] There is no doubt that this appeal turns on the proper interpretation of the second exception in Article 3.1 of the Shareholders’ Agreement. While it is true that the general context of this provision can provide useful assistance in this task, it must begin with the words of the exception and their ordinary meaning. See Kentucky Fried Chicken Canada, a Division of Pepsi-Cola Canada Ltd. v. Scott’s Food Services Inc. (1998), 1998 4427 (ON CA), 114 O.A.C. 357 at para. 25 (C.A.).
[25] By a plain reading, the exception applies to the failure of the appellant to remedy a default in payment of dividends on the Class X preference shares as prescribed in the Articles of Amalgamation within sixty days of such default. There is no suggestion that the exception is confined to a default due to a particular cause such as the corporation’s lack of funds. In its ordinary meaning the exception is triggered by any default, whatever its cause, that remains unremedied for sixty days.
[26] Indeed, the language of the exception does not accommodate being read down as the appellant argues. The appellant’s obligation to pay dividends on Class X preference shares is expressly made subject to the OBCA by the Articles of Amalgamation. Section 38(3) of the Act prevents the payment of a dividend if there are reasonable grounds to believe that its payment would render the corporation unable to pay its liabilities as they come due. The appellant seeks to confine the exception to a default in payment because of the corporation’s lack of funds as described in this section. However, this would mean reading down the circumstances of default in the payment of a dividend contemplated by the second exception in Article 3.1 to extend only to those circumstances in which the legislation prohibits the corporation from paying a dividend. One is not ordinarily described as being in default for failing to do something prohibited by legislation. The parties cannot have intended to limit the exception in this way.
[27] Thus, the words used to define the second exception in Article 3.1 cannot be read down as the appellant argues. In their plain and ordinary meaning they encompass all defaults, regardless of their cause, including the default in this case.
[28] Nor do the surrounding exceptions suggest otherwise. It is correct to say, as the appellant argues, that the first exception in Article 3.1 is triggered by a “bankruptcy event” by Kololian, the appellant or Precinda Ltd. and is not aimed at their “bloody minded” conduct, to use the appellant’s term. However, the third exception clearly encompasses a “bloody minded” failure by Kololian to complete a particular purchase of Class X preference shares from the respondent as called for by the Preferred Share Purchase Agreement. The placement of the second exception between these two does not lead to any inference that a “bloody minded” default in paying a dividend falls outside the exception.
[29] Moreover, whether or not the appellant could refuse to declare a “cumulative dividend” in a particular quarter (which we need not decide here), when it does declare a dividend that payment can reasonably be seen as the payment of interest on the outstanding purchase price for the respondent’s preference shares. That is particularly so because the amount of the dividend is fixed at the annual rate of 5.714 percent of a fixed redemption price. Viewed in this way, it is not unreasonable that the failure to pay a declared dividend should render the entire debt due and owing.
[30] Finally, while this may seem a draconian remedy from the vantage point of the appellant and Kololian, it is commercially reasonable from the respondent’s point of view, particularly given that this case was about a “bloody minded” refusal to pay based on a suspicion for which there was no evidence, despite the fact that the appellant had the funds to pay.
[31] In summary, we agree with Blair J. that the second exception in Article 3.1 of the Shareholders’ Agreement is triggered in the circumstances of this case, giving the respondent the immediate right to redeem all his Class X preference shares.
[32] The appeal is dismissed, with costs to the respondent fixed at $20,000, inclusive of disbursements and G.S.T.
Released: February 13, 2004 “MR”
“S.T. Goudge J.A.”
“I agree Marc Rosenberg J.A.”
“I agree E.A. Cronk J.A.”