Montreal Trust Co. of Canada v. Call-Net Enterprises Inc. [2002 49409 (ON SC), 57 O.R. (3d) 775]
70 O.R. (3d) 90
[2004] O.J. No. 631
Docket Nos. C37833, C37844 and C37893
Court of Appeal for Ontario
Rosenberg, MacPherson JJ.A., Lane J. (ad hoc)
February 20, 2004
Corporations -- Shareholders -- Proxies -- Change of Control Agreement -- Executives entitled to payments if control of corporation changed -- Proxyholder being a mere agent with transitory authority -- Proxy not conferring any right to control or direct the voting power of the corporation -- Accumulation of proxies not effecting change of control under Change of Control Agreement.
NOTE: The catchlines above relate to a decision of the Superior Court of Justice. An appeal of this judgment to the Court of Appeal for Ontario (Rosenberg, MacPherson JJ.A. and Lane J. (ad hoc)) was dismissed on February 20, 2004. The court's endorsement was as follows:
Chris G. Paliare and Richard Stephenson, for Vincent Salvati. David Harris, for Andrew Krupski, Ken Wilson, Irene Panageas and Brock Robertson. Andrea L. Burke, for Montreal Trust Company of Canada. Michael E. Royce and Nina Bombier, for Call-Net Enterprises Inc.
[1] BY THE COURT: -- The appellants are a group of former senior executives at the respondent Call-Net Enterprises Inc. ("Call-Net"). They appeal the judgment of Justice Joan Lax in which she determined that in the autumn of 1999 there had been [page91 ]no "change in control" at Call-Net. Accordingly, she held, various compensation provisions in the employment contracts of senior executives were not triggered.
[2] In 1999, Call-Net was experiencing serious financial difficulties. Shareholders were upset and critical of the performance of senior management, especially the president, Juri Koor, and the chief financial officer, the appellant Vincent Salvati.
[3] In August 1999, Crescendo Partners L.P. ("Crescendo") informed Call-Net that it had obtained sufficient share ownership (13.3 per cent) to requisition a special meeting of Call-Net which it scheduled for October 14, 1999. The stated purpose of the meeting was a Crescendo resolution to remove and replace six of the nine members of the Call-Net Board of Directors.
[4] In the face of Crescendo's challenge, Call-Net supplemented the existing employment agreements with its senior executives with new Change of Control Agreements. These new agreements provided generous employment benefits to senior executives in a "change in control" scenario. The definition of "change in control" in s. 1.1(i) of the Agreements is a long one. The part of the definition the appellants rely on in their case deems a change in control to have occurred if any person acquired "the right to control or direct . . . 35 per cent or more of the combined voting power of the Corporation".
[5] In tandem with the new change of control agreements, Call-Net entered into a trust agreement with Montreal Trust. Call-Net deposited CDN$27,569,062 and US$2,402,600 to be used to pay out benefits to its executives if the company experienced a "change in control" and the executives elected to invoke the provisions in their new agreements.
[6] In the weeks leading up to the special meeting, Crescendo solicited the proxies of shareholders. On the eve of the meeting, it appeared to Call-Net's management that Crescendo had enough votes to carry its proposed resolution. The risk for Call-Net was that it might be taken over by a corporate raider whose goal would be to sell off its assets. However, there was also a risk for Crescendo if it proceeded with the special meeting. The risk related to change of control provisions in Call-Net's bond indenture agreements. Under those agreements, the passing of the Crescendo resolution would have triggered a change in control pursuant to which Call-Net would have been compelled to repurchase the bonds for $2.2 billion. This, too, would have destroyed the existing company. Crescendo needed the bondholders to waive these agreements; this had not happened before October 14. [page92 ]
[7] October 14, 1999 dawned and, perhaps not surprisingly, negotiations took place, a settlement was reached, and the special meeting never took place. One of the terms of the agreement was that Crescendo was permitted to nominate three directors on a slightly expanded ten-member board.
[8] After the dust settled, ten senior managers invoked the Change of Control Agreement. The five appellants sought payouts from the trust fund as follows: Vincent Salvati -- $1,366,328.76; Andrew Krupski -- $1,275,366; Ken Wilson -- $1,564,600; Brock Robertson -- $706,582; and Irene Panageas -- $243,576. Call-Net refused to pay these amounts because, in its view, there had been no "change in control" at the company before or on October 14.
[9] A trial took place before Lax J. in December 2001. In a comprehensive judgment released on January 28, 2002, she held that the former executives were not entitled to receive payments from the trust fund. She concluded that Crescendo's accumulation of proxies relating to more than 35 per cent of Call-Net's shares did not amount to a "change in control" within the meaning of the Change of Control Agreement and the trust agreement. Near the end of her reasons, the trial judge concluded [at pp. 785-86 O.R.]:
I agree with Call-Net that the language of s. 1.1(i) was intended to deal with an actual takeover bid or other transaction, under which control is actually assumed, and not the mere accumulation of proxies. This is the only interpretation that gives effect to all of the provisions of the agreement, is consistent with the meaning of control or direct in corporate law, reflects accurately the nature of the power conferred by a proxy and addresses the commercial purpose of the Change of Control Agreement.
I conclude that no change in control as defined in s. 1.01 of the Trust Agreement and s. 1.1(i) of the Change of Control Agreement occurred.
(Emphasis in original)
[10] The appellants (five of the ten original claimants) appeal the trial judge's decision. They contend that the trial judge misconstrued the general purpose of change of control agreements and misinterpreted the wording of the specific Call- Net Change of Control Agreement. We disagree.
[11] The trial judge described the general purpose of change of control agreements in this fashion [at p. 780 O.R.]:
A Change of Control Agreement is thus a protective mechanism for both the corporation and the executive and has a legitimate business purpose. It is intended to retain executives and ensure their loyalty to the corporation in a time of uncertainty. It offers financial security to an executive who is either terminated or resigns after a change in control. As it has the potential to [page93 ]cause substantial financial exposure for a corporation, it must be entered into with the best interests of the corporation in mind. Otherwise, it has no legitimate corporate or business purpose.
(Emphasis added)
[12] In our view, this is an accurate description. A change of control agreement is not just for the benefit of the senior executives it covers. The benefit to the executives is directly linked to the interests of the company. As the appellant Salvati recognized in his factum: "The purpose is fulfilled if the key executives remain at their posts, loyally serving the best interests of the corporation, until the outcome of the siege is determined, one way or the other."
[13] We agree with the respondent that the purpose of change of control agreements is completely undercut if the appellants' interpretation of the Call-Net agreement is adopted. The appellants' interpretation is that the mere acquisition of proxies totalling 35 per cent of the voting shares of the company triggers a change of control in the company within the meaning of the agreements. The result would be that senior executives would have an incentive to leave the company at a moment of turmoil and fragility in the company and reap huge financial rewards for doing so. This is the opposite of the appellants' own stated purpose of such agreements, namely retaining "key executives . . . at their posts, loyally serving the best interests of the corporation, until the outcome of the siege is determined, one way or the other".
[14] In the end, we agree with Mr. Royce's somewhat vivid description of the consequences of the appellants' interpretation of the Call-Net Change of Control Agreement: "If the appellants' interpretation is correct, then at a moment of conflict and uncertainty in the company, senior management would have the right to open the till, take out the money and head for the hills. The company would then be forced to tell its shareholders and the public, in mid-battle, 'our management is gone and we are $27 million poorer'." This can hardly be seen as an interpretation that recognizes that the purpose of change of control agreements is, as the trial judge stated and as the appellants recognized, the protection of senior executives, but in the context of retaining their loyalty at a time of turmoil for the company.
[15] In summary, we agree with the trial judge that the mere accumulation of proxies is not a sufficient foundation to trigger a change in control within the wording of s. 1.1(i) of the Change of Control Agreement. We are satisfied that bearing in mind the entire definition of change in control, the evident purpose of the agreements and the legal requirements imposed on a proxy holder, [page94 ]Crescendo did not acquire the right to "control or direct" 35 per cent or more of the combined voting power of the corporation.
[16] Finally, we note that the appellants submit that the trial judge erred in failing to answer other questions submitted to her about the interpretation of the agreement. We disagree. Those other questions flowed from a determination that s. 1.1(i) of the agreement had been triggered. Since the trial judge made the opposite determination, the other questions were moot and she was entitled to decline to answer them.
[17] The trial judge's reasons are comprehensive, sound and, in a word, impeccable. The appeal is dismissed with costs fixed at $34,000.