DATE: 20050223
DOCKET: C43047, C43049 and C43051
COURT OF APPEAL FOR ONTARIO
FELDMAN, SHARPE and ARMSTRONG JJ.A.
B E T W E E N :
STAMOS KATOKAKIS, 1066821 ONTARIO INC. and 1427936 ONTARIO INC.
Peter Howard and Timothy Banks, for the appellants
Applicants
Gordon McKee and Robin Linley for BNY Capital Corporation
(Appellants in Appeal)
Norman J. Emblem and Michael D. Schafler for Linedata Services S.A.
- and -
Paul Steep and Eric Block for Financial Models Co.
WILLIAM R. WATERS LIMITED, 1427937 ONTARIO INC. and BNY CAPITAL CORPORATION
Jeffrey S. Leon for the Special Committee of the Board of Directors of FMC
William J. Burden and Linda I. Knol for 1427937 Ontario Inc. and William R. Waters Limited
Respondents
(Respondents in Appeal)
Heard: February 22, 2005
On appeal from the judgment of Justice John D. Ground of the Superior Court of Justice dated February 8, 2005.
SHARPE J.A.:
[1] This is an expedited appeal from the judgment of Ground J., sitting as a Commercial List judge, interpreting a shareholders’ agreement and related documents. Stamos Katotakis (“Katotakis”), William Waters (“Waters”), together with their corporate entities, and BNY Capital Corporation (“BNY”) are parties to a shareholders’ agreement that contains rights of first refusal and rights of first offer with respect to shares in Financial Models Company Inc. (“FMC”). We are deciding the appeal on an urgent basis as a crucial offer will expire in a matter of a few days. These reasons, accordingly, will necessarily be brief.
[2] FMC became a publicly traded company in 1998, but the combined holdings of Katotakis, Waters, and BNY, the original shareholders, represent over 80 per cent of the outstanding shares. Waters and BNY delivered selling notices pursuant to the shareholders’ agreement offering to sell shares to Katotakis at a price of $12.20. By the terms of the selling notices, Waters and BNY offered to sell Katotakis shares on “terms and conditions … substantially in accordance with the terms and conditions set forth” in a draft acquisition agreement between FMC and Linedata Services S.A. (“Linedata”) and in a draft lock-up agreement between Waters, BNY, and Linedata “to the extent applicable” to Katotakis.
[3] Both the acquisition agreement and the lock-up agreement contain “superior proposal” conditions that permit the sellers to sell their shares to another buyer at a better price, provided that the initial buyer is given notice of the superior proposal and the opportunity to match or better it. Katotakis delivered acceptances to the selling notices, including all the terms and conditions contained in them. He also made a takeover bid for the rest of the shares, as required by the shareholders’ agreement and securities laws. Linedata subsequently delivered a further proposal to purchase the shares at $14.50. This new offer was set to expire on February 11, 2005. Waters and BNY gave Katotakis notice of Linedata’s superior proposal, but Katotakis made no further offer.
[4] The central issue on this appeal is whether the superior proposal conditions apply to Katotakis’ acceptance of the offer. Katotakis says that it does not and that he is entitled to specific performance of his acceptance of Waters’ and BNY’s offer to sell the shares at $12.20. Waters and BNY say that the superior proposal conditions apply to Katotakis and that, as he has failed to match Linedata’s $14.50 offer, they are free to tender their shares to that offer.
[5] Katotakis moves to introduce fresh evidence on appeal that a bid from another purchaser at $17.50 is in the offing. While this evidence has little relevance to the precise issues we must decide, I agree with the position taken by all parties except Linedata that it may be admitted to provide us with a full picture of the background and commercial reality of the situation.
[6] The central findings of the application judge were: (1) that Katotakis’ acceptance of the offer was void because it did not comply with the Ontario Securities Act, R.S.O. 1990, c. S.5, s. 96, and (2) that the selling notices delivered to Katotakis incorporated the superior proposal conditions by way of reference, and so by accepting the offer, Katotakis was bound by those conditions.
[7] On February 11, 2005 – the day Linedata’s $14.50 offer was set to expire – Feldman J.A. stayed the order of the application judge and enjoined Waters and BNY from tendering their shares to the Linedata offer. Linedata has since extended until February 25, 2005, pending the outcome of this appeal.
[8] It is common ground that to succeed on this appeal, Katotakis must convince us to reverse both of the application judge’s central findings. I have not been so persuaded, and I conclude that the appeal should be dismissed for the following reasons.
[9] While the relevant terms of the shareholders’ agreement, the selling notices, and the draft acquisition and lock-up agreements are certainly not free from ambiguity, in the circumstances presented, it would not be appropriate to interfere with the findings of the application judge.
[10] On the wording of the documents, it was certainly open to the application judge to find that the superior proposal provisions were incorporated into the selling notices. Not all the terms of the draft acquisition and lock-up agreements were applicable to Katotakis. However, the selling notices expressly state that the terms upon which the offer was being made were “substantially in accordance” with the terms and conditions of the draft deal with Linedata “to the extent applicable” to Katotakis (emphasis added). Katotakis accepted the offer “subject to the terms and conditions set forth in the Selling Notice” but otherwise unconditionally and without any reservation or comment regarding the superior proposal conditions.
[11] The language of the offer and acceptance expressly contemplates that not all terms of the incorporated agreements will apply to Katotakis in the same way that they apply to Linedata. The terms of the selling notices are, in my view, clearly capable of incorporating the Linedata superior proposal conditions as a term of the offer to Katotakis and to apply that condition, mutatis mutandis, to Katotakis.
[12] To the extent there is any ambiguity or uncertainty, the selling notices and the terms of the shareholders’ agreement should be interpreted in light of the commercial practicalities of the situation confronting the parties and in a manner that will produce a commercially fair and sensible result: Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co. (1979), 1979 10 (SCC), 112 D.L.R. (3d) 49 at 58-59 (S.C.C.).
[13] It was known to all concerned that FMC was a takeover target and that Linedata was interested in acquiring a significant interest. As the application judge put it “at the time the selling notices were delivered and accepted, all parties were aware that FMC was in play … and they must have been aware that there was the potentiality of a competing bid to the bid being made by [Katotakis]”. Shareholders in the position of Waters and BNY who wanted to sell their shares were entitled, subject to any contractual provisions to the contrary, to take steps to maximize the value of their own holdings and of the holdings of the minority shareholders. The superior proposal provision in the draft deal with Linedata was a central and obvious element of a strategy to maximize the price of the FMC shares. The application judge appropriately considered Katotakis’s unconditional acceptance of the selling notices offer “subject to the terms and conditions set forth in the Selling Notice” in that light.
[14] The selling notices to Katotakis, together with the draft Linedata deal, was Waters’s and BNY’s opening gambit in a process that they, and presumably the minority shareholders, expected would take the price of the FMC shares higher. To accept Katotakis’s argument would be to find that he had the right to cut off the process and reap all of the benefits from the subsequent bidding for himself. If the fresh evidence is reliable, Katotakis could purchase the Waters and BNY shares for $12.20 and then tender them to the new bid for $17.50, realizing a premium of $5.30 that would be denied to Waters and BNY.
[15] I do not accept Katotakis’ submission that the superior proposal conditions were inconsistent with the rights of first offer or first refusal conferred by the shareholder’s agreement. The shareholders’ agreement explicitly permits the seller to include “any other terms and conditions not contrary to the provisions of Article 4”. It is not suggested that the superior proposal conditions are not contrary to Article 4. I see no reason not to give full effect to that language so as to allow the sellers to provide for a process designed to maximize the value of their shares.
[16] That process was, in my view, entirely consistent with the rights conferred on Katotakis by the rights of first offer and first refusal in the shareholders’ agreement. Consistent with Katotakis’ rights of first offer and first refusal, Waters and BNY could not sell their shares without first giving him the right to match the terms of any proposed sale. The terms of the superior proposal condition maintained Katotakis’ right to have the final word. GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 1996 8286 (ON SC), 27 B.L.R. (2d) 251 (Ont. Gen. Div.), a case relied on by counsel for Katotakis, involved a scheme to deprive a party of rights of first refusal and is distinguishable.
[17] I do not accept the submission that the terms of the shareholders’ agreement gave Katotakis the right to preempt or preclude the superior proposal process. To preclude Waters and BNY from incorporating the superior proposal conditions would, in my view, amount to implying a term or restriction on their right to maximize value of their shares that the shareholders’ agreement does not contain. On the contrary, there is no provision in the shareholders’ agreement that precludes the inclusion of a superior proposal condition.
[18] To interpret the rights of first offer and first refusal in the manner suggested by Katotakis would allow him to acquire the shares of Waters and BNY at the price of the opening bid in a takeover and leave him free to collect for himself the reward of the ensuing bidding for the shares of FMC. In my view, the terms of the shareholders’ agreement do not entitle Katotakis to that result. It does not follow from the terms of the relevant agreements and documents and would be contrary to commercial reality and good sense. The application judge was entitled to reject it, and I see no ground for appellate intervention.
[19] As the conclusion I have reached with respect to the interpretation of the relevant documents is sufficient to dispose of the appeal, I do not find it necessary to consider the arguments concerning s. 96 of the Securities Act and I express no view on that aspect of the case.
[20] Accordingly, I would dismiss the appeal. The parties agreed in oral argument that costs would follow the event on a partial indemnity scale. If the parties are unable to agree as to the quantum, we will receive brief written submissions within seven days of the release of these reasons.
“Robert J. Sharpe J.A.”
“I agree K. Feldman J.A”
“I agree R.P. Armstrong J.A.”