Brookdale International Partners, L.P. v. Sentry Select Capital Corp., 2008 ONCA 442

CITATION: Brookdale International Partners, L.P. v. Sentry Select Capital Corp., 2008 ONCA 442

DATE: 20080605

DOCKET: C47392

COURT OF APPEAL FOR ONTARIO

ROSENBERG, BORINS and EPSTEIN JJ.A.

BETWEEN:

BROOKDALE INTERNATIONAL PARTNERS, L.P. and BROOKDALE GLOBAL OPPORTUNITY FUND Applicants (Respondents)

And

SENTRY SELECT CAPITAL CORP. Respondent (Appellant)

Counsel: James D. G. Douglas and Angela Vivolo for the appellant Douglas F. Harrison and Daniel S. Murdoch for the respondents

Heard: April 15 and 16, 2008

On appeal from the judgment of Justice James M. Spence of the Superior Court of Justice dated June 15, 2007.

ROSENBERG J.A.:

[1] This appeal from a judgment of Spence J. concerns the interpretation of a declaration of trust of an income trust. The declaration of trust sets out rules for when unit holders may redeem their units and for valuing those units. The issue in this appeal is which of two rules for determining value contained in the declaration of trust applied.

[2] The appellant is the manager of the income trust. The respondents were former unit holders who redeemed their units. They claimed that the appellant had erred in its calculation of the amount necessary to redeem the units. The application judge agreed with the respondents’ interpretation of the relevant terms of the declaration of trust.

[3] I agree with the application judge and accordingly would dismiss the appeal.

THE FACTS

[4] The appellant, Sentry Select Capital Corp., sponsors and manages investment funds in Canada. One of these funds is the Sentry Select Commodities Income Trust (the “Trust”) which is an investment fund listed on the Toronto Stock Exchange (“TSE”). The appellant is both trustee and manager of the Trust.

[5] The Trust was created to provide the purchasers of units with an investment opportunity to realize both capital appreciation and distributions through direct investment in commodities-related income fund issuers and indirect exposure to commodities that make up the Rogers International Commodity Index (“RICI”). The indirect exposure to commodities that make up the RICI was obtained by purchasing common shares of Canadian public companies and entering into a forward agreement with a bank that the Trust would sell the common share portfolio for a price that was indirectly linked to the RICI. Once the Trust was fully invested it owned: (a) a portfolio of income fund securities; (b) the common share portfolio and the Trust’s rights under the associated forward agreement; and (c) cash.

[6] Among the powers conferred upon the Trustee under the Declaration of Trust is the right to determine all questions and matters of doubt which may arise in the course of the administration of the Trust or distribution of the trust property.

[7] The respondents are foreign-based hedge funds managed by Weiss Capital, LLC, a United States based investment firm. The respondents began purchasing units of the Trust on the TSE in January 2006 and continued to make market purchases of units of the Trust until August 2006. By that time the respondents held over 1.7 million units, over ten percent of the total outstanding units.

[8] Between August 1 and 17, 2006, which was the redemption period provided for in the Declaration of Trust, almost 5 million units, including all of the units held by the respondents, were tendered for redemption. These units represented 27.57 percent of the outstanding units. As will be explained later, a key date is the Valuation Date, which in 2006 was August 31. On that date, the redemption of the units was complete and the respondents and the other redeeming unit holders no longer had any voting rights or rights to distributions.

[9] Because of its understanding of the Declaration of Trust, the appellant did not begin to dispose of the necessary securities to be able to redeem the units until after August 31. By September 22, 2006, the date by which the unit holders were to be paid for their redeemed units, the appellant had sold at least 27.57 percent of most of the various securities that were held in the portfolio as of the Valuation Date. However, the appellant did not dispose of 27.57 percent of each of the securities. For some of the securities, the appellant disposed of a small number of shares to establish a price and then used that price to determine the value of a pro rata share. In the result, the appellant realized $9.815 per unit which was paid out to the former holders who had redeemed their units.[^1]

[10] As will be explained below, there are two methods of calculating the amount to be paid out to redeeming unit holders, which is referred to in the Declaration of Trust as the “Net Realized Proceeds per Unit”. The respondents claimed that the appellant used the wrong method and that they were entitled to approximately fifty cents more per unit. Accordingly, they brought an application for a declaration.

THE PROVISIONS OF THE DECLARATION OF TRUST

[11] The Declaration of Trust is a lengthy document, but the issue in this appeal principally revolves around certain clauses in Article 5, which is entitled “Redemption of Units”.

[12] Clause 5.1 gives unit holders the right to surrender their units for redemption on the tenth business day before the last business day in August. As indicated, in the year in question on this appeal that day was August 17. Clause 5.1 provides that these units “will be redeemed on the Valuation Date”, which was August 31, 2006.

[13] Clause 5.3 is headed “Redemption Price and Payment” and provides that unit holders whose units are redeemed on the Valuation Date “will be entitled to receive a redemption price per Unit equal to the Net Realized Proceeds per Unit determined as at such Valuation Date”.[^2] Actual payment of the redemption price together with any unpaid distribution in respect of such units “which became payable on or before such Valuation Date” is to be made on or before the fifteenth business day following the Valuation Date, which was September 22, 2006.

[14] Before the application judge, the issue of interpretation dividing the parties in relation to Clause 5.3 was whether the term “as at such Valuation Date” modified the phrase “Net Realized Proceeds per Unit”. The application judge held that it did and the appellant no longer argues that he erred in doing so. Rather, it now argues that the term “as at such Valuation Date” properly interpreted means “on or after” the Valuation Date. It does not seem that this argument was made to the motion judge.

[15] The term “Net Realized Proceeds per Unit” is defined in the interpretation part of the Declaration of Trust. The definition provides two different ways of arriving at a value as follows:

“Net Realized Proceeds per Unit” means the amount obtained by dividing either:

(i) the aggregate proceeds received by the Trust on the disposition of the pro rata share of the Portfolio Securities represented by the Units surrendered for redemption, less brokerage fees, commissions and all other transaction costs relating to such disposition and less the pro rata share of the liabilities of the Trust; or

(ii) if for any reason the Manager determines that it is not practicable for the Trust to effect such disposition, then the pro rata share of the Net Asset Value represented by the Units surrendered for redemption, less the brokerage fees, commissions and all other transaction costs that would have resulted from such disposition,

by the number of Units surrendered for redemption. For certainty of interpretation, the disposition of a pro rata share of the Portfolio Securities will entail the pre-settlement of a pro rata portion of the Forward Agreement;

[16] In simple terms, the difference between the two methods of calculation is that under method (i) the redeeming unit holders receive their share of the actual proceeds of the disposition of sufficient of the Trust’s portfolio to meet the requirements of the redemption, whereas under method (ii) they receive the notional “Net Asset Value” of their share less notional costs of disposition.

[17] Net Asset Value is also a defined term in Article 3. Clause 3.5 provides that the Net Asset Value of the Trust “on a particular date, shall be equal to the aggregate value of the Trust Property on such date less the aggregate value of the Trust’s liabilities on such date, expressed in Canadian dollars”. Article 3 goes on to set out various valuation rules including rules that apply on the Valuation Date. In short, the Net Asset Value is not actually determined on a particular date but rather is the weighted average trading price of a security during the three consecutive trading days ending on the Valuation Date.

[18] Operating on the assumption that it was using method (i), the appellant sold the necessary percentage of the securities after the Valuation Date and redeemed the units at $9.815 per unit. The respondents took the position that since the appellant did not sell the units in accordance with method (i) before the Valuation Date, they were entitled to the amount calculated in accordance with method (ii).

ANALYSIS

[19] The appellant concedes that where method (ii) of calculating Net Realized Proceeds per Unit is used, the date for making that determination is the Valuation Date of August 31. However, it argues that if it actually chooses to sell the securities, August 31 is not the date for making the determination under method (i); rather, it is merely a start date and it is the proceeds of sale of securities on or after August 31 that are used to calculate the Net Realized Proceeds per Unit. I do not accept this submission.

[20] In my view, the phrase “determined as at such Valuation Date”, which the appellant now concedes modifies the term “Net Realized Proceeds per Unit”, applies to both methods of calculating the Net Realized Proceeds per Unit. I cannot read “determined as at” the Valuation Date as applying to one method but not the other. To do so is inconsistent with the plain meaning of the phrase. It is also inconsistent with other parts of Clause 5.3, such as the payment requirements which reads as follows:

The Trustee shall, on or before the fifteenth Business Day following the Valuation Date on which a Unitholder’s units are redeemed, make, or arrange for the Transfer Agent to make, payment of the redemption price per Unit in respect of the Units redeemed together with any unpaid distribution in respect of such Units which became payable on or before such Valuation Date less any amount required to be withheld therefrom under applicable law. Payment shall be made by wire transfer to CDS with instructions concerning delivery to the CDS Participants or by some other method as the Trustee deems appropriate. Any payment so made shall, unless a cheque is not honoured on presentation, discharge the Trust and the Trustee from all liability to the Unitholder in respect of the amount thereof plus any amount required by law to be withheld, and the Units so redeemed shall be cancelled and not reissued. [Emphasis added.]

[21] Clause 5.3, which is the clause that speaks specifically about redemption, refers to “redeemed” in the past tense, and also refers to unpaid distributions that “became payable on or before such Valuation Date”. This suggests that the Valuation Date is the date for determining the redemption price. The two definitions of “Net Realized Proceeds per Unit” in the interpretation section of the Declaration of Trust provide two ways for making that calculation, but Article 5.3 directs that the determination of redemption price must be made “as at such Valuation Date” – not some later date.

[22] Further support for this interpretation can be found in the economics associated with distributions. The interpretation the appellant urges would enable potential manipulation of the sale process to deprive the seller of full value of the security. If the manager were to become aware of a pending distribution on certain securities scheduled to take place between the Valuation Date and the 15th Business Day following the Valuation Date, the manager could wait until after the distribution to sell the securities subject to the distribution. The seller would receive a sale price reduced to reflect the amount of the distribution and, under the terms of the agreement, would not be entitled to participate in the distribution.

[23] The difficulty in this case is that because the appellant took a different view of the interpretation of “Net Realized Proceeds per Unit”, it did not commence disposition of the necessary securities to meet the redemption requirements until after the Valuation Date. Thus, the appellant submits that there was no express determination by the appellant as manager that it was “not practicable” for the Trust to sell the securities within the meaning of method (ii). The motion judge reasoned that since the appellant failed to take action to invoke method (i), by default method (ii) was the method for determining the redemption price.

[24] This is a reasonable interpretation of the document. Otherwise, the appellant would be in breach of the Declaration of Trust for neither having sold the requisite part of the portfolio when it should have to get the necessary cash to redeem the former unit holders in accordance with method (i), nor having made the requisite determination under method (ii).

[25] The appellant submits that this interpretation of Net Realized Proceeds per Unit is inconsistent with the duty of the court to not simply look at the plain meaning of the terms of the document but also take into account the context or circumstances in which the words are used: see Dumbrell v. The Regional Group of Companies Inc. (2007), 2007 ONCA 59, 85 O.R. (3d) 616 (Ont. C.A.) at para. 52. The appellant points to evidence concerning the evolution of the definition of Net Realized Proceeds per Unit.

[26] Before June 2005, most funds managed by the appellant provided for redemption at the Net Asset Value per Unit, which was defined as the value of the assets on the redemption date less the value of the liabilities of the fund on that date divided by the number of units then outstanding. Due to the potential for manipulation of the Net Asset Value per Unit by the redeeming unit holders to the detriment of those unit holders who did not redeem, the appellant changed the method of calculating the Net Asset Value per Unit for its listed investment funds by providing that the assets would be valued based upon the weighted average trading price over the three business days ending on the redemption date. The purpose of this change was to prevent the non-redeeming unit holders of such funds from being penalized by trading resulting in an artificial increase in the Net Asset Value per Unit that would have to be paid to the redeeming unit holders. Managers of other listed investment funds made similar changes.

[27] The evidence is that despite these changes, the listed investment funds managed by the appellant continued to experience significant redemptions. These redemptions were detrimental to the non-redeeming unit holders of the funds because brokerage commissions are not taken into account in the calculation of Net Asset Value per Unit and, therefore, would be borne entirely by the non-redeeming unit holders. Further, the Net Asset Value per Unit is based on the last trading price of the portfolio securities which does not always coincide, and is often higher, than the price that is obtained for the securities sold to meet the redemption. Finally, large sell orders necessitated by redemptions would have a downward pressure on the price of securities held by the funds.

[28] The appellant says that changes were made to the Declaration of Trust to meet these problems and, so far as possible, shift the burden of redemption to the redeeming unit holders where it belongs. The principal mechanism was to allow the appellant as manager to redeem units with the actual disposition proceeds less the actual costs of disposition, or in other words, in accordance with method (i) for determining the Net Realized Proceeds per Unit.

[29] In my view, this evidence of context or circumstances is of limited assistance in interpreting the relevant clauses. In the Declaration of Trust, brokerage commissions are taken into account whichever method is used. Under method (i) it is the actual commissions; under method (ii) a notional calculation is made. As to the problem that the Net Asset Value is often higher than the price that is obtained for the securities sold, this is an avoidable problem. It only arises if the manager does not sell the necessary portion of the portfolio before the Valuation Date in accordance with method (i). If the manager sells the necessary percentage of the portfolio, which is known as of the last day for unit holders to redeem their units, the calculation will be made in accordance with method (i). Consequently, the Net Asset Value contemplated by method (ii) would be irrelevant. Method (i) was incorporated in the Declaration of Trust to give the appellant the option of redeeming units with the actual disposition proceeds. However, if the appellant does not avail itself of this option, it should not be permitted to complain that the Net Asset Value calculation under method (ii) is imperfect.

[30] Finally, the problem of downward pressure on the price of securities brought about by large sell orders is going to be a concern whether the dispositions take place in the fifteen days before August 31 or the fifteen days after August 31. The point of giving the manager the option to redeem the units by using the actual disposition proceeds realized as of the Valuation Date in accordance with method (i), is that it shifts the risk of declining value to the redeeming unit holders. I do not read the clauses involved as requiring some notional calculation when using method (i) to require the appellant to redeem the units for some amount different from the amounts actually received as of the Valuation Date. Rather, the redeeming unit holders are entitled to the aggregate proceeds actually received by the Trust “determined as at such Valuation Date”. This interpretation is no less fair to the non-redeeming shareholders than the one advanced by the appellant.

[31] As a fallback and to afford the appellant discretion in managing the Trust, if for any reason it is impracticable to dispose of a particular security by the Valuation Date, the manager can resort to method (ii) in relation to that security. In fact, the appellant did resort to method (ii) in 2006 in relation to certain securities, even when it believed it was acting in accordance with method (i).

[32] This observation provides further support for the conclusion that (ii) was the method for determining the redemption price. With respect to a small portion of the amount redeemed, the appellant determined that it was not practicable for the Trust to dispose of these particular interests. However, the agreement does not allow the manager to arrive at a redemption value using both (i) and (ii). Since the appellant determined that it was not practicable for the Trust to dispose of all of the amount being redeemed, the appellant must have been proceeding under (ii).

[33] So interpreted, I see no basis for the appellant’s submission that such an interpretation is factually inoperable and commercially unworkable. The appellant submits that during the period between the receipt of redemption notices and the Valuation Date, the Trust could have been buying and selling securities and purchasing its own units in the market. Thus, it submits that in order for the redemption provisions to be administrable, it was necessary for the appellant to determine what the holdings of the Trust were so as to be able to dispose of the applicable percentages of those holdings. It must also be certain as of which date it would have to make the determination regarding which assets to sell. It argues that commercial reality dictated that this determination could only be made on the Valuation Date and not before. I do not accept this submission.

[34] The appellant’s general discretion to determine all questions and matters of doubt could have been used between August 17 and 31 to satisfactorily dispose of the securities by the Valuation Date. The appellant knew as of August 17 what percentage of securities needed to be sold in order to redeem the unit holders. It had ten business days to make the necessary dispositions. By August 31 it also knew the amount of the various liabilities in order to complete the calculation. As the motion judge said:

It is not shown on the material that sub-paragraph (i) is inoperable factually in the period prior to the Valuation Date. If there is some administrative difficulty, the Declaration contains provisions that would likely allow determinations to be made in the pre-Valuation Date period that would allow the dispositions to be made satisfactorily during that period.

[35] As the respondents point out, one of the mechanisms available to the appellant is the power under the Declaration of Trust to hold cash. Under Article 2.7 of the Declaration of Trust, “in order to provide liquidity for the redemption of Units, Trust Property may also be held in Cash Equivalents”. In fact, even when the appellant thought it was entitled to invoke method (i) after Valuation Date, the evidence shows that the appellant sold securities in excess of 27.57 percent, generating cash in excess of the amount needed to pay the redeeming unit holders. The Declaration Trust, which was drafted by the appellant, gave it broad powers that would have permitted it to comply with method (i) by Valuation Date.

DISPOSITION

[36] Accordingly, I would dismiss the appeal with costs fixed at $15,000 inclusive of G.S.T. and disbursements.

Signature: “M. Rosenberg J.A.”

“I agree S. Borins J.A.”

“I agree G. Epstein J.A.”

RELEASED: “MR” June 5, 2008

[^1]: It was subsequently revealed that there was an error in the calculation of the redemption price of approximately six cents per unit. When the error was identified, the resulting difference was paid to the redeeming unit holders. Nothing turns on this error.

[^2]: The actual clause reads: “Unitholders whose Units are redeemed on a Valuation Date in a year (commencing with the 2006 Valuation Date) will be entitled to receive a redemption price per Unit equal to the Net Realized Proceeds per Unit determined as at such Valuation Date.”