Hawley et al. v. North Shore Mercantile Corporation (formerly Arrowsmith Properties Limited) et al. [Indexed as: Hawley v. North Shore Mercantile Corp.]

99 O.R. (3d) 142

Court of Appeal for Ontario,

Juriansz, MacFarland and Watt JJ.A.

September 28, 2009

Civil procedure -- Trial of issue -- Judge hearing application for oppression remedy based on release of shares from escrow concluding that escrow agreement was ambiguous and ordering trial of issue -- Trial judge not entitled to find that escrow agreement was clear and unambiguous -- Trial judge required to accept that escrow agreement was ambiguous and to interpret it accordingly.

Corporations -- Oppression -- Trial judge misinterpreting escrow agreement in concluding that release of preference shares from escrow was improper and amounted to oppressive conduct -- Release being proper.

Gingko Trust, Pennington Trust and Hubland were shareholders of North Shore (formerly Arrowsmith). Pennington Trust and Hubland became shareholders when Arrowsmith purchased the shares of 108 from them. The share purchase agreement provided that Arrowsmith was to acquire all of the issued and outstanding common shares of 108. The agreement was subsequently amended so that the purchase price was to be satisfied partly by the issuance to Pennington Trust and Hubland of Arrowsmith common shares and partly by the issuance of Arrowsmith preference shares. The common shares were to be subject to a timed escrow, and the preference shares were to be subject to a performance escrow. The escrow agreement provided that the Alberta Securities Exchange "will generally consent to the release from escrow of one share for each $0.20 dollar/ cents of Cash Flow generated by or from the property or asset(s)". "Cash flow" was defined as net income "derived from the property", adjusted for certain add-backs. A subsequent release and conversion of preference shares of Arrowsmith resulted in increases in the shareholdings of Pennington Trust and Hubland, while the percentage of the shareholding of Gingko Trust was diluted. If the reference in the escrow agreement to "cash flow" was to the cash flow of Arrowsmith, the preference shares were properly released from escrow. If the reference was to the cash flow of 108, they were not. The trustee of Gingko Trust brought an application for an order setting aside the release from escrow and the conversion of the preferred shares, a declaration that the acts of North Shore, Pennington Trust and Hubland (the "appellants") were oppressive to minority shareholders, and other remedies. The application judge found that the escrow agreement was ambiguous and could not be interpreted without resort to extrinsic and parole evidence and without a weighing of the competing evidence. A trial of the issues was ordered. The trial judge found that the escrow agreement was clear and unambiguous and that "th e property or asset(s)" meant the shares of 108. She concluded that the conduct of the appellants amounted to oppression within the meaning of s. 241 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44. The appellants appealed.

Held, the appeal should be allowed. [page143]

Absent an appeal, the application judge's finding that the escrow agreement was ambiguous was final and conclusive on that point. It was not open to the trial judge to revisit the issue. Her task was to accept that the document was ambiguous and to interpret it accordingly. She erred in law in concluding that the escrow agreement was clear and unambiguous.

In light of the documentary evidence, the only reasonable interpretation of the escrow agreement was that the phrase "net income derived from property" referred to the net income derived from the property of Arrowsmith. The release of the preference shares from escrow was not improper.

APPEAL from the order of Coats J. (2007), 2007 41891 (ON SC), 87 O.R. (3d) 96, [2007] O.J. No. 3822 (S.C.J.) on an application for oppression remedies.

Cases referred to Dumbrell v. Regional Group of Companies Inc. (2007), 85 O.R. (3d) 616, [2007] O.J. No. 298, 2007 ONCA 59, 279 D.L.R. (4th) 201, 220 O.A.C. 64, 25 B.L.R. (4th) 171, 55 C.C.E.L. (3d) 155, 154 A.C.W.S. (3d) 1097; Fidelitas Shipping Co. v. V/O. Exportchleb, [1965] 2 All E.R. 4, [1966] 1 Q.B. 630 (C.A.); Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of) (1997), 1997 12275 (ON SC), 35 O.R. (3d) 273, [1997] O.J. No. 1175, 27 O.T.C. 235, 69 A.C.W.S. (3d) 1024 (Gen. Div.)

Statutes referred to Canada Business Corporations Act, R.S.C. 1985, c. C-44, ss. 102(2) [as am.], 241 [as am.]

Craig Colraine and Debbie Jorgensen, for appellants. Ron Sleightholm, for respondent.

The judgment of the court was delivered by

[1] MACFARLAND J.A.: -- This is an appeal from the judgment of Coats J. dated October 1, 2007, where she concluded that the conduct of the appellants amounted to oppression within the meaning of s. 241 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA").

[2] The appellants further appeal the related order of the trial judge dated June 20, 2008, where, by way of remedy, she ordered the cancellation of the shares which were the subject of the transaction in issue.

Overview

[3] The respondent, The Aged Gingko Trust ("Gingko Trust"), and the appellants, the John K. Pennington Family Trust No. 1 ("Pennington Trust") and Hubland Investments Ltd. ("Hubland"), are shareholders in the defendant North Shore Mercantile [page144] Corporation [^1] ("North Shore"), formerly Arrowsmith Properties Ltd. ("Arrowsmith"). James B. Hawley ("Hawley") is the trustee of the respondent, Gingko Trust. John K. Pennington ("Pennington") is a trustee of the Pennington Trust and Robert E. Fasken ("Fasken") is a principal of Hubland.

[4] The helpful chart at para. 3 of the appellants' factum sets out the shareholdings of the parties hereto, both before and after the release, and the conversion of preference shares [^2] which gives rise to this litigation.

[QL:GRAPHIC NAME="99OR3d142-1.jpg"/]

[5] As is readily seen, the release and conversion of shares resulted in increases in the shareholdings of Pennington Trust and Hubland, as well as a corresponding increase in their percentage of the total shareholdings. While the shareholdings of Gingko Trust and the public remained constant, their percentage of the total shareholding is diluted from what it had been prior to the release and conversion. On wind-up and liquidation of the company, there would be a corresponding decrease in their participation on distribution.

[6] The corporate entities and their principals are, for present purposes, one and the same.

[7] In order to be listed on the Alberta Stock Exchange ("ASE"), North Shore was required to complete a "major transaction" within 18 months of being listed.

[8] That major transaction was the purchase by North Shore, in 1998, of the shares of 1083181 Ontario Ltd. ("108"). 108 owned Park Shore, a nine-hole golf course in Brampton valued at $1.4 million. 108, Arrowsmith (now North Shore), Pennington Trust and Hubland, the latter two being the vendors, entered into a share purchase agreement dated December 2, 1998 [page145] (the "Share Purchase Agreement"). The contract was amended twice by agreement.

[9] The agreement provided that Arrowsmith was to acquire all of the issued and outstanding common shares of 108. In accordance with the terms of the original agreement, and specifically art. 2(1)(c) thereof, the purchase price was to be satisfied:

[B]y Arrowsmith issuing such number of Arrowsmith common shares of the effective date equal in value to the purchase price. The value of the Arrowsmith common shares shall be deemed to be equal to $0.40 per share. One half of the Arrowsmith common shares to be issued shall be issued in the name of the Trust and the other half shall be issued in the name of Hubland.

[10] The first amending agreement, dated February 1, 1999, amended the value of the Arrowsmith common shares from $0.40 to $0.20.

[11] The second amending agreement, dated September 24, 1999, amended a number of provisions in the original agreement. Significantly, the purchase price was to be satisfied in part by the issuance of Arrowsmith common shares and partly by Arrowsmith preference shares. The purchase price was amended from $1.4 million to $1.2 million. Article 2.1(c) was deleted and replaced with the following provision:

(c) The Purchase Price shall be satisfied by Arrowsmith issuing to the vendors 2,675,000 Arrowsmith Common Shares at a deemed price on the effective date of $0.20 per share and 3,325,000 Arrowsmith Preferred Shares at a deemed price on the Effective Date of $0.20 per share. One-half of the Arrowsmith Common Shares and one-half of the Arrowsmith Preferred Shares to be issued shall be issued in the name of the Trust and the other half of the Arrowsmith Common Shares and the other half of the Arrowsmith Preferred Shares shall be issued in the name of Hubland. The Arrowsmith Preferred Shares are convertible into common shares in the capital of Arrowsmith on a one-for-one basis subject to Arrowsmith maintaining public distribution requirements as specified by the Alberta Stock Exchange.

[12] The following subsection (d) was added to s. 2.1:

(d) The 2,675,000 Arrowsmith Common Shares issued in part satisfaction of the Purchase Price will be subject to an escrow and will be released as to 1/3 on each of the first, second and third anniversaries of the approval of the transaction by the shareholders of Arrowsmith. The 3,325,000 Arrowsmith Preferred Shares will be subject to a performance escrow pursuant to which one Arrowsmith Preferred Share will be released from escrow for each $0.20 of cash flow of Arrowsmith, after adjustment for certain non-cash items.

[13] The purchase price was reduced by $200,000. The common shares of Arrowsmith issued to the vendors, Pennington Trust and Hubland, in part satisfaction of the purchase were now subject to a timed escrow and the preference shares subject to a performance escrow. [page146]

[14] It is to be noted that the performance contemplated by the Share Purchase Agreement is that of Arrowsmith.

[15] For its approval of the major transaction, the ASE had certain requirements that needed to be met. In its letter dated April 16, 1999 to Stuart M. Olley of Stikeman Elliott LLP, it stated the following:

Request for Pre-Meeting Documents

Pursuant to section 6.2 of Circular No. 7, prior to the Exchange being in a position to provide conditional approval to the proposed Major Transaction, the following pre-meeting documents must be submitted: . . . . .

9. one draft copy of an escrow agreement or agreements evidencing that all of the 4,800,000 common shares to be issued pursuant to the acquisition of 108 Inc., the conversion of the $225,000 term loan and the $100,000 private placement are subject to our standard form 10A escrow agreement and all of the 3,325,000 Preferred Shares, Series One are subject to our standard Form 10B escrow agreement with one share being releasable from escrow for each $0.20 of Cash Flow generated by 108 Inc. As previously mentioned, to the extent that escrowed shares . . . .

[16] Form 10B is the escrow agreement that is relevant for present purposes. There is no issue among the parties in relation to the issuance of the common shares that were subject to a timed release.

[17] The Form 10B Escrow Agreement (Performance) ("Escrow Agreement") is dated May 25, 1999. It is stated to be among Arrowsmith, as the issuer; Montreal Trust Company of Canada, as the escrow agent; and The Persons Listed on Schedule "A", called the security holders. Schedule "A" names the security holders as Pennington Trust and Hubland, each holding 1,662,500 Preferred Series 1 Shares.

[18] Relevant provisions of the Escrow Agreement provide:

1. Where used in this agreement, or in any amendment or supplement hereto, unless the contract otherwise requires, the following words and phrases shall have the following ascribed to them below:

(a) "Cash Flow" means net income derived from the property, as shown on the audited financial statements or verified by the Issuer's auditors, adjusted for the following add-backs: (i) depreciation, (ii) depletion, (iii) deferred taxes, (iv) amortization of goodwill, (v) amortization of research and development costs. [page147]

(b) "Deferred Expenditures" means expenditures which have been verified by the Issuer's auditors and incurred in exploring, developing or maintaining in good standing the aforesaid property.

(c) "Related Party" means a promoter, officer, director, insider or control person of the Issuer and any associates or affiliates of these parties . . . . .

11(a) In the case of (i) an industrial, real estate or investment issuer, the Exchange will generally consent to the release from escrow of one share for each $0.20 dollar/cents of Cash Flow generated by or from the property or asset(s), or (ii) a natural resource issuer, the Exchange will generally consent to the release from escrow of one share of each $0.20 dollar/cents of Deferred Expenditures incurred on the property.

(b) Any release from escrow under this paragraph 11 shall be made pursuant to a written application on behalf of the Issuer or the Security Holders, which application shall be accompanied by evidence of the Cash Flow received or Deferred Expenditures incurred in a form satisfactory to the Exchange. Application for release may only be made once per year and may only relate to Cash Flow received or Deferred Expenditures incurred in the preceding fiscal year or fiscal years of the issuer since the last release from escrow pursuant to this agreement, whichever is greater. All shares released from escrow shall, unless otherwise directed by the Exchange, be distributed pro rata to all Security Holders.

[19] The parties agree that it is the meaning given to the term "Cash Flow", in clause 1(a) of the Escrow Agreement, which governs. What is in dispute is whether the term refers to the cash flow of Arrowsmith or the cash flow of 108.

[20] If the reference is to the cash flow of Arrowsmith, then the preference shares at issue in this litigation were properly released from escrow. If the reference is to the cash flow of 108, they were not.

The Proceedings

[21] The respondent, Hawley, commenced these proceedings by way of application, which was heard before Pepall J. on June 8, 2004. The relief sought included: (a) an order setting aside as improper the release from escrow and the conversion of the preferred shares subject to the Escrow Agreement; (b) a declaration that the acts and omissions of North Shore Mercantile Corporation ("North Shore") and its affiliate 1083131 Ontario Inc. ("1083131"), the business and affairs of North [page148] Shore and its affiliate 1083131, and the powers of the directors of North Shore and its affiliate 1083131 effect or threaten to effect a result, have been carried on or conducted, in a manner that is oppressive to or unfairly disregards the interests of the applicant Hawley and other minority security holders of North Shore; (c) an order requiring North Shore to comply with s. 102(2) of the Canada Business Corporations Act and s. 2.1 of the TSX Venture Exchange ("TSXV") Policy 3.1 to appoint an independent director to the board of directors; (d) an order enforcing the application of the majority of the minority approval requirement in Policy 2.9, s. 4.3 of TSXV for any step taken by North Shore to directly or indirectly de-list the company; (e) such further or other interim, interlocutory or final orders under s. 241 of the Canada Business Corporations Act as may be necessary to rectify the matter complained of; (f) costs fixed at the substantial indemnity scale and payable forthwith; and (g) such further and other order as to this honourable court seems just.

[22] In her written reasons released June 9, 2004, the application judge ordered that the relief sought in paras. (a), (b), (e) and (f) above proceed to the trial of an issue and that the transcripts of the cross-examinations of the parties serve as examinations for discovery. She further ordered that North Shore and its directors, Hawley, Pennington and Fasken, take such steps as were necessary for North Shore to comply with s. 102(2) of the CBCA and s. 2.1 of the TSXV Policy 3.1 to appoint an independent director to their board of directors.

[23] In her reasons, the application judge stated in part:

The application depends in part on the interpretation to be given to an escrow agreement. Indeed, both facta identify interpretation of the escrow agreement as the first issue to be considered. In my view, the escrow agreement must be considered ambiguous. The description of the property was stated to be included in Schedule A of that agreement and Schedule A is blank. The agreement cannot be interpreted without resort to extrinsic and parole evidence and without a weighing of the competing evidence. . . . . .

It is my view that a motions judge cannot effectively or properly determine the matters in dispute without a trial of the issues and I so order. [page149]

[24] There was no appeal taken from the order of Pepall J. and the matter eventually came on for trial before Coats J. on January 9, 2007. Following nine days of evidence and submissions, in reasons released October 1, 2007, the trial judge concluded, at para. 48:

I find that the wording of the Escrow Agreement is clear and unambiguous and that "the property or asset(s)" means the shares in 1083131. This is apparent from the Escrow Agreement itself and, in particular, the following:

The trial judge went on, at subparas. (a)--(e), to set out the basis for her conclusion that the Escrow Agreement was clear and unambiguous.

Analysis

[25] In my view, absent an appeal, the application judge's finding that the Escrow Agreement was ambiguous is final and conclusive on that point. It was not open to the trial judge to revisit the issue. In Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of) (1997), 1997 12275 (ON SC), 35 O.R. (3d) 273, [1997] O.J. No. 1175 (Gen. Div.), defence counsel moved before Spence J., in the course of the litigation, for production of a certain memorandum. Spence J. declined to grant the order on the grounds that the memorandum had been prepared in contemplation of litigation and, as such, was properly subject to the claim of litigation privilege. Later in the course of that same litigation, counsel for one of the defendants moved before the trial judge, Winkler J., to ask in cross-examination seven questions of the witness who had prepared the memorandum. The purpose and objective of the questions was, as the trial judge articulated at para. 1, "to provide a basis for a motion to require production of the memorandu m at trial". Counsel for the plaintiff objected to the questions on the ground that they went to the root of the claim for privilege, the propriety of which had already been finally determined by Spence J. He argued that the defendant was bound by that ruling and was prohibited, by operation of the doctrine of issue estoppel, from relitigating that issue. The trial judge accepted the plaintiff's argument and dismissed the defence's motion on the basis that the doctrine of issue estoppel operates to prevent parties from relitigating the same issues. At para. 7 of his reasons, Winkler J. stated:

The effect of an interlocutory decision in subsequent proceedings between the same parties was considered by the Supreme Court of Canada in Diamond v. The Great Western Realty Co., 1924 2 (SCC), [1924] S.C.R. 308. In that case, the Court held that an interlocutory judgment which definitely decides a question of law and from which no appeal is taken may be binding when the question is raised between the same parties, even in the same action. Duff J. stated for the majority at pp. 315-316: [page150]

Now to this argument there appears to be one conclusive answer. The point raised by it was decided against Diamond in the judgment given by Mr. Justice Middleton on the appeal from the first report. The claim thus advanced was one he held which the referee, under the terms of the reference, had no jurisdiction to examine. This judgment of the learned judge was a definite decision upon a definite point of law. From that decision no appeal was taken, and it seems to have put an end to the controversy. It is true to say that in a sense the decision was interlocutory; that is to say, the proceeding in which it was given was an interlocutory proceeding; but it was nevertheless a final decision in the sense that in the absence of an appeal it became binding upon all parties to it . . . . The application of the principle is not affected, it is, perhaps, needless to say, by the circumstance that the first decision is pronounced in the course of the same action.

[26] In the course of his reasons, Winkler J. also considered the decision of the English Court of Appeal in Fidelitas Shipping Co. v. V/O. Exportchleb, [1965] 2 All E.R. 4, [1966] 1 Q.B. 630 (C.A.), wherein Lord Diplock, in concurring reasons, stated, at p. 10 All E.R.:

Where the issue separately determined is not decisive of the suit, the judgment on that issue is an interlocutory judgment and the suit continues. Yet I take it to be too clear to need citation of authority that the parties to the suit are bound by the determination of that issue. They cannot subsequently in the same suit advance argument or adduce further evidence directed to show that the issue was wrongly determined. Their only remedy is by way of appeal from the interlocutory judgment and, where appropriate, an application to the appellate court to adduce further evidence . . . .

[27] Coats J. erred in law in concluding that the Escrow Agreement was clear and unambiguous. Her task was to accept that the document was ambiguous and to interpret it accordingly. As Doherty J.A. of this court explained in Dumbrell v. Regional Group of Companies Inc. (2007), 2007 ONCA 59, 85 O.R. (3d) 616, [2007] O.J. No. 298 (C.A.), at para. 52, contractual interpretation involves the interplay between the words of a contract and the context in which those words were chosen:

No doubt, the dictionary and grammatical meaning of the words (sometimes called "the plain meaning") used by the parties will be important and often decisive in determining the meaning of the document. However, the former cannot be equated with the latter. The meaning of a document is derived not just from the words used, but from the context or circumstances in which the words were used. Professor John Swan puts it well in Canadian Contract Law (Markham, Ont.: Butterworths, 2006) at 493:

There are a number of inherent features of language that need to be noted. Few, if any words, can be understood apart from their context and no contractual language can be understood without some knowledge of its context and the purpose of the contract. Words, taken individually, have an inherent vagueness that will often require courts to determine their meaning by looking at their context and the expectations that the parties may have had. [page151]

[28] First, it is helpful to consider the purpose of the document in its context. The Escrow Agreement was one of a number of documents created to accomplish a "major transaction", a condition for the continued listing of Arrowsmith in the ASE's Junior Capital Program. [^3] In order to be listed as an issuer on the ASE, Arrowsmith had to complete a "major transaction" within 18 months of being listed. Arrowsmith satisfied the ASE's requirement when it purchased all of the shares of 108 in 1998. At the time, 108 owned a nine-hole golf course in Brampton valued at $1.4 million. All of the outstanding shares of 108 were owned by Hubland and Pennington Trust.

[29] A Share Purchase Agreement, dated December 2, 1998, was among 108, Arrowsmith, Pennington Trust and Hubland, the latter two being described in the document as the "vendors" in the transaction. The agreement's recitals read:

WHEREAS:

1. The Corporation [^4] owns and leases various assets, equipment and rights in connection with the operation of the golf course located at 7797 Goreway Drive, Brampton, Ontario;
2. Arrowsmith desires to purchase all of the issued and outstanding common shares of the Corporation on the terms and conditions contained in this Agreement;
3. The Vendors and Arrowsmith reached an agreement in principle by August 30, 1998, on the terms pursuant to which the Vendors would sell to Arrowsmith and Arrowsmith would purchase from the Vendors all of the Purchased Shares (as defined in section 1.1) and the parties now wish to enter this Agreement to evidence such agreement in principle;

[30] Section 1.1 of this agreement provides that "Purchased Shares means all of the issued and outstanding common shares of the Corporation which are registered in the name of and beneficially owned by the Vendors."

[31] Article 2 of the agreement describes the terms of the sale:

2.1 Share Purchase (a) Subject to the terms and the fulfillment of the conditions contained in this Agreement, the Vendors shall sell and Arrowsmith shall purchase the Purchased Shares at the Closing Time on the Closing Date. (b) The purchase price for the Purchased Shares (the "Purchase Price") shall be the sum of $1,400,000.00 less the liabilities shown on the Corporation's [page152] financial statements for the most recently completed calendar quarter prior to the Effective Date. (c) The Purchase Price shall be satisfied by Arrowsmith issuing such number of Arrowsmith Common Shares on the Effective Date equal in value to the Purchase Price. The value of the Arrowsmith Common Shares on the effective date shall be deemed to be equal to $0.40 per share. One-half of the Arrowsmith Common Shares to be issued shall be issued in the name of the Trust and the other half shall be issued in the name of Hubland. [^5]

[32] The Share Purchase Agreement was amended twice. The first Share Purchase Amendment Agreement is dated February 1, 1999, and its stated purpose was "to amend the demand purchase price per share of the Arrowsmith Common Shares to be issued in the transaction".

[33] The price per share changed from $0.40 to $0.20 -- a reduction by one-half.

[34] The second, and final, Share Purchase Amendment Agreement is dated September 24, 1999. Its stated purpose was "to amend a number of the provisions of the Share Purchase Agreement". This amendment is of pivotal importance because it redefined the bargain between the parties.

[35] The second amendment provided that the purchase price was now to be satisfied by the issuance of both common and preferred shares of Arrowsmith and the purchase price for the Purchased Shares was reduced from $1,400,000 to $1,200,000. The following provisions in the amendment are also relevant for present purposes:

5. Subsection 2.1(c) shall be deleted in its entirety and replaced by the following: (c) The Purchase Price shall be satisfied by Arrowsmith issuing to the Vendors 2,675,000 Arrowsmith Common Shares at a deemed price on the Effective Date of $0.20 per share and 3,325,000 Arrowsmtih Preferred Shares at a deemed price on the Effective Date of $0.20 per share. One-half of the Arrowsmith Common Shares and one-half of the Arrowsmith Preferred Shares to be issued shall be issued in the name of the Trust and the other half of the Arrowsmith Common Shares and the other half of the Preferred Shares shall be issued in the name of Hubland. The Arrowsmith Preferred Shares are convertible into common shares in the capital of Arrowsmith on a one-for-one basis subject to Arrowsmith maintaining public distribution requirements as specified by the Alberta Stock Exchange.
6. The following subsection (d) shall be added to section 2.1: [page153] (d) The 2,675,000 Arrowsmith Common Shares issued in part satisfaction of the Purchase Price will be subject to an escrow and will be released as to 1/3 on each of the first, second and third anniversaries of the approval of the Transaction by the Shareholders of Arrowsmith. The 3,325,000 Arrowsmith preferred shares will be subject to a performance escrow pursuant to which one Arrowsmith Preferred Share will be released from escrow for each $0.20 of cash flow of Arrowsmith, after adjustment for certain non-cash items.

[36] The second, and final, amendment to the Share Purchase Agreement is of pivotal importance. It reflects changes to the issuance of both common and preferred shares in satisfaction of the purchase price for all of the outstanding shares of 108.

[37] The amendment stipulates that common shares are now subject to a timed escrow, while the preferred shares are subject to a performance escrow, based on Arrowsmith's cash flow.

[38] Prior to the final amendment to the Share Purchase Agreement, Mr. Olley, counsel for Arrowsmith, wrote to Messrs. Pennington, Fasken and Hawley, accountants for both Arrowsmith and 108, and the appraiser who had valued 108's sole asset, the golf course in Brampton. In his letter dated March 31, 1999, Mr. Olley enclosed a draft of the Information Circular (the "Circular") intended to be issued to all shareholders of Arrowsmith in advance of the annual and special meeting to approve the major transaction. Hendren Mitchell Real Estate Appraisals Ltd. ("Hendren") was asked to review the summary of the appraisal report contained within the Circular and confirm that they give their consent to the form of summary contained in the Circular. Grant Thornton LLP Chartered Accountants & Managing Consultants ("Grant Thornton") was asked to confirm that Arrowsmith's financial statements, as well as those of Pro-Form Consolidated Financial Statements were acceptable. Grant Thornton was also to confirm that any financ ial information contained elsewhere in the Circular was acceptable to them. McGovern, Hurley, Cunningham LLP Chartered Accountants were asked to confirm, with respect to the financial statements for 108, that the statements were acceptable and that they consented to the use of the statements in the Circular. Mr. Olley also instructed that

[e]ach of the Directors of Arrowsmith should review the enclosed Circular to confirm that it does contain full, true and plain disclosure of all material facts with respect to the proposed shareholders meeting. I would also ask that the Directors, if they are satisfied with the form of the Circular, execute the enclosed Resolution confirming their approval for the calling of the shareholders meeting currently scheduled to be held on May 10, 1999.

Should you have any comments or corrections for the Circular, I would ask that these be provided to me as soon as possible so that we can finalize the circular in time for mailing on April 4, 1999. [page154]

[39] There is no evidence that Hawley, or anyone else, complained to Mr. Olley before the Circular was finalized that the performance escrow to which the preferred shares were subject was to be based on 108's performance, rather than that of Arrowsmith, as stated by the Share Purchase Agreement and the Circular.

[40] The Circular is dated April 7, 1999 and, under the heading The Purchase Agreement at p. 7, provides:

The 2,675,000 Common Shares issued to acquire the Park Shore Golf Club and the 1,125,000 Common Shares issued to pay out the term loan will be subject to an escrow and will be released as to 1/3 on each of the first three anniversaries of the shareholder approval of the major transaction. The 3,325,000 Preferred Shares will also be subject to escrow but will be released based on the future performance of Arrowsmith. Under the performance escrow, one Preferred Share will be released for every $0.20 of cash flow realized by Arrowsmith after adjustment for certain non-cash items. The Preferred Shares are convertible into Common Shares on a one for one basis subject to Arrowsmith maintaining public distribution requirements as specified by the Alberta Stock Exchange.

Under the heading Escrow at p. 10, the Circular goes on to state:

The 3,325,000 Preferred Shares will be subject to a performance escrow pursuant to which one Preferred Share will be released from Escrow for each $0.20 of cash flow of Arrowsmith, after adjustment for certain non-cash items.

Further, under the heading Escrowed Shares at p. 20, the Circular provides:

The 3,325,000 Preferred Shares, series one to be issued pursuant to the transactions discussed herein will be subject to an escrow which provides that such shares may be released as to one share for every $0.20 of cash flow realized by Arrowsmith.

[41] In addition, prior to the completion of the Escrow Agreement, Arrowsmith issued a press release (the "Press Release"), which states in part:

Management of Arrowsmith Properties Limited is pleased to announce that the Company has received conditional approval from the Alberta Stock Exchange for its revised major transaction, originally announced October, 1998. The major transaction will consist of the non-arm's length acquisition of the Park Shore Golf Course, a nine-hole executive golf course located west of Toronto, Ontario.

[42] After setting out the details of the transaction, the Press Release went on to state:

The Preferred Shares will be subject to a performance escrow which will provide that one Preferred Share will be releasable for every $0.20 of cash flow realized by Arrowsmith. The balance of shares will be subject to a time escrow and will be releasable as to 1/3 on each of the first three anniversaries of the shareholder approval of the Major Transaction. [page155]

[43] All of these documents were seen and approved by Hawley before any of them were finalized, signed and/or issued.

[44] Hawley was a founding partner in the creation of Arrowsmith. He, along with Pennington and Fasken, put up the original seed capital to get the company started in early 1998. Their goal was to get Arrowsmith into the Junior Capital Program of the ASE. That program was intended to allow new companies to raise funds from the public and then to acquire assets -- the "major transaction" -- to grow the company to a point where it would become an issuer on the ASE. The terms and conditions of the major transaction, as well as all documents, had to be submitted to the ASE for approval.

[45] The only document that states that the performance escrow is to be based on 108's performance, rather than Arrowsmith's, is a letter dated April 16, 1999, from the ASE to Mr. Olley. At p. 2 point 9 of that letter, Denise Hendrickson, a listings analyst writing on behalf of the ASE, states that the common shares, term loan and private placement are subject to the ASE's standard Form 10A escrow agreement. The preferred shares are subject to the ASE's standard Form 10B escrow agreement "with one share being releasable from escrow for each $0.20 of Cash Flow generated by 108 Inc."

[46] ASE's letter is the only document in the record that makes this reference and, as such, the only reasonable conclusion is that the reference to 108, instead of Arrowsmith, is a mistake. It is unfortunate that someone from ASE was not called to give evidence on this point. In my view, absent evidence to the contrary, logic suggests that the reference is simply an error. The ASE's only interest is in the growth of the company listed in its Junior Capital Program: Arrowsmith, not 108. Additional evidence in support of my conclusion can be found in the Share Purchase Agreement, which contains several references to the cash flow of Arrowsmith. Nowhere does it refer to the cash flow of 108. Moreover, since it is the shares of Arrowsmith in which the public will be asked to invest, it is logical that it is the issuance of those shares with which the ASE is concerned.

[47] Upon careful review of ASE's April 16 letter, it is clear that ASE is simply requiring formal copies of the documents, appraisals and valuations already prepared by Arrowsmith's solicitors and accountants. Those documents all state that the performance escrow in relation to the preferred shares is to be based on the cash flow of Arrowsmith. If ASE intended to change that requirement from what it was stated to be in the Circular, Share Purchase Agreement, and two subsequent amending agreements it would have said so in clear and unambiguous terms. It did not. [page156] This letter can be no more than the ASE repeating what it understood the deal to be and giving its approval. If ASE intended the deal to be different from what the contract documents provided, that would constitute a significant change, one which would need to be brought to the specific attention of the parties to the contract. Nothing of the sort occurred.

[48] As mentioned, at para. 17, the Escrow Agreement is among Arrowsmith, the "issuer"; Montreal Trust Company of Canada, the "escrow agent"; and The Persons Listed on Schedule "A", the "Security Holders". Schedule "A" names the security holders as Hubland and the Pennington Trust.

[49] It is to be recalled that the Escrow Agreement is in Form 10B, which is a standard form document of the ASE. It was not a document created specifically for the major transaction, as, for example, the Share Purchase Agreements, Circular and Press Release were.

[50] The provisions of the Escrow Agreement that give rise to the issues here raised are set out below:

WHEREAS the Security Holders and the Issuer entered into an agreement dated effective December 2, 1998 and amended effective February 1, 1999 whereby the Security Holders agreed to sell certain property or assets to the Issuer, the consideration for such property being at least in part the allotment of Securities of the Issuer to the Security Holders, the property or assets and the number of securities and the names of the Security Holders presently owning or about to receive such securities being respectively and more particularly described in Schedule "A" attached to and forming part of this agreement.

1. Where used in this agreement, or in any amendment or supplement hereto, unless the context otherwise requires, the following words and phrases shall have the following ascribed to them below: (a) "Cash Flow" means net income derived from property, as shown on the audited financial statements or verified by the Issuer's auditors, adjusted for the following add-backs: (i) depreciation, (ii) depletion, (iii) deferred taxes, (iv) amortization of good will, (v) amortization of research and development costs. (b) "Deferred Expenditures" means expenditures which have been verified by the Issuers auditors and incurred in exploring, developing or maintaining in good standing the aforesaid property. (c) "Related Party" means a promoter, officer, director, insider or control person of the Issuer and any associates or affiliates of these parties. [page157] . . . . .

11(a) In the case of (i) an industrial, real estate or investment issuer, the Exchange will generally consent to the release from escrow of one share for each $0.20 dollar/cents of Cash Flow generated by or from the property or asset(s), or (ii) a natural resource issuer, the Exchange will generally consent to the release from escrow of one share for each $0.20 dollar/ cents of Deferred Expenditures incurred on the property. (b) Any release from escrow under this paragraph 11 shall be made pursuant to a written application on behalf of the Issuer or the Security Holders, which application shall be accompanied by evidence of the cash flow received or Deferred Expenditures incurred in a form satisfactory to the Exchange. Application for release may only be made once per year and may only relate to cash flow received or Deferred Expenditures incurred in the preceding fiscal year or the fiscal years of the Issuer since the last release from escrow pursuant to this agreement, whichever is greater. All shares released from escrow shall, unless otherwise directed by the Exchange, be distributed pro- rata to all Security Holders.

[51] The terms "property or assets" used in the preamble to the Escrow Agreement, and said to be described in Schedule "A" to the agreement, mean the number of securities of the issuer allotted as consideration for the said property and the names of the security holders to whom the shares of the issuer were allotted. That Schedule "A", however, does not describe the property or assets. Only the names of the security holders and their respective allotment of escrowed securities are provided.

[52] It is apparent, however, that the reference to "property or assets" in the preamble can only logically refer to the shares of 108. Those shares were the subject of the "major transaction".

[53] The respondents argue that the reference to "property" throughout the document must be the same; otherwise, a different term would have been used. As set out at para. 20 of their factum:

20. Subsequent to the use of the term "certain property or asset(s)" in the first paragraph of the recitals to the Escrow Agreement, each time the word "property" is used thereafter, it is identified by the articles, or determiners, "the", "the aforesaid" or "the said", indicating the specific property as opposed to a flexible or changing definition of property.

[54] "Cash Flow" is defined in the document as the "net income derived from the property as shown on the audited financial statements or verified by the Issuer's auditor". The respondent's argument is that cash flow refers to the net income [page158] derived from the shares of 108, as opposed to the net income of Arrowsmith.

[55] If the reference is to the net income of 108, as opposed to the net income of Arrowsmith, then the appellants were not entitled to as many shares as were released to them from escrow. If, however, the reference is to the net income of Arrowsmith, the shares were properly released.

[56] First, I note that the net income is to be that shown on the audited financial statements, or verified by the auditors, of the issuer -- Arrowsmith -- not 108. Arrowsmith's financial statements do not show the net income derived from the shares of 108. The consolidated financial statements show the income and expenses of the golf course owned by 108, but the golf course is not the property referenced in the preamble to the Escrow Agreement. The major transaction was not an asset purchase. Arrowsmith acquired the shares of 108. Any net income from the shares would be dividend income and none is shown. Also, the call is not for what is shown on the audited statements of 108 or for the net income as verified by 108's auditors, but rather for those of the issuer, Arrowsmith.

[57] Second, the references to depreciation, depletion, deferred taxes, amortization of goodwill and amortization of research and development costs in clause 1(a)(i)--(v) of the Escrow Agreement have no relevance whatsoever if the "property" is the shares of 108. Nothing in that clause applies to dividends from shares.

[58] Third, the references in paras. 1(b) and (c) are all related to the issuer, Arrowsmith.

[59] Fourth, the agreement itself contemplates that the meaning of the language used may change depending on context. At para. 1, the opening language reads: "Where used in this agreement, or in any amendment or supplement hereto, unless the context otherwise requires" (emphasis added).

[60] Fifth, as indicated earlier in these reasons, the ASE is concerned with the earnings of Arrowsmith, since it is the company that is listed on its Junior Capital Program. It is only when that company's earnings are at a certain level that it will authorize the issuance of preference shares. While this was the first "major transaction" in 1999/2000, it was not the last. Arrowsmith later acquired other interests. [^6] [page159]

[61] In addition, in all Arrowsmith's audited financial statements, the reference to the subject preference shares is stated in the following terms:

The 3,325,000 Preferred Shares will be subject to a performance escrow pursuant to which one Preferred Share will be released from escrow for each $0.20 of cash flow of the Company, after adjustment for certain non-cash items.

[62] This reference can only be to Arrowsmith.

[63] The annual report of Arrowsmith Limited for the years 2001 and 2002 repeat precisely the same reference to the subject preference shares as above. Again, the reference can only be to the cash flow of Arrowsmith.

[64] In both the audited financial statements and the annual reports of Arrowsmith, the reference is to the "cash flow of the Company, after adjustment for certain non-cash items". Those "non-cash items" are found at para. 1(a)(i)--(v) of the Escrow Agreement.

[65] Finally, the ASE accepted the application for release from escrow and was obviously satisfied with it before it agreed to the release of the shares. Had it not been satisfied, it would not have released the shares. Further, even after Hawley made his complaint to the ASE, taking the position he has in this litigation, the ASE did nothing. The ASE did not even respond to his complaint. Therefore, it is a reasonable inference that had the ASE been of the view that Hawley's position was correct, it would never have released the shares from escrow when the application was made or, minimally, would have taken steps on receipt of Hawley's complaint. Neither of those things happened. This further reinforces my view that the reference to the "cash flow of 108" in its April 16, 1999 letter to Mr. Olley was simply an error.

[66] There was nothing improper with Fogler, Rubinoff LLP's application to the ASE for the release of shares on behalf of the company. The Escrow Agreement contemplates the application being made either by the security holders or the issuer. The security holders have the right to the receipt of the shares in payment for the shares they sold to the issuer and the issuer has the obligation to pay for those shares by release of its security.

[67] It must have been apparent to Hawley at all times, including when he approved the acquisition of the shares of 108, that his share holding would be diluted once the transaction was completed. Both Pennington and Fasken, or their corporate nominees, would have treasury shares issued to them -- Hawley would not. There is nothing "oppressive" about that fact. Hawley is, and was, a meticulous man, as can be seen from his notes on [page160] the draft financial statements he reviewed. Arrowsmith acquired all of the shares of 108 and had to pay for it. Pennington and Fasken owned 108's golf course, valued at $1.4 million, via their shareholdings in 108, and were entitled to be paid for it.

[68] There is no objection to the liquidation of Arrowsmith. Hawley consented to the liquidation in 2004 and, accordingly, that cannot in any way be raised by him as "oppressive conduct".

[69] Hawley's sole basis of complaint is that the shares were improperly released from escrow. He argues that the net income of 108 was significantly less than that of Arrowsmith and, as such, was not sufficient to permit the number of shares released from escrow to the appellants.

[70] For the foregoing reason, I am of the view that the only reasonable interpretation of the Escrow Agreement is that the phrase "net income derived from the property" refers to the net income derived from the property Arrowsmith. In my view, the documentary evidence, overwhelming, supports this conclusion.

[71] I would allow the appeal and set aside the judgment of Coats J. In its place, an order should go dismissing the application with costs, such costs to be agreed upon or assessed.

[72] Costs of the appeal to the appellants fixed in the sum of $30,000 on a partial indemnity scale, inclusive of disbursements and GST.

Appeal allowed.

[^1]: North Shore took no part at trial nor in the appeal. [^2]: Excluding the 225,000 preferred shares that were not converted. [^3]: Arrowsmith's common shares were listed and initialy posted for trading on the ASE on October 20, 1998. [^4]: Reference in the Share Purchase Agreement to the "Corporation" is to 108. [^5]: All of the outstanding shares of 108 were owned equaly by Hubland and the Pennington Trust. [^6]: 747 shares of Flea Market limited Partnership acquired May 26, 2001; 338,695 shares of the RMN-1 Small Business Development Corporation September 20, 2001; and 53,305 Shares of RMN-1 Small Business Development Corporation November 19, 2001.