Zeubear Investments Ltd. et al. v. Magi Seal Corporation et al. Buttonwood Holdings Inc. et al. v. Zeubear Investments Ltd. et al. [Indexed as: Zeubear Investments Ltd. v. Magi Seal Corp.]
103 O.R. (3d) 578
2010 ONCA 825
Court of Appeal for Ontario,
O'Connor A.C.J.O., Simmons and Juriansz JJ.A.
December 7, 2010
Corporations -- Shareholder agreements -- Buy-sell provisions of shareholders' agreements setting out "minimum terms" of offer and providing that "Notwithstanding any other provision hereof . . . the Terms shall be deemed to provide" that at least 50 per cent of purchase price was to be paid on closing -- Application judge erring in interpreting those provisions as stipulating only minimum terms that shareholder had to include in offer in order to trigger buy-sell process rather than as setting out actual terms that formed part of offer.
Group A and Group B were parties to two identical shareholders' agreements. The agreements contained a shotgun buy-sell clause. Section 4.12(2) of the clause, headed "Minimum terms", stated: "Notwithstanding any other provision hereof . . . the Terms shall be deemed to provide" that at least 50 per cent of the purchase price was to be paid in cash or by certified cheque or bank draft on closing. Group A triggered the buy-sell provisions, and Group B purported to accept the offers to purchase Group A's shares. Group A took the position that the purported acceptances were not made in accordance with the offers in its notices as both the offer to purchase and the offer to sell in the notices provided that 100 per cent of the purchase price was to be paid on closing, whereas Group B's [page579] acceptances provided only for a payment of at least 50 per cent of the purchase price in cash or by certified cheque or bank draft on closing, together with a promissory note for the balance of the purchase price. Group B brought an application for a declaration that its acceptances of Group A's offer were valid and enforceable. The application judge dismissed the application, holding that s. 4.12(2) stipulated only the minimum terms that a shareholder had to include in an offer in order to trigger the buy-sell process. Group B appealed.
Held, the appeal should be allowed.
Section 4.12(2) set out the actual payment terms that formed part of the buy-sell offer and not merely the minimum terms.
APPEAL from judgment of Rady J. of the Superior Court of Justice dated March 11, 2010 dismissing an application for a declaration that the appellants' acceptance of an offer under a buy-sell clause of the shareholders' agreement was valid.
Cases referred to 942925 Alberta Ltd. v. Thompson, [2008] A.J. No. 194, 2008 ABCA 81, 432 A.R. 177, 165 A.C.W.S. (3d) 663, 47 B.L.R. (4th) 1; 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
Jed M. Chinneck and William D. Mitches, for appellants. John W.T. Judson, for respondents.
The judgment of the court was delivered by
[1] O'CONNOR A.C.J.O.: -- This appeal is concerned with the interpretation of a buy-sell provision in a shareholders agreement.
Factual Background
[2] Prior to February 2007, the respondents James Harris and June Harris (the "Harris group") owned 100 per cent of the shares of the respondents Magi Seal Corporation and Magi Seal International Inc. (the "corporations"). The appellant Bradford Geddes ("Geddes") was hired as a consultant to the corporations and in time became an employee.
[3] On February 13, 2007, Geddes, through his wholly owned corporation, the appellant Zeubear Investments Ltd. (collectively, the "Geddes group"), purchased 40 per cent of the shares of the corporations from the Harris group for $1.2 million. The Geddes group paid for the shares by providing two promissory notes (the "promissory notes"). The two groups entered into a shareholders agreement with respect to the shares of each of the corporations (the "shareholders agreements"). With respect to the issues on this appeal, the shareholders agreements are [page580] identical. At the time of the shareholders agreements, Geddes was appointed president and chief operating officer of the corporations.
[4] Section 4.12 of the shareholders agreements contains the buy-sell regime that is at the core of the dispute between the parties.
[5] Section 4.12(1) sets out the means by which one of the parties may trigger the buy-sell process. The party wishing to trigger the buy-sell provisions (the "Offeror") must give a notice pursuant to which it offers to purchase the other party's shares and offers to sell its own shares at the same price. The terms and conditions, including the price for each share, apply to both the offer to buy and the offer to sell.
[6] Section 4.12(1) reads as follows:
4.12 Shotgun Buy-Sell Any Shareholder (in this section, the "Offeror") . . . may, subject to 30 days prior compliance with, or waiver of, the provisions of section 5.20, give notice (in this section, the "Notice") to all of the other Shareholders (in this section, the "Offerees") and to the Corporation invoking the provisions of this section:
(1) Notice. The Notice shall contain: (a) an offer by the Offeror to purchase all of the Shares owned by the Offerees and their Related Transferees (in this section, the "Sell Option"); (b) an offer by the Offeror to sell all of the Shares owned by such Offeror and its Related Transferees to the Offerees pro rata based upon the number of Shares owned by each Offeree (in this section, the "Purchase Option"); and (c) the terms and conditions, including the price to be paid for each Share, which shall apply to both the Sell Option and the Purchase Option (in this section, the "Terms");
[7] The party receiving a notice under s. 4.12(1) (the "Offeree") has 30 days to accept either the Offeror's offer to purchase or its offer to sell. If the Offeree fails to accept either offer, it is deemed to have accepted the offer to have its shares purchased. Section 4.12(3) reads as follows:
(3) Reply. Within 30 days of the Notice being given, each Offeree shall accept either the Sell Option or the Purchase Option by giving notice thereof to each of the other Shareholders and to the Corporation. If any Offeree does not accept either option by giving notice thereof as required within 30 days of the Notice being given, such Offeree shall be deemed to have accepted the Sell Option[.]
[8] The primary issue in this appeal centers on s. 4.12(2), which states that the terms of an offer under s. 4.12(1) shall be deemed to provide the matters set out in paras. (a), (b) and (c). For the purpose of this appeal, only para. (c) is relevant. [page581]
[9] The relevant portion of s. 4.12(2) reads as follows:
Minimum Terms. Notwithstanding any other provision hereof . . . the Terms shall be deemed to provide, inter alia, that: . . . . . (c) payment of the Purchase Price for all of the Shares to be purchased pursuant to this section shall be made by delivering on completion: (i) at least 50.0% of the Purchase Price in cash or by certified cheque or bank draft; and (ii) a promissory note for the balance of the Purchase Price, which promissory note shall: A. bear interest at a fixed rate . . . ; B. be payable in full on or before the first (1st) anniversary of the date of completion; C. be open for prepayment . . .; and D. be secured by a pledge of all the Shares held by the purchaser, including the Shares being purchased and, where the purchaser is a Shareholder which is not an individual, the personal guarantee of its Principal(s). (Emphasis added)
[10] During 2009, the relationship between Geddes and James Harris deteriorated. On December 1, 2009, Geddes left the businesses. The circumstances under which he left are in dispute. They are not relevant to the issues on appeal.
[11] On January 22, 2010, the Harris group triggered the buy-sell provisions by delivering notices to the Geddes group which offered to purchase the Geddes group shares (40 per cent of the corporations) or to sell its own shares (60 per cent of the corporations). The notices provided that in either case, a purchase or a sale, the price payable for the shares "shall be paid in full on closing". The term "closing" is used in the same sense as the word "completion" in s. 4.12(2) of the shareholders agreements.
[12] The notices provided that, under the offer to purchase the Geddes group's shares, the Harris group would pay the purchase price by applying the indebtedness owing under the promissory notes which the Geddes group had used to purchase 40 per cent of the shares in February 2007. As a result, the Geddes group would receive no cash in the transactions. On January 22, 2010, the amount owing under the promissory notes was $1,147,000.
[13] The notices also provided that, under the offer to sell the Harris group's 60 per cent of the shares of the corporations, the Geddes group would be required to pay the full amount of the purchase price of approximately $1.8 million on closing. In [page582] addition, under the terms of the promissory notes, if the Geddes group opted to purchase the Harris group's shares, it would be required to pay the amount then outstanding, being $1,147,000. In short, if the Geddes group opted to accept the Harris group's offer to sell its shares, it would be required to pay the Harris group close to $3 million on closing.
[14] On February 12, 2010, the Geddes group purported to accept the offers to purchase the Harris group's shares. Section 3 of the acceptances provided that the purchase price would be payable in full on April 22, 2010
. . . by delivering (in accordance with [the corporations'] USA [the shareholders agreements] Section 4.12(2)(c)): i) at least 50% of the Purchase Price in cash or by certified cheque or bank draft; and ii) a promissory note for the balance of the Purchase Price, which promissory note shall: A. bear interest at a fixed rate . . .; B. be payable in full on or before the first (1st) anniversary of the date of completion; C. be open for prepayment. . . .; and D. be secured by a pledge of all the Shares held by the purchaser, including the Shares being purchased and, where the purchaser is a Shareholder which is not an individual, the personal guarantee of its Principal(s);
[15] The Harris group took the position that the purported acceptances were not made in accordance with the offers in its notices and therefore were not valid. Both the offer to purchase and the offer to sell in the notices provided that 100 per cent of the purchase price was to be paid on closing. The Geddes group's acceptances provided only for a payment of at least 50 per cent of the purchase price in cash or by certified cheque or bank draft on closing together with a promissory note for the balance of the purchase price. The Harris group took the position that, because the payment terms in the acceptances were not in accordance with the payment terms in its offers, the acceptances were not valid. Thus, the Harris group asserted that the Geddes group was required to sell its shares to the Harris group pursuant to s. 4.12(3) of the shareholders agreements.
[16] In response, the Geddes group commenced an application in the Superior Court of Justice seeking an order declaring that its acceptances of the Harris group's offer to sell were valid and enforceable. [page583]
[17] The Geddes group argued that all offers made under s. 4.12 of the shareholders agreements are deemed to include the specific payment provisions set out in s. 4.12(2)(c). Under this interpretation, an offer may be accepted by providing for the payment of "at least 50.0% of the Purchase Price in cash or by certified cheque or bank draft" on completion and "a promissory note for the balance" containing the terms set out in s. 4.12(2)(c). The acceptances in this case were valid because they were consistent with the terms deemed by s. 4.12(2)(c) of the shareholders agreements to be provided in the offers.
Decision Below
[18] The application was argued before the application judge on March 2, 3 and 4, 2010. Both parties took the position, as they do on this appeal, that the Harris group's offers were valid under the shareholders agreements. The parties differed only on the issue of whether the Geddes group's acceptances were valid.
[19] By reasons delivered on March 11, 2010, the application judge dismissed the application. She held that the Geddes group's purported acceptances were not valid. The acceptances failed to reply in accordance with the offers in that they did not provide for payment of 100 per cent of the purchase price on completion. She held that, in effect, the acceptances were counter-offers.
[20] The application judge found that s. 4.12(2) stipulated only the minimum terms that a shareholder must include in an offer in order to trigger the buy-sell process. Under that interpretation, an offer may require more than 50 per cent of the purchase price to be paid in cash, by certified cheque or bank draft on completion. Implicitly, the application judge rejected the Geddes group's argument that s. 4.12(2) sets out the terms that are deemed to be included in an offer.
[21] In the result, the application judge found that pursuant to s. 4.12(3), the Geddes group was deemed to have accepted the Harris group's offer to purchase its shares.
Analysis
(a) The law
[22] Both parties agree that the standard of review in this appeal is one of correctness. I accept their position. In my view, the Geddes group's submission that the application judge erred in the interpretation of s. 4.12 involves a review of how the legal principles relating to contractual interpretation were applied and does not involve a consideration of any factual findings. As [page584] such, this court should review the interpretation of the shareholders agreements using a standard of correctness.
[23] When interpreting a written contract, a court should focus on the meaning of the words used in the contract. It should consider the meaning of the words in light of the whole of the contract as well as in the context in which the contract was made, sometimes called the factual matrix. The purpose of the interpretative exercise is to determine the meaning of the contract in an objective sense, by asking what the parties using the words in the contract against the relevant background would reasonably have been understood to mean: 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. 51.
[24] In this case, the court is confronted with the interpretation of a buy-sell provision in a commercial contract. I agree with the observation of the Alberta Court of Appeal in 942925 Alberta Ltd. v. Thompson, 2008 ABCA 81, [2008] A.J. No. 194, 47 B.L.R. (4th) 1 (C.A.), at para. 21, that "[a] shareholder must strictly comply with the terms of a shotgun clause [buy-sell] in order to obtain its benefit".
(b) Application to this case
[25] The interpretation question is whether s. 4.12(2)(c) sets out the minimum payment terms for a buy-sell offer or instead sets out the actual terms that form part of that offer. If the former, the party triggering the buy-sell clause has flexibility when it comes to setting the payment terms for its offers. The party may provide for payment of between 50 and 100 per cent of the purchase price in cash, by certified cheque or by bank draft, with any balance payable by a promissory note. On the second interpretation, s. 4.12(2) deems the payment provisions of para. (c) to be included in the terms of an offer. It would therefore not be open to a triggering party to provide for another means of payment inconsistent with the terms set out in para. (c). Put another way, the payment terms in para. (c) are automatically included in a notice making a buy-sell offer under s. 4.12(1).
[26] I start with the language of s. 4.12(1) and (2). I am satisfied that the language of those subsections, viewed objectively, indicates an intention that para. (c) of s. 4.12(2) be included as a term of an offer made under s. 4.12(1).
[27] Section 4.12(1)(c) provides that a notice triggering the buy-sell process shall contain "the terms and conditions, including the price to be paid for each Share, which shall apply to the sell option and the purchase option (in this section, the 'Terms')" (emphasis added). [page585]
[28] Section 4.12(2) is headed "Minimum Terms". The relevant part of the introduction to the section reads as follows:
Notwithstanding any other provision hereof . . . the Terms shall be deemed to provide, inter alia, that: (Emphasis added)
This introductory language is then followed by three paragraphs lettered (a), (b) and (c).
[29] On its face, the highlighted language in the introduction indicates that the lettered paragraphs are deemed to be included in an offer made under the section. The language is mandatory. Thus, if an offer does not include the terms and conditions set out in paras. (a) to (c) of s. 4.12(2), it is deemed to include them. Put another way, the lettered paragraphs in s. 4.12(2) are mandatory terms that must be either expressly included in an offer or deemed to be included.
[30] Paragraph (c) of s. 4.12(2) is the paragraph in issue. For convenience, I repeat it here:
(c) payment of the Purchase Price for all of the Shares to be purchased pursuant to this section shall be made by delivering on completion: (i) at least 50.0% of the Purchase Price in cash or by certified cheque or bank draft; and (ii) a promissory note for the balance of the Purchase Price,
The terms of the promissory note are set out in para. 9, above.
[31] By virtue of the introductory language in s. 4.12(2), para. (c) is deemed to be a "Term" of an offer made under the section. Thus, pursuant to para. (c), an Offeree, such as the Geddes group, who wishes to buy the Offeror's shares, is obliged to pay at least 50 per cent of the purchase price on closing and the balance by way of a promissory note with the terms set out in the paragraph. Pursuant to the language of para. (c), the Offeree is entitled to pay more than 50 per cent on completion if it so chooses, but it is not required to do so.
[32] The Harris group argues, and the application judge found, that s. 4.12(2)(c) sets out the minimum standard for an offer. At a minimum, an offer must require at least 50 per cent of the purchase price to be paid on closing. Under this interpretation, the Offeror has the option of requiring more than 50 per cent to be paid on closing. In this case, the Harris group required 100 per cent payment on closing. The problem with this argument, as I see it, is that it is inconsistent with the words used in the section. It fails to take into account the introductory language which says "the Terms shall be deemed to provide". [page586]
[33] The Harris group's arguments would have the court replace s. 4.12(2)(c) with a clause along the following lines:
An offer shall provide the amount of the Purchase Price that shall be paid on completion by way of cash, promissory note or bank draft, provided that such amount is not less than 50% of the Purchase Price. The balance, if any, shall be paid by way of promissory note[.]
[34] The difference between the two interpretations is significant. Under the Harris group's interpretation, an Offeror is entitled to require payment of between 50 and 100 per cent on completion. Under the Geddes group's interpretation, an Offeree cannot be required to pay more than 50 per cent on completion. In my view, the language of the section favours the latter interpretation.
[35] In reaching this point, I have concerned myself only with the language in s. 4.12. I have reviewed the language of the balance of the shareholders agreements and find nothing that assists in the interpretative exercise.
[36] The Geddes group argues that the context or factual matrix in which the shareholders agreements were created favours the interpretation that I consider flows from the language of s. 4.12. The Harris group argues that there is nothing in the factual background or context in which the agreements were created to which this court should have regard in interpreting s. 4.12.
[37] In these circumstances, I do not find it necessary to look at the factual matrix or context.
[38] In my view, the interpretation of s. 4.12(2) that flows from the language used in the shareholders agreements leads to a result that is commercially reasonable. That interpretation avoids the very situation that arose in this case, whereby the Harris group would be able to purchase the Geddes group's shares without paying any money unless the Geddes group was able to pay close to $3 million within 90 days in order to purchase the Harris group's shares and pay the amounts owing under the promissory notes. In my view, it is not commercially unreasonable to interpret s. 4.12(2) in a manner that, at least to some extent, levels the buy-sell playing field between the parties.
[39] Thus, I am satisfied that the Geddes group had the option of accepting the Harris group's offer to sell its shares with the payment provisions set out in s. 4.12(2)(c). While it is correct that the Harris group was the triggering shareholder, it could only make an offer that conformed to the shareholders agreements. The Harris group's offers were deemed to include the payment terms set out in s. 4.12(2)(c). The Geddes group's [page587] acceptances responded to those offers. In my view, the acceptances were valid.
[40] On my interpretation, the Geddes group was entitled to acquire the Harris group's shares as of April 22, 2010. Because of the decision below, that did not happen. The Geddes group is entitled to be put in the position it would have been in had the sale been completed. Given the conclusion I have reached, a number of issues arise, including (a) the timing of completion of the sale to the Geddes group; (b) the process for the orderly transfer of management of the businesses of the corporations from the Harris group to the Geddes group; and (c) an accounting of the operations of the companies in the period from April 22, 2010 when the sale should have been completed to the date of the closing of the actual sale.
[41] I recognize there may be other issues that arise in sorting out a fair and reasonable way to transfer the shares and management of the businesses of the corporations. Understandably, the parties did not make full argument on these matters on appeal. I recommend that the parties attempt to resolve, by negotiation, the best way to address the issues arising from the disposition made by this court. If they are unsuccessful, I would direct that the issues be remitted to the court below.
[42] In addition, I note that there are several matters raised in the application that were not addressed by the application judge because of the result she had reached. Those issues should form part of the discussions I refer to above. Again, if they are not resolved, I would remit those matters to the court below.
[43] In the result, I would allow the appeal and set aside the judgment below. I would make the orders sought in paras. 1(b)(i), 1(e) and 1(f) in the notice of application dated February 17, 2010.
[44] As to costs, I would set aside the award of costs below and order the Harris group to pay the Geddes group's costs of the application. That amount, if it cannot be agreed upon, should be fixed by the court below.
[45] I would order the Harris group to pay the Geddes group's costs of this appeal fixed in the amount of $20,000, inclusive of disbursements and applicable taxes.
Appeal allowed.