Court of Appeal for Ontario

Date: 2017-05-30 Docket: C62778

Judges: Strathy C.J.O., Cronk and Pepall JJ.A.

Between

Angelica McGinn Plaintiff (Appellant)

and

Richard Evanshen, Evanshen Holdings Inc. and Indwisco Limited Defendants (Respondents)

Counsel

Mark Gelowitz and Larry Franschman, for the appellant

Bobby Sachdeva, for the respondents

Heard: May 12, 2017

On appeal from: the order of Justice Freya Kristjanson of the Superior Court of Justice, dated September 6, 2016.

Reasons for Decision

[1] This is an appeal to which the principles in Sattva apply: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633. The sole issue is whether the appellant has identified an extricable error of law in the motion judge's interpretation of the shareholders' agreement at issue or a palpable and overriding error in her assessment of the evidence. In our view, for the reasons that follow, no such error has been established. The motion judge's interpretation of the agreement is entitled to deference.

A. Background

[2] Indwisco Limited was founded in 1973 by Peter McGinn ("Peter") and Alex Garvin ("Al"). It is a successful manufacturing business. The respondent, Richard Evanshen, was hired in 1983 and eventually became Vice President and General Manager and a key employee, running the business for some 23 years.

[3] Initially, Peter and Al each owned, either directly or through holding companies, 50% of the shares of Indwisco. In 1994, Peter, Al and the respondent entered into a shareholders' agreement. The agreement gave Peter and Al the right to purchase the other's shares in the event the other wished to sell, became incapable or died. If the other shareholder did not wish to purchase the shares, the respondent was given the right to do so.

[4] A new shareholders' agreement, the one at issue, was executed in 2000 (the "Agreement"). There was evidence before the motion judge concerning the circumstances that gave rise to it.

[5] The respondent had become increasingly important to the success of the business. In recognition of this, at the time the Agreement was signed, he acquired 10% of the shares of Indwisco through an employee stock option agreement. The Agreement gives him the right to acquire additional shares in various specified circumstances.

[6] As well, Peter had been diagnosed with a terminal illness. It was agreed that he could transfer his shares to himself and his wife, the appellant Angelica McGinn, jointly, with right of survivorship. There was evidence before the motion judge, which she accepted, that this was done to avoid taxes or probate fees on Peter's death. The Agreement contains a provision limiting the appellant's rights in relation to these shares.

[7] As events transpired, Peter, whose death was anticipated when the Agreement was signed, lived until 2016. But Al, whose death had not been anticipated, died in 2012. At that time, the respondent exercised his right under the Agreement to acquire a portion of Al's shares to increase his shareholdings to 50% and Peter and the appellant purchased the balance of Al's shares. The result was that the respondent, on the one hand, and Peter and the appellant, on the other, were 50/50 shareholders. That remained the case until Peter's death in 2016.

[8] Prior to Peter's death, the respondent advanced his interpretation of the Agreement that on Peter's death, he is entitled to purchase the shares held jointly by Peter and the appellant. Peter and the appellant took a contrary position and brought this application, seeking a declaration that the respondent has no right to purchase the shares on Peter's death. Peter died shortly before the hearing of the application.

B. The Motion Judge's Reasons

[9] The motion judge resolved the issue in the respondent's favour, after considering the terms of the Agreement in light of the factual matrix in which it was executed.

[10] She rejected the appellant's submission that her ownership of the jointly-held shares, by right of survivorship, gives her independent status as a shareholder and that the respondent is not entitled to purchase those shares on Peter's death.

[11] Article 2.7, entitled "Application to Jointly Hold Shares", provides as follows:

The parties acknowledge and agree that Peter and Angelica jointly (with right of survivorship) hold the Shares previously owned by Peter. For all purposes of this Agreement, such Shares shall be considered as owned by Peter. For example, Peter alone shall vote such Shares. Further, in a transaction of purchase and sale of Shares herein where Peter is a vendor of Shares, Angelica must sell the same number of Shares. The same would apply to a purchase of Shares by Peter.

[12] The motion judge accepted the evidence that Article 2.7 was added on the advice of Peter's accountant for tax or estate-planning purposes, particularly to avoid probate fees. Neither Al nor the respondent was given a similar right to hold their shares jointly with their spouses.

[13] The motion judge found that the Agreement contemplates that the shares held by the appellant and Peter were to be treated as being owned by Peter and could be purchased by one or both of the other two shareholders on his death.

[14] The motion judge also rejected the appellant's submission that the respondent is not entitled to acquire more than 50% of the shares without the consent of the other shareholders. Before this court, the appellant does not challenge this conclusion.

C. The Appellant's Submissions

[15] The appellant makes three submissions. First, she submits that the motion judge failed to recognize that the Agreement contained protection for the "founders" (Al and Peter) and that the respondent is not entitled to acquire the "founder's shares" held by the appellant.

[16] Second, she submits that the motion judge erred in finding that the respondent is the only surviving shareholder. Instead, the motion judge should have recognized that the appellant is a shareholder of the jointly-held shares pursuant to her right of survivorship.

[17] Third, she submits that the motion judge erred in her interpretation of the option clause of the Agreement.

D. Discussion

[18] We begin with the first submission. There is nothing in the factual matrix to suggest that the concepts of "founder" or "founder's shares" played a role in the formation of the Agreement. Nor do those terms appear in the Agreement. The appellant did not express the argument in this way before the motion judge.

[19] The Agreement does contain terms to ensure that Al and Peter could preserve their relative positions in the ownership of Indwisco through the exercise of options in various circumstances (for example, as a result of another shareholder dying or wishing to sell his shares). However, there is nothing to prevent the respondent from increasing his shareholdings if the other two are unwilling or unable to exercise their options. Nor is there anything that would enable the estate of a "founder" to refuse to sell the "founder's shares" where another shareholder is entitled to exercise an option to purchase them. Indeed, the appellant admits that if Peter had died first, his estate would have had no right to retain his shares. We see no reasonable way of interpreting the Agreement so as to find that on Peter's death his estate can refuse to permit the respondent to exercise his option to purchase because the shares were "founder's shares".

[20] What was addressed in the court below, and what informed the motion judge's interpretation of the Agreement, was the factual matrix in which the Agreement was executed. This included the reason for giving the appellant a right of survivorship in relation to the jointly-held shares – namely, and solely, the avoidance of probate fees and taxes. This explains why the Agreement also provides that those shares would nevertheless be treated as Peter's "[f]or all purposes" – there was no intention to affect the other provisions of the Agreement.

[21] This also answers the appellant's second submission. Although the appellant had title to the shares by virtue of survivorship, they are to be treated as Peter's shares and are subject to the option to purchase of the other shareholder(s) on Peter's death.

[22] In our view, the motion judge's interpretation is reasonable. One provision in the Agreement, made solely to address Peter's tax and estate-planning wishes, does not alter the meaning of other provisions of the Agreement, which do not contemplate that the estates or spouses of any of the three shareholders could refuse to sell the deceased's shares to a surviving shareholder who wished to purchase them. Requiring the appellant to sell the shares on Peter's death is consistent with treating the shares as being Peter's "[f]or all purposes", within the meaning of Article 2.7.

[23] We turn to the appellant's third submission. At the time the Agreement was signed, the parties did not foresee that Al might predecease Peter. But the Agreement was not amended after Al's death and the motion judge was faced with its interpretation where the respondent was the only surviving shareholder. While limiting the respondent to 50% of the shares without the acquiescence of the other shareholder makes sense when there was at least one other shareholder, it makes no sense when the respondent was the only survivor.

[24] The appellant argues that the motion judge erred in the interpretation of Article 10.1, which appears in the Agreement under the heading "Death of a Shareholder". That provision states:

Upon the death of a Shareholder (hereinafter called the "Deceased Party") the surviving Shareholders (the "Survivors") shall have thirty (30) days (the "Notice Period") within which to notify the other parties hereto of the exercise of an option to acquire Shares owned by the Deceased Party.

[25] Article 10.6 provides that if the surviving shareholders do not elect to purchase all the shares of the Deceased Party, the estate of the Deceased Party can either retain the shares or require that they be sold to a third party.

[26] The motion judge found that Article 10.1 gives the respondent the right to exercise an option to acquire Peter's shares. Only if the other shareholders did not acquire the shares can Peter's estate retain them.

[27] The appellant submits that the motion judge's conclusion that Article 10.1 is a stand-alone option is an extricable error of law or a palpable and overriding error that permeates the motion judge's interpretation of Article 10. She submits that Article 10.1 simply introduces the options that follow, but is not itself an option. She submits, in any event, that Article 10.1 only applies when there are "surviving Shareholders" (plural) and not when there is a sole surviving shareholder.

[28] We disagree. The Agreement contains a standard provision (Article 17.6) that the singular includes the plural and vice versa. Thus, Article 10.1 can be interpreted to mean that when there is only one surviving shareholder, that person has the right to purchase all the shares held by the deceased shareholder. The other provisions of Article 10 can reasonably be interpreted to put limits on the respondent's right to acquire more than 50% of the shares when there is a second surviving shareholder, but not when the respondent is the sole survivor.

[29] Article 10.6 reinforces the conclusion that a sole surviving shareholder is entitled to purchase the shares held by the deceased shareholder (whether a "founder" or not) and that only if the option is not exercised can the estate retain the shares or sell them to a third party.

[30] The motion judge's responsibility was to apply the principles of contractual interpretation to the language of the Agreement in light of the factual matrix in which it was executed. In so doing, the motion judge was required to give meaning and, if possible, harmony, to all the terms of the contract. In our view, the motion judge fulfilled her responsibilities and her interpretation was reasonable – the respondent is entitled to compel the estate of the deceased shareholder to sell the shares to him, at a price to be determined as provided in the Agreement. The appellant has not discharged the heavy burden of establishing either an extricable error of law in the interpretation of the Agreement, or a palpable and overriding error in the motion judge's assessment of the evidence of the factual matrix.

[31] In the circumstances, it is unnecessary to consider the alternative question of the respondent's rights on the appellant's death.

[32] For these reasons, the appeal is dismissed. Costs to the respondent in the amount of $15,000, inclusive of disbursements and all applicable taxes.

"G.R. Strathy C.J.O."

"E.A. Cronk J.A."

"S.E. Pepall J.A."