Court of Appeal for Ontario

Date: 20211201 Docket: C67057, C67062, C67364 & C67376

Before: Hourigan, Huscroft and Coroza JJ.A.

Between

Docket: C67057 Extreme Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir, and Kenneth Teslia Plaintiffs/Defendants by Counterclaim (Respondents)

And

Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Chamath Palihapitiya, El Investco I Inc., Extreme Venture Partners Annex Fund I LP, and EVP GP Annex Fund I Inc. Defendants/ Plaintiffs by Counterclaim (Appellants / Respondents)

And Between

Docket: C67062 Extreme Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir, and Kenneth Teslia Plaintiffs/Defendants by Counterclaim (Respondents/Appellants by Cross-Appeal)

And

Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Chamath Palihapitiya, El Investco I Inc., Extreme Venture Partners Annex Fund I LP, EVP GP Annex Fund I Inc., Cassels Brock & Blackwell LLP, and Seven Hills Group LLC Defendants/Plaintiffs by Counterclaim (Appellants/Respondents by Cross-Appeal)

And Between

Docket: C67364 Extreme Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir, and Kenneth Teslia Plaintiffs/Defendants by Counterclaim (Respondents)

And

Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Chamath Palihapitiya, El Investco I Inc., Extreme Venture Partners Annex Fund I LP, EVP GP Annex Fund I Inc., Cassels Brock & Blackwell LLP, and Seven Hills Group LLC Defendants/Plaintiffs by Counterclaim (Appellants)

And Between

Docket: C67376 Extreme Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir And Kenneth Teslia Plaintiffs (Respondents)

And

Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Chamath Palihapitiya, El Investco I Inc., Extreme Venture Partners Annex Fund I LP, EVP GP Annex Fund I Inc., Cassels Brock & Blackwell LLP, and Seven Hills Group LLC Defendants (Appellants)

Counsel: Jonathan Lisus, Crawford Smith, Nadia Campion, Vlad Calina and John Carlo Mastrangelo, for the appellants Amar Varma, Sundeep Mandra, Varma Holdco Inc. and Madra Holdco Inc. Andrew Brodkin, David E. Lederman and Daniel Cappe, for the appellants Chamath Palihapitiya and El Investco 1 Inc. Won J. Kim, Megan B. McPhee, Aris Gyamfi and Rachael Sider, for the respondents

Heard: October 4-5, 2021 by video conference

On appeal from the orders of Justice Barbara A. Conway of the Superior Court of Justice, dated May 14, 2019, July 24, 2019, and February 4, 2020, and the judgment of Justice Barbara A. Conway of the Superior Court of Justice, dated May 14, 2019.

Hourigan J.A.:

Part I - Introduction

[1] After a five-week trial, the trial judge released thorough and compelling reasons that weaved a narrative of corporate malfeasance, avarice, and deceit in the technology sector. The appeals before this court raise important issues about remedies and, more fundamentally, acceptable standards of conduct in corporate Canada.

[2] I begin with an introduction of the key players. Amar Varma and Sundeep Madra, along with their respective holding companies, Varma Holdco Inc. (“Varma Holdco”) and Madra Holdco Inc. (“Madra Holdco”), are the "Varma/Madra Appellants." Chamath Palihapitiya and his holding company, El Investco 1 Inc. (“Investco”), are the “Palihapitiya Appellants”. They are collectively referred to as the "Appellants". Extreme Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir and Kenneth Teslia are the "Respondents".

[3] At trial, the Respondents asserted two central claims: (1) the “Annex Fund Claim”, alleging that the Varma/Madra Appellants were liable for breach of fiduciary duty and breach of contract regarding the establishment of a competing business, and (2) the “Xtreme Labs Claim”, alleging that the Varma/Madra Appellants were liable for breach of fiduciary duty, breach of contract, and conspiracy and that the Palihapitiya Appellants were liable in tort for knowing assistance in breach of fiduciary duty, inducing breach of contract, and conspiracy, all concerning the sale of Xtreme Labs Inc. (“Xtreme Labs”).

[4] The trial judge found in favour of the Respondents and ordered that: (1) on the Annex Fund Claim, Varma and Madra are liable for $250,000 in punitive damages, and (2) on the Xtreme Labs Claim, the Palihapitiya Appellants and the Varma/Madra Appellants are jointly and severally liable for $3.36 million (U.S.) in damages and $12.33 million (U.S.) in disgorgement of profits. She also made additional orders regarding the applicable exchange rate and prejudgment interest.

[5] The two groups of appellants take different approaches to this appeal. The Varma/Madra Appellants do not challenge the factual findings made by the trial judge. Instead, in their written materials, these appellants raise several alleged legal errors, which were narrowed in their oral submissions to two issues: (i) the calculation of damages on the sale of Xtreme Labs, and (ii) the validity of an amendment to the statement of claim to seek disgorgement regarding the sale of Hatch Labs Inc. (“Hatch Labs”) and the disgorgement order ultimately made by the trial judge.

[6] In these reasons, I will explain why I am not persuaded by either of these arguments or the other grounds of appeal that were not addressed in oral argument. In summary, the trial judge made a sensible damages calculation, grounded in the evidence, which does not require appellate intervention. She also reasonably exercised her discretion in permitting the amendment of the claim and making the disgorgement order. There is also no basis to interfere with the trial judge’s conclusions on the issues raised by the Appellants in their written material but not addressed in their oral submissions.

[7] The Palihapitiya Appellants adopt the legal arguments advanced by the Varma/Madra Appellants. They further submit that the trial judge erred in imposing joint and several liability for her disgorgement order. Relying on English authority, they say that a knowing assistant should not face the same liability as a faithless fiduciary. While that position is contrary to some Canadian jurisprudence, I am prepared to accept that there might be circumstances where a knowing assistant should have their liability limited. However, this is not such a case. Here, the Palihapitiya Appellants were active participants in the core wrongful conduct as well as its primary beneficiaries. There is no equitable reason why their liability should be limited.

[8] The Palihapitiya Appellants also offer a double-barrelled attack on the trial judge's factual findings as part of their submission that she erred in finding that Palihapitiya had knowingly assisted in the breaches of fiduciary duty. First, they argue that she made a series of palpable and overriding errors of fact. Second, they submit that their conduct was well within the boundaries of ethical and legal corporate behaviour and that the trial judge's findings of misconduct are based on her own “idiosyncratic moral values.” These appellants argue that permitting the trial judge's findings to stand would result in confusion in the Canadian corporate world as business people would be held to unknowable standards of conduct that conflict with their legitimate business interests.

[9] The principal problem with the first part of the Palihapitiya Appellants' position is that it is dependent upon the Appellants' credibility. The trial judge rightly found the Appellants to be incredible witnesses whose sworn testimony was routinely contradicted by the written record. Moreover, Palihapitiya had an unusual habit in his public and private communications of bragging about significant aspects of his alleged misbehaviour but then inexplicably denying any misconduct on the witness stand.

[10] The second part of the submission is a straw man argument. The trial judge's conclusions were not grounded in her idiosyncratic moral values, nor did she require Palihapitiya to compromise his legitimate business interests. Instead, she applied well-established tort and corporate law principles to his conduct and made findings of illegality supported by the record. Counsel's submission that the Appellants' unethical and illegal behaviour should be excused as standard examples of corporate conduct is meritless. The trial judge, an experienced commercial judge, saw through this argument and reached the correct conclusion. In my view, if the Appellants' conduct was not the subject of adverse findings by her, the court would have communicated a message that there are few, if any, limits to corporate malfeasance. Such a message would have caused significant uncertainty in the Canadian business world.

[11] The final legal issue is the cross-appeal. Ms. McPhee, on behalf of the Respondents, submits that the trial judge was correct in making an order for disgorgement. Further, she argues that the trial judge was right in finding that the order should act as a deterrent to similar behaviour in keeping with the prophylactic purpose of disgorgement. However, Ms. McPhee submits that the order made will have no deterrent effect because the Appellants are obliged to disgorge to the Respondents only what they would otherwise be entitled to receive had they not breached their fiduciary duty. I am persuaded by that argument and agree that the disgorgement order should be increased to achieve its deterrent purpose.

[12] The question raised by the panel in oral argument was whether a prophylactic disgorgement order necessarily requires the disgorgement of all ill-gotten gains. The Respondents argue that it should. However, counsel for the Appellants chose to make no submissions on the point. My view is that courts should have flexibility in making a prophylactic disgorgement order, and thus there should not be an automatic rule for the disgorgement of all profits in all circumstances. However, on the facts of this case, where the Appellants have engaged in a litany of brazenly illegal acts and where their counsel elected not to offer any submissions on the point, I would order disgorgement of the total amount of the profits.

Part II – Background Facts

[13] The following high-level factual overview will provide the necessary context to consider the issues in these appeals.

(a) Fund I

[14] Extreme Venture Partners Fund I LP (“Fund I”) is a venture capital fund that provides seed capital to start-up technology companies. It was established in November 2007 by the following parties in this litigation: Sharma, Bashir, Teslia, Varma and Madra.

[15] Fund I was registered as a limited partnership, and its general partner, EVP GP Inc. ("EVP GP"), was incorporated. The shares of EVP GP were owned personally by Sharma, Bashir and Teslia, as well by Varma Holdco and Madra Holdco.

[16] EVP GP managed the business of Fund I. The board of directors of EVP GP consisted of Sharma, Bashir, Teslia, Varma and Madra. In addition, Varma and Madra served as managing directors of EVP GP, were responsible for all aspects of the day-to-day operations of Fund I, and recommended companies for investment to the Investment Committee.

[17] Fund I grew rapidly, but by late 2010, tensions had started to develop in the relationship between Sharma, Bashir and Teslia on the one hand and Varma and Madra on the other. Varma and Madra testified at trial that they were doing all the work to grow the businesses and were not being adequately recognized or compensated for their efforts.

(b) Annex Fund

[18] In November 2010, Madra was on a plane to California and ran into the managing director of Northleaf Capital Partners (“Northleaf”). They began talking about establishing a fund together, with Northleaf as the primary limited partner. Varma, who had been looking into pitching Northleaf for Fund I with Sharma, joined these conversations at a later meeting. Madra and Varma did not tell Sharma, Bashir or Teslia about the meetings.

[19] In December 2011, Madra and Varma established a second fund named the Annex Fund. Madra and Varma did not tell Sharma, Bashir or Teslia about the establishment of the Annex Fund. Instead, Madra and Varma surreptitiously obtained $5 million in financing from Northleaf. After the Annex Fund was established, Madra and Varma provided Northleaf with confidential information about Fund I's portfolio and investment strategy. As a result, the Annex Fund invested in six of Fund I's most successful portfolio companies and operated for two years until it closed in 2013. The foregoing facts were the basis of the Annex Fund Claim.

(c) Xtreme Labs

[20] One of Fund I’s investments was Xtreme Labs, a mobile software development lab business co-founded by Madra and Varma. The original equity of Extreme Labs, less 5% held by Go Pivotal Inc. (“Pivotal”), was split equally among Sharma, Bashir, Teslia, Varma Holdco and Madra Holdco. Fund I later acquired an interest in the company. Madra and Varma were also the managing directors and co-CEOs of Xtreme Labs and were responsible for its day-to-day operations.

[21] By 2011, the parties had started to explore options to sell Xtreme Labs. Despite the prior years’ rapid growth, Madra and Varma presented projections that estimated the company’s growth would slow, which surprised and disappointed the Xtreme Labs board. They advised the board, which included Sharma, Bashir and Teslia, that the projected revenues for the current fiscal year would be $12 million (U.S.).The initial efforts to sell Xtreme Labs were unsuccessful, and the board members had different opinions about the company's value.

[22] On February 1, 2012, Palihapitiya contacted Madra to talk about buying Xtreme Labs. Palihapitiya is a prominent Silicon Valley entrepreneur, a founding senior executive at Facebook, and a good friend of Varma and Madra. On March 20, Palihapitiya, Varma and Madra had dinner together in Toronto and then went to Varma’s apartment afterward. Together, they prepared an offer by Palihapitiya to purchase the company that would allow Varma and Madra to stay on with the company after the sale. The offer was forwarded to the rest of the board the next day, but Varma and Madra did not tell the board that they had been with Palihapitiya the previous evening, working on the offer.

[23] After the offer and a counteroffer, as well as an independent valuation by Seven Hills Group LLC (“Seven Hills”) that Varma and Madra oversaw, the Respondents agreed to sell their shares in Xtreme Labs to Palihapitiya’s holding company, Investco. The purchase price was based on an enterprise value for Xtreme Labs of $18 million (U.S.). The selling shareholders received $12 million (U.S.) for their shares of Xtreme Labs. Varma and Madra and the Xtreme Labs employees received $6 million (U.S.) in the ongoing equity of the company.

[24] In October 2013, Palihapitiya negotiated the sale of shares of Xtreme Labs to Pivotal for $60 million (U.S.). Prior to the sale, Palihapitiya, Varma and Madra carved certain assets out of Xtreme Labs and transferred them to a holding company of which they were the sole shareholders, 2390184 Ontario Inc. (“239 Ontario”). One of those assets was a 13% equity interest in Hatch Labs, which had developed the mobile dating app Tinder. In March 2014, 239 Ontario sold its stake in Hatch Labs to a large American corporation, InterActive Corp. (“IAC”), for $30 million (U.S.).

Part III – Proceedings Below

[25] The Respondents sued the Appellants, asserting various causes of action, including breach of fiduciary duty, breach of contract, inducing breach of fiduciary duty and inducing breach of contract.

(a) Standing

[26] At trial, the Appellants noted that Varma and Madra were managing directors of EVP GP and not Fund I. Therefore, they submitted, Fund I had no standing to claim a breach of fiduciary duty. Further, they argued that EVP GP had no standing to assert such a claim because it had not suffered harm. In addition, the Appellants’ position was that in the Xtreme Labs sale, Varma and Madra were acting exclusively in their role as Xtreme Labs directors, not EVP GP directors. Thus, they argued that they owed no duty to any of the Respondents.

[27] The trial judge rejected these submissions. She observed that "[i]n this case, Fund I is alleging that it suffered harm as a result of the breach of fiduciary duty owed by Amar and Sunny to its general partner, EVP GP, which was responsible for managing the business of Fund I.” The trial judge also noted that EVP GP holds all the property of the limited partnership. Therefore, to the extent that EVP GP received any damages, those damages would be the property of Fund I. Under either rationale, the damages would be receivable by Fund I, the party that alleged the loss. Additionally, she found that Varma and Madra were directors of both EVP GP and Xtreme Labs, and “as directors of EVP GP, owed fiduciary duties to that company in connection with the sale of Xtreme Labs."

(b) Annex Fund Claim

[28] Sharma, Bashir and Teslia testified that they trusted Varma and Madra as managing directors of Fund I. Their evidence was that the plan from the outset was to operate a series of funds under the Extreme Venture Partners brand, with Varma and Madra taking a lead role. If Varma and Madra started a new fund independently, the expectation was they would do so transparently and properly by buying out the Respondents’ interests in EVP GP under the EVP GP Shareholders' Agreement. Varma and Madra, on the other hand, testified they were entitled to pursue the second fund on their own, without the Respondents’ involvement.

[29] The trial judge accepted the Respondents' account and found that Varma and Madra had breached their duties of honesty, loyalty, and confidentiality owed by virtue of being directors of EVP GP. However, the trial judge dismissed the Respondents’ passing off claim.

[30] While the Respondents alleged reputational damages as part of the Annex Fund Claim, the trial judge ruled such damages were not made out. In addition, Fund I sought compensatory damages for lost opportunities, but the trial judge rejected that claim. However, the trial judge found that punitive damages were appropriate on the basis that Varma and Madra’s conduct was “most deserving” of sanction and required denunciation. Accordingly, she awarded $250,000 punitive damages against each of Varma and Madra, payable to Fund I.

(c) Xtreme Labs Claim

(i) General Findings

[31] Palihapitiya, Varma, and Madra denied that they conspired on the Xtreme Labs acquisition. However, the trial judge rejected their evidence as incredible, in part because it was contradicted by the written record. Instead, she found that they worked together and coordinated their efforts to present Palihapitiya's offer to buy the company at the board meeting in March 2012. Further, Varma and Madra hid this coordination and pressured the board to accept the offer. They acted out of self-interest as Palihapitiya’s offer to buy the company was their opportunity to increase their compensation and equity in the business.

[32] The trial judge also found that Varma and Madra worked with Palihapitiya to facilitate his acquisition of Xtreme Labs at a discounted purchase price by: (a) understating the company’s revenue projections, (b) advancing a low earnings multiple, and (c) concealing the company’s equity interest in Hatch Labs.

(ii) Causes of Action

[33] The trial judge carefully considered each of the constituent elements of the causes of action asserted.

[34] Regarding the claim of breach of fiduciary duty, Fund I alleged at trial that Varma and Madra breached their fiduciary duties as directors of Fund I’s general partner, EVP GP, in connection with the Xtreme Labs sale transaction. The trial judge agreed. She found that they were in a conflict of interest and were not transparent with the EVP GP board. The board was entitled from the outset to know the role Varma and Madra were playing with respect to Palihapitiya’s offer. In addition, Varma and Madra breached their duty of loyalty in various ways, such as by providing confidential information to Palihapitiya before the sale had closed.

[35] On the claim of breach of contract/breach of warranty, the trial judge found that Varma and Madra breached their warranties in the Xtreme Labs sale contract. In addition, their conduct constituted a breach of contract by Varma Holdco and Madra Holdco of their confidentiality obligations.

[36] Palihapitiya testified that he did not know what information was exchanged and what communications Varma and Madra had with other board members. Accordingly, he denied that he provided knowing assistance to any breach of fiduciary duty. His evidence was found to be contradicted by his email to Madra on March 16, instructing Madra what to tell the board about the multiplier on a recent sale regarding Pivotal. It was also contradicted by the ongoing communications between the co-conspirators as to what was transpiring among board members. The trial judge found that Palihapitiya worked together with Varma and Madra on an offer that included a Pivotal multiplier figure that they knew was understated. Palihapitiya sent this offer to Varma and Madra to present to the board and, by extension, knowingly participated in their advancing an understated multiplier figure to the board. Palihapitiya therefore assisted Varma and Madra in breaching their duty of honesty.

[37] The trial judge also concluded that Palihapitiya knowingly assisted Varma and Madra in breaching their duty of honesty concerning Hatch Labs/Tinder. Varma and Madra did not disclose the existence of the equity interest in Hatch Labs or the launch of Tinder to Fund I before closing. Palihapitiya was found to have known about Hatch Labs/Tinder and, along with Varma and Madra, to have closed the transaction based on this concealed information. In so doing, Palihapitiya knowingly assisted Varma and Madra in the breach of their fiduciary duty.

[38] The elements of the tort of inducing breach of contract were met as Palihapitiya induced Varma Holdco and Madra Holdco to breach their contractual obligations under the Xtreme Labs Shareholders’ Agreement. Palihapitiya intended to and did procure the breach of the Xtreme Labs Shareholders’ Agreement when he asked Varma and Madra to provide him with confidential information from Xtreme Labs before signing the letter of intent in May 2012.

[39] Concerning the conspiracy claim, the trial judge relied on, among other things, Palihapitiya's talk at a Town Hall held with the employees of Xtreme Labs shortly after the sale and his speech at the Collision Conference in 2014 to find that Palihapitiya, Varma and Madra were acting in concert. The requisite unlawful conduct included the breaches of fiduciary duty, contract and warranty, as well as Palihapitiya's knowing assistance in the breach of fiduciary duties and his inducement of the breach of the Xtreme Labs Shareholders' Agreement. This misconduct was directed towards the Respondents and caused damages.

(iii) Remedies

[40] The trial judge found that Fund I, Sharma and Bashir sold their shares of Xtreme Labs based on the wrongful conduct of Palihapitiya, Varma and Madra. Had Fund I, Sharma and Bashir been given accurate information about the financial position and prospects of Xtreme Labs, they would have had the opportunity to negotiate a sale to Palihapitiya or another buyer based on this accurate information or to continue to hold their shares.

[41] Using actual revenues of $17.2 million (U.S.) for FY 2012, the trial judge multiplied that figure by 1.5, resulting in a revised purchase price of $25.8 million (U.S.). Since Fund I, Sharma and Bashir owned 64.56% of the shares of Xtreme Labs, the trial judge concluded that they would receive 64.56% of $17.20 million (U.S.), the latter figure referring to the cash amount they would have received on the new purchase price. In other words, they would have received $3.36 million (U.S.) more than what they did receive on the sale of the company. Further, because Palihapitiya, Varma, Madra, Investco, Varma Holdco and Madra Holdco were all participants in the acquisition of Xtreme Labs that was based on the breaches of fiduciary and contractual duties and all played a role in the conspiracy, she concluded that they should be jointly and severally responsible for the $3.36 (U.S.) million in losses.

[42] Regarding Hatch Labs, while the Respondents initially claimed damages for the undervalued share price and lost opportunity, during their closing submissions they sought to amend their claim to elect disgorgement. After considering the Appellants' submissions on prejudice, the trial judge granted leave to amend the claim. She found no non-compensable prejudice in granting the amendment, as it was simply another remedy being asserted and would not take the Appellants by surprise.

[43] At the time of the sale to Palihapitiya (through Investco), Fund I owned 41.82% of the shares of Xtreme Labs and therefore had a 41.82% indirect interest in the Hatch Labs equity. One year later, Palihapitiya, Varma and Madra transferred the Hatch Labs equity to their holding company, 239 Ontario. The shareholders of 239 Ontario were Investco (50%), Varma and Madra (25% each). Six months later, 239 Ontario sold the Hatch Labs equity to IAC for $30 million (U.S.).

[44] According to the trial judge, by concealing the existence of the Hatch Labs equity, Varma and Madra, working with Palihapitiya/Investco, deprived Fund I of the opportunity to take it into account on the sale of its shares of Xtreme Labs, to renegotiate the terms of sale, or to decide not to sell its shares of Xtreme Labs at that time. Further, as a direct result of this concealment, Varma, Madra and Palihapitiya /Investco were able to profit from Fund I’s interest in the Hatch Labs equity. Accordingly, the trial judge found that they should not be entitled to retain the profits attributable to their wrongdoing. A disgorgement order was required to serve a deterrent purpose. However, she found that the order should only apply to the profits that corresponded to Fund I’s 41.82% interest in the Hatch Labs equity.

(iv) Exchange Rate and Prejudgment Interest

[45] The trial judge issued supplementary reasons for judgment regarding the exchange rate and prejudgment interest applicable to the awards she made in her primary reasons for judgment.

[46] Orders payable in a foreign currency are subject to s. 121(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 (“CJA”). The default rule is that the applicable exchange rate to be used is the rate on the day before payment is received by the judgment creditor. However, s. 121(3) of the CJA gives the court the discretion to apply a different exchange rate date if it considers using the rate on the day before payment to be inequitable.

[47] The Appellants submitted that the trial judge should exercise her discretion to use the exchange rate that existed on the date of the transactions in question because the current exchange rate reflected a significantly weakened Canadian dollar. Further, the Appellants argued that because the Respondents' expert used the date of the transactions in his report for currency conversion, the Respondents were estopped from asserting a right to the current exchange rate.

[48] The trial judge found that the Appellants had not met their onus of establishing why she should depart from the usual rule regarding the exchange rate. She observed that the s. 121(3) discretion is often exercised with a view to preventing inequity and making plaintiffs whole. Here, however, choosing the transaction dates with a more favourable exchange rate in favour of the Appellants would allow them to benefit from their wrongful conduct at the expense of the Respondents. Further, she found that the Respondents did not rely on their expert report in closing submissions.

[49] Regarding prejudgment interest on the Xtreme Labs Claim, the parties used the same formula and the same rate of 1.3%. The only issue was the starting date. The Respondents claimed prejudgment interest on the full amount from August 15, 2012. This was the date the Xtreme Labs sale closed and, they submitted, the date the cause of action arose. The Appellants agreed that August 15, 2012 was the date for the Xtreme Labs sale damages but submitted that the loss arising from the Hatch Labs sale only occurred on April 3, 2014, the date when they first received profits from the sale that closed on March 11, 2014.

[50] The trial judge ruled in favour of the Respondents, finding that the Appellants were improperly equating the remedy of disgorgement with the date that the cause of action arose. Disgorgement of profits was the remedy for Varma and Madra’s breach of fiduciary duty and Palihapitiya/Investco's knowing assistance concerning the concealment of Xtreme Labs' equity interest in Hatch Labs. The cause of action arose with the concealment of this asset when the Appellants purchased the shares of Xtreme Labs on August 15, 2012. Therefore, the trial judge concluded that this was the date the cause of action arose and the date from which prejudgment interest should be calculated.

Part IV – Analysis

(a) Damages on Sale of Xtreme Labs (Excluding Hatch Labs)

[51] The Appellants make three submissions regarding the award of damages on the sale of Xtreme Labs. I am not persuaded by any of these arguments.

[52] First, they submit that the damages award lacked an evidentiary foundation. In setting a revised purchase price of $25.8 million (U.S.) and then calculating damages on that basis, they say that the trial judge took an “extraordinary step in crafting her own damages theory.” According to the Appellants, the “trial judge erred in failing to accept the experts’ evidence, absent any cogent reason, given that both parties’ experts agreed there were no damages.”

[53] The jurisprudence recognizes that trial judges are not held to a standard of perfection in making damages awards. Appellate courts will not interfere with reasonable damages awards where they have an evidentiary basis, as damages cannot always be calculated with mathematical precision. Sometimes the trial judge must do the best they can in the circumstances: Penvidic v. International Nickel, [1976] 1 S.C.R. 267, at 280. An appellate court should interfere with a trial judge’s damages assessment only if it is “tainted by an error in principle, or is unreasonably high or low”: Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744, 87 O.R. (3d) 321, at para. 28. See also 1758704 Ontario Inc. v. Priest, 2021 ONCA 588, at para. 70; Southwind v. Canada, 2021 SCC 28, 459 D.L.R. (4th) 1, at paras. 153-60.

[54] I am satisfied that there is no basis for interference with the trial judge’s damages calculation. She was not obliged to accept the evidence of the expert witnesses on damages. The trial judge reasonably calculated the damages, basing her calculations on the actual revenues for FY 2012 and the fact that the Respondents were amenable to selling at a 1.5 multiplier. This award aimed to put the Respondents in the position they would have been in had they been given correct information regarding the revenues of Xtreme Labs.

[55] Second, the Appellants submit that the trial judge erred in ignoring the lack of evidence of a buyer at a higher price. Their position is that there was no evidence that a $25.8 million purchase price could have been achieved but for their alleged misconduct. They note as well that there was no suggestion that Palihapitiya, others in his group of buyers or anyone else, would have paid that price.

[56] This submission ignores the critical fact that the misconduct of the Appellants prevented the company from being properly marketed, as the correct underlying revenue and other information was concealed by the Appellants and thus could not be presented to potential buyers. Moreover, the trial judge found that the Respondents were deprived of the opportunity to sell the company or retain their shares and sell at a higher value later. It should be remembered that Xtreme Labs was sold at a much higher value just over one year later.

[57] Finally, the Appellants argue that the Respondents were awarded loss of chance damages that were not claimed or argued at trial. I disagree. While the Respondents changed the methodology of their damages calculation during the course of the trial, they consistently sought damages on the sale of Xtreme Labs. They argued that as a result of the Appellants' misconduct, they did not obtain a fair price on the sale of the company. The trial judge’s damages calculation is responsive to that claim.

(b) Amendment to the Statement of Claim

[58] The Appellants submit that the trial judge erred in allowing the Respondents to amend their statement of claim after trial to include a claim for disgorgement. They argue that the presumptive prejudice of late-stage amendments means the party seeking the amendment bears the burden of establishing the absence of irremediable prejudice. According to the Appellants, the trial judge reversed this burden, requiring the Appellants to show prejudice. Further, they note that the Respondents never ended up amending their claim formally, so the trial judge made a finding of liability and awarded substantial damages on a theory that was not pleaded. Counsel for the Varma/Madra Appellants submitted in oral argument that the correct course is to order a new trial on the issue of disgorgement so that his clients may adduce further evidence to respond to this claim. I would not give effect to this argument.

[59] Initially, the Respondents claimed damages for the losses they suffered in selling their shares of Xtreme Labs to Palihapitiya at an undervalued price. They also claimed damages for lost opportunity regarding Hatch Labs due to the concealment of Xtreme Labs' 13% equity interest in that company. However, due to errors in their expert's report, they were forced to abandon the latter claim. The Respondents raised disgorgement of the profits from the Hatch Labs sale during closing submissions, and the trial judge commented that they appeared to be trying to amend their claim to seek new relief.

[60] The Appellants opposed the amendment, arguing that it would cause non-compensable prejudice because they would have conducted the trial differently if they had known about a claim for disgorgement of profits. After considering the Respondents’ submissions, the trial judge gave reasons granting leave to amend the claim to seek disgorgement of profits for Hatch Labs. She concluded that there was no non-compensable prejudice, that disgorgement was simply another remedy being sought, and that the Appellants would not be taken by surprise in any of the substantive allegations or amounts claimed. Further, the trial judge also found that most of the evidence concerning profits was in the Appellants’ possession or control.

[61] The Appellants were then given an opportunity to request an adjournment and/or present further evidence and make additional submissions. On their return to court ten days later, the Appellants advised that they maintained their position that they had suffered non-compensable prejudice and that leave to amend should not have been granted. They advised the court that they would not be seeking an adjournment and would not be tendering additional evidence or making further submissions on the Hatch Labs issue.

[62] The trial judge was correct in finding that there was no prejudice to the Appellants. They have not articulated for this court what substantial new evidence they might call at the new trial they are requesting. My view is that they have not done so because there is no new evidence. They knew at trial that there was an allegation that Varma and Madra had hidden Xtreme Labs’ equity interest in Hatch Labs. The defence proffered was twofold: (i) they did not know about the interest in Tinder, and (ii) the gains made on the investment were based entirely on a fortuitous series of events that occurred after the closing of the sale. Evidence was tendered in support of these positions. It is reasonable to infer that the same evidence would be presented in a new trial on disgorgement. In any event, the Appellants were given an opportunity to either lead further evidence or seek an adjournment. They declined both options. That was a strategic choice, and the Appellants must live with the consequences of their choice.

[63] The fact that the pleading was not amended is of no moment. Rule 26.06 provides that “[w]here a pleading is amended at the trial, and the amendment is made on the face of the record, an order need not be taken out and the pleading as amended need not be filed or served unless the court orders otherwise”: Rules of Civil Procedure, R.R.O. 1990, Reg. 194. In the present case, the pleading was effectively amended at trial through the motion judge's order. I am satisfied that the Appellants understood the amended claim against them. Thus, no formal amendment of the statement of claim was necessary.

[64] Finally, the trial judge did not reverse the onus. Here, it was clear to the trial judge that an amendment would cause no irreparable prejudice to the Appellants. The Appellants were given an opportunity to dissuade the trial judge of that view and failed to do so.

(c) Disgorgement Award

[65] The Appellants submit that the trial judge made four errors in making her order for disgorgement independent of her alleged error in permitting the statement of claim to be amended.

[66] First, they submit that the trial judge erred in not requiring a causal relationship between the wrongdoing and the profits to be disgorged. Here, the profits held to have been received from the sale of the Hatch Labs equity were not causally connected to the wrongful conduct. The Hatch Labs equity was only worth at most $500,000 (U.S.) when the Xtreme Labs sale closed – its increase in value thereafter was due to Tinder's success at the 2014 Sochi Olympics and “a lot of luck." It is argued that the trial judge allowed the Respondents to take the benefit of a significant increase in value that resulted from external independent events unrelated to the appellants’ conduct.

[67] I am not persuaded that the trial judge erred in this regard. I concur with her statement in paragraph 173 of her reasons where she rejected this same argument:

The defendants argue that no one could have predicted in August 2012 that Tinder would become a great success. There are two problems with this submission. First, it is not consistent with the position advanced by the defendants in their testimony. The defendants did not testify that they were aware of Tinder but failed to disclose it to the board because they thought it had no value at the time. Rather, they testified that they never heard of Tinder until well after the sale transaction. I have rejected their evidence and found that they did know about Tinder at the time of the sale and failed to tell the plaintiffs about it. Second, as fiduciaries, Amar and Sunny had a duty to disclose to the board all of the information with respect to the company’s assets, regardless of whether or not they thought it had the potential for future success at the time. They did not do so.

[68] The trial judge's second point is worth emphasizing. What the fiduciaries did in this case was hide the investment in Hatch Labs/Tinder. As a consequence of their actions, Fund I lost the opportunity to participate in the upside of the investment. It is no defence to such actions to say that no one knew that Hatch Labs would be profitable. A fiduciary has a duty of utmost good faith and an obligation to disclose so that the beneficiary has an opportunity to make an informed decision about the best course of action: see Hodgkinson v. Simms, [1994] 3 S.C.R. 377, at paras. 93-94. By breaching their duty in this case, the appellants denied the respondents the opportunity to make that decision.

[69] Second, the Appellants submit that the trial judge erred in ordering disgorgement from 239 Ontario, Varma and Madra when there was no evidence that they had personally profited from Hatch Labs' sale to IAC. Thus, they say that the trial judge pierced the corporate veil of 239 Ontario, a non-party.

[70] I reject this argument. The trial judge found that the Appellants or their holding companies “wholly owned” 239 Ontario and that a sizable portion of the profits "were distributed" to the Appellants. This was an available inference on the facts as one of the purposes of the conspiracy was to conceal an asset of Xtreme Labs – namely Hatch Labs – from the selling shareholders for the benefit of the co-conspirators. There was no order that 239 Ontario itself make any disgorgement and therefore no veil piercing or disregard of any corporate form.

[71] Third, the Appellants contend that the trial judge’s disgorgement award focused exclusively on the sale price and did not account for deductions/expenses in completing the sale. In effect, the Appellants argue, she made her order in an evidentiary vacuum. But if there was indeed an evidentiary vacuum, it was created by the Appellants. The trial judge recognized that they held the evidence regarding the precise details of the sale. Nevertheless, they elected not to call that evidence and cannot now complain about its absence from the record.

[72] Fourth, the Appellants argue that the trial judge’s damages calculation includes an element of double counting. Their position is as follows. The trial judge’s calculation is based on an enterprise value of $25.8 million (U.S.), representing a 1.5 multiple applied to the actual FY 2012 revenues of $17.2 million (U.S.). The enterprise value, the Appellants claim, included the price of Hatch Labs Equity. Thus, the trial judge erred by ordering both damages that included this value as well as disgorgement of proceeds from the sale of Hatch Labs. Damages and disgorgement are alternative remedies; a plaintiff cannot obtain a judgment for both.

[73] This argument is flawed in its central contention that the value of Hatch Labs was reflected in the damages awarded. That award was made to compensate for the depressed sale price received by the Respondents for Xtreme Labs and was based on the trial judge's assessment of the extent to which the actual FY 2012 figures for the revenues of Xtreme Labs exceeded the depressed figures put forth by Varma and Madra. The trial judge based the damages calculation on a multiple of actual earnings. However, the Hatch Labs equity interest did not contribute to the Xtreme Labs revenue stream during that fiscal year and was therefore not included in the damages calculation. Thus, there was no double counting.

(d) Knowing Assistance in Breach of Fiduciary Duty

[74] The constituent elements of the tort of knowing assistance in the breach of a fiduciary duty are that: (i) there must be a fiduciary duty; (ii) the fiduciary must have breached that duty fraudulently and dishonestly; (iii) the stranger to the fiduciary relationship must have had actual knowledge of both the fiduciary relationship and the fiduciary’s fraudulent and dishonest conduct; and (iv) the stranger must have participated in or assisted the fiduciary’s fraudulent and dishonest conduct: Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, at pp. 811-13.

[75] The Palihapitiya Appellants submit that the trial judge erred in her application of the knowing assistance test because there was no intentional wrongful act in this case. They argue that the trial judge erred in reaching her factual conclusions. They allege, for example, that the trial judge incorrectly concluded that Palihapitiya knew of the Hatch Labs equity and Tinder at the time of closing. In addition, these appellants submit that Palihapitiya’s conduct was legal and entirely consistent with Canadian business conduct standards. To properly analyze this submission, it is necessary to consider its two underlying themes: (i) the trial judge made palpable and overriding errors of fact, and (ii) the trial judge erred in imposing her idiosyncratic moral code upon what was otherwise standard business conduct.

(i) Factual Findings

[76] It should be remembered that the Varma/Madra Appellants accept the factual findings of the trial judge. The Palihapitiya Appellants do not. It is helpful to review some of the significant findings of fact made by the trial judge in her comprehensive reasons for judgment, including the following:

• Varma, Madra and Palihapitiya were incredible witnesses. They were not forthright in their testimony. Their testimony constituted an attempt to get around the contemporaneous emails and documents that contradict their version of events.
• Teslia, Bashir and Sharma were straightforward in their testimony, which was consistent with the documentary evidence.
• Varma, Madra and Palihapitiya worked together and coordinated their efforts to present Palihapitiya’s offer to buy Xtreme Labs at the board meeting on March 21. They undertook this coordinated campaign in the weeks leading up to the meeting as proven by their emails, which showed that they were working together on the offer to purchase, had brought “key folks” on board and were planning the “hammer drop” for the board meeting.
• When Varma and Madra presented the offer to the board, they pretended that they were not involved in its creation and acted as though they had just received an unsolicited offer from Palihapitiya. They immediately sent a slide deck recommending the offer and pressured the Respondents intensely to accept the offer over the next few days. They tried to resist a valuation of the company and voted against giving the board an M&A mandate.
• Varma and Madra were motivated by their self-interest because they wanted to increase their compensation and equity interests in Xtreme Labs.
• Varma and Madra downplayed Xtreme Labs' financial prospects to facilitate Palihapitiya's acquisition of the company at a discounted price. The trial judge rejected Varma and Madra's testimony that they thought their $12 million projection was reasonable as of April 2012. Their testimony was contradicted by the much higher figures they were providing around the same time to others such as Samsung and Palihapitiya.
• Varma and Madra provided Seven Hills with understated revenue projections.
• Contrary to what they were telling the Respondents, Varma and Madra were actually optimistic about the business and its potential for continued growth and knew that upcoming projects would generate significant additional revenues for FY 2012.
• Varma, Madra and Palihapitiya all knew the Pivotal multiple was higher than the 0.75x number contained in Palihapitiya’s March 20 offer. Varma and Madra nonetheless conveyed the offer to the board, even though the offer was based upon a number they knew to be understated.
• When told by Sharma that a 3x multiple would be appropriate, Varma and Madra tried to persuade him that the appropriate multiple was a lower number.
• Varma and Madra never disclosed to the board the fact that Xtreme Labs had a 13% equity interest in Hatch Labs, which was significant, given management’s view that the way for a fee for service business to evolve was by developing proprietary technology, which is what Hatch Labs was doing.
• Palihapitiya’s testimony wherein he denied knowing anything about Hatch Labs at the time of the sale transaction and said that he only learned of the investment shortly after closing was false.
• Varma knew about the development of the Tinder app and its launch in the Apple Store at the time of closing. Further, given how closely Varma, Madra and Palihapitiya were working together on the Xtreme Labs transaction, they clearly all knew about Tinder.

[77] The Palihapitiya Appellants challenge these findings, but they fail to specify, either in their factum or oral submissions, how the trial judge went wrong in her factual analysis or how she made any palpable and overriding errors of fact. They point out, for example, that the initial offer to purchase Xtreme Labs was rejected by the board and thus argue that the offer had no impact. However, this submission ignores the trial judge's finding that the offer was only one instance of the illegal activity employed as part of the ongoing conspiracy to purchase Xtreme Labs at a discounted purchase price.

[78] Another example of an objection to the findings is the specious argument that the board could have discovered the actual revenue numbers if they had undertaken more due diligence. That is not the way corporate law works. A board of directors has a right to believe what its officers and directors are telling it. Where that information is deliberately falsified, as in this case, it is no defence to say that the board should have known better: Business Corporations Act, R.S.O. 1990, c. B. 16, s 135(4).

[79] The Palihapitiya Appellants also submit that the trial judge ought to have accepted Palihapitiya's evidence over the testimony of the Respondents. The difficulty with this argument is that Palihapitiya's testimony was contradicted time and again by the written record. Indeed, Palihapitiya's private and public statements are inconsistent with his sworn evidence. I offer the following examples:

• On September 27, 2012 – just seven weeks after closing – Palihapitiya wrote an email to a friend regarding the acquisition of Xtreme Labs, boasting: “25% net cash margins, 100% YoY revenue growth – should do $35 – 40M next year. We bought it for $16M. Yum, yum!!!!”
• Palihapitiya spoke at a Town Hall for the Xtreme Labs employees shortly after closing. In his remarks, he talked about how the previous owners of the company were "douchebags," "fuckfaces" and "idiots that were counterproductive." He described how at the 11th hour, the company's ownership structure got "convoluted," and in his opinion, Varma and Madra "got taken advantage of." He said that "over the course of this last year, sort of instigating and pushing and prodding, we finally found the path to basically buy Xtreme and recapitalize it."
• Palihapitiya's denials about knowing about Hatch Labs and Tinder before closing, as well as his testimony that he found out about Hatch Labs shortly after closing and considered it worthless, were contradicted by a speech he gave at a Collision Conference in 2014. In his speech, Palihapitiya described his strategy in acquiring Xtreme Labs, selling it to Pivotal, carving out the Hatch Labs equity and selling it to IAC four months later. Palihapitiya said he knew that his friend had been developing apps and receiving equity in lieu of payment.

[80] In his testimony, Palihapitiya tried in vain to distance himself from his previous statements. The trial judge saw through that effort. It is difficult to imagine any judge believing his denials and prevarications in spite of the record, and I am satisfied that the trial judge made no factual errors in finding that he was not only an active participant in the core wrongful activity, but also its primary beneficiary. I am fortified in that conclusion by the fact that the Varma/Madra Appellants are not challenging the trial judge’s factual findings on these appeals. On the contrary, they sensibly concluded that those findings were unassailable.

(ii) Standard of Business Conduct

[81] I come now to the second theme. As noted earlier, the Palihapitiya Appellants assert that Palihapitiya's conduct was in keeping with how business is conducted in Canada, and the trial judge inappropriately applied her idiosyncratic moral values and thereby found wrongdoing where there was none. The policy issue said to underlie this submission is that allowing trial judges to impose their own moral codes will lead to uncertainty in the corporate world. The crux of the argument is that business people are supposed to maximize profit and look after their own interests; it will lead to uncertainty if they are held to a different standard whereby they are obliged to look out for the best interests of their competition.

[82] This is a straw man argument. Counsel for these appellants queries whether business people should be forced to assume broad and unknowable duties of fairness to their counterparts in transactions. The obvious answer to that question is no. But, of course, that was not the question before the court below or this court. What was in issue was whether the Appellants had breached their duties and/or engaged in tortious conduct by organizing the sale of Xtreme Labs. This was not a case of the trial judge imposing some new morality-based constraints on the way business operates; it was the court applying the settled law of corporations, fiduciary duty, contract, and tort to the conduct of the Appellants. The trial judge correctly rejected the Appellants’ submission, finding in her reasons that:

This is not a case of tough business tactics and clever negotiating strategy. Nor is it a case of sellers’ remorse. This is a case of a purchaser conspiring with fiduciaries of a company to acquire a business and doing so based on breaches of fiduciary and contractual duties.

[83] Another argument under this theme is that Palihapitiya's real interest was in protecting young tech entrepreneurs and that this motivation somehow rendered his illegal conduct justifiable in the circumstances. The following excerpt from his cross-examination regarding his initial offer to purchase Xtreme Labs is particularly revealing on this point:

Q. Sir, you are a founder of Social Capital, and you talk about having Social Capital values and Chamath values-the highest ethics. Did you find it weird that the potential sellers are helping you with an offer that tightens the screws on them? A. If you’re asking for my opinion, this, Your Honour, it’s quite common place. It tends to be the case in Silicon Valley that young founders are so in need of money that many of them do really bad deals at the beginning and then they do find themselves in a situation where their boards really take advantage of them and I do think that this type of stuff is quite common place there amongst these kind of deals because you’re not talking about 35, 40, 50-year-old with years of experience, you’re talking about folks that are starting their new venture a few years in. They’re quite naïve and they often do get taken advantage of and they do react this way.

[84] Remarkably, Palihapitiya does not challenge the premise of the question that Varma and Madra were assisting him in breach of their duties. Instead, he justifies his participation in this conduct on the basis that they had been taken advantage of by the board. It is hard to believe that a business person of Palihapitiya's experience and sophistication believed that his conduct was legal and justified by reason of his co-conspirators' dissatisfaction with their compensation. It is tempting to conclude that Palihapitiya used Varma and Madra for his own purposes and, in the process, reaped a multi-million dollar windfall. However, I need not determine this matter, because even if I believed Palihapitiya's dubious justification, it offers no defence in law.

(e) Joint and Several Liability

[85] The Palihapitiya Appellants submit that the trial judge erred in law by holding them jointly and severally liable with the Varma/Madra Appellants. They argue, relying on an English trial court decision, Ultraframe (UK) Ltd. v. Fielding, [2005] EWHC 1638 (Ch.), that a knowing assistant’s liability ought not to be synonymous with a fiduciary’s because the knowing assistant, who has not given an undertaking of loyalty, is not in the same position as the fiduciary. The court ruled in that case, at para. 1600:

I can see that it makes sense for a dishonest assistant to be jointly and severally liable for any loss which the beneficiary suffers as a result of a breach of trust. I can see also that it makes sense for a dishonest assistant to be liable to disgorge any profit which he himself has made as a result of assisting in the breach. However, I cannot take the next step to the conclusion that a dishonest assistant is also liable to pay to the beneficiary an amount equal to a profit which he did not make and which has produced no corresponding loss to the beneficiary. As James LJ pointed out in Vyse v. Foster (1872) LR 8 Ch App 309:

"This Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the Court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the Court finds that he actually made more, constituting moneys in his hands "had and received to the use" of the cestui que trust."

[86] There is Canadian jurisprudence where our courts have found a knowing assistant to be jointly and severally liable: see, for example, the decision of this court in Enbridge Gas Distribution Inc. v. Marinaccio, 2012 ONCA 650. Contrary to the assertion of the Palihapitiya Appellants, the Canadian cases do not all involve situations where the knowing assistant was found to be a constructive trustee: see, for example, Imperial Parking Canada Corporation v. Anderson, 2015 BCSC 2221. Counsel for the Palihapitiya Appellants was unable to point to any Canadian authority that supports his position.

[87] There is also academic commentary that supports a finding of joint and several liability for the knowing assistant (also referred to by some as the dishonest assistant). Steven Elliott and Professor Charles Mitchell, in their article “Remedies for Dishonest Assistance”, (2004) 67 Mod L Rev 16, write at p. 40 that:

[A] well established line of Canadian authority flowing from Canada Safeway Ltd v Thompson tells us that a dishonest assistant is jointly and severally liable for whatever unauthorised profit the wrongdoing fiduciary has made….This is consistent with and finds support in the secondary nature of liability for dishonest assistance. [Footnotes omitted.]

[88] Ultraframe is the leading case in England on the issue of a knowing assistant’s joint and several liability: see Geoffrey Morse, ed, Palmer’s Company Law (London, UK: Sweet & Maxwell, 2021), at vol. 2, ch. 8.3614. Based on a legal article filed with this court, however, it appears that the English approach towards knowing assistance is not followed in Australia: see Madison Robins, “Accessory Liability in Canadian Law” (2020) Annual Rev Civ Litigation 1, at p. 9. In any event, there is little reason to hew closely to the Ultraframe approach; the reasoning in that case is in my view inconsistent with the policy goals underlying equitable remedies. A court exercising its equitable jurisdiction seeks to fashion remedies that are fair in the circumstances of the case before it. While I agree that a knowing assistant should not be penalized, experience tells us that a judgment against a faithless fiduciary is often uncollectable. Indeed, that is one of the reasons why plaintiffs normally seek an order for joint and several liability. As between the wronged beneficiary and the knowing assistant, in most circumstances, the loss more equitably falls on the shoulders of the knowing assistant who has deliberately taken steps to procure a breach of fiduciary duty.

[89] I do not purport to establish a rule that liability should always be joint and several between the faithless fiduciary and the knowing assistant. There may be circumstances where a different order should be made. Courts should be given sufficient flexibility to fashion a fair remedy in the circumstances of the particular case. In this case, where Palihapitiya was intimately involved in the breach of the fiduciary duty as part of a conspiracy where he received most of the profits, there is no equitable reason why the liability should not be joint and several.

(f) Other Grounds of Appeal

[90] The parties were allocated two full days of court time to argue the appeals and cross-appeal. However, counsel for the Appellants chose to restrict their oral submissions to the issues discussed above. Therefore, the remaining grounds of appeal from their factums, which were not pressed in oral argument, may be dealt with summarily as follows.

(i) Punitive Damages

[91] The trial judge did not err in awarding punitive damages on the Annex Fund Claim. Varma and Madra engaged in outrageous and illegal conduct that was worthy of sanction by the court. The damages awarded were appropriate to accomplish the objectives of denunciation and deterrence of others from acting similarly. Indeed, they could well have been higher in the circumstances.

(ii) Exchange Rate and Prejudgment Interest

[92] The trial judge did not err in exercising her discretion not to deviate from the default rules for prejudgment interest and the exchange rate. In both instances, she correctly applied the law and ruled that the Appellants had not met their onus to establish that a variation of the standard rule was appropriate.

(iii) Group Enterprise Theory

[93] The trial judge did not use the group enterprise theory to affix liability for any breach of fiduciary duty. The Appellants' argument that any breach of duty was owed exclusively to Xtreme Labs does not withstand scrutiny. I agree with the trial judge that Varma and Madra owed fiduciary duties to EVP GP to maximize the value realized by the sellers as part of the sale of Xtreme Labs and that they breached those duties.

(iv) Directors’ Liability

[94] The Appellants argue in their factums that they cannot be held liable for any breach because the party to whom they owed the duty, EVP GP, is different than the party that suffered the loss, Fund I. In rejecting this argument, I reach the same conclusion as the trial judge but for different reasons.

[95] I note that the position taken by the Appellants that no duty was owed directly to the Limited Partnership is inconsistent with the text of the Limited Partnership Agreement. Article 6.5 of that document states that the General Partner and its “officers, directors, shareholders or agents” can be liable to the Limited Partnership or a Limited Partner for acts or omissions “performed or omitted fraudulently or in bad faith” or that “constituted willful misfeasance or negligence in the performance of their obligations or as a result of the reckless disregard of such obligations.”

[96] Moreover, it would be an anomalous result if the law offered no remedy for the breach of a director's fiduciary duty in circumstances where the limited partnership suffered the resulting loss. If that were the case, directors could act with impunity to damage the interests of the limited partnership, including by engaging in self-dealing, and there would be no remedy for such a breach of fiduciary duty. The law of fiduciary duties, which is based in equity, should not brook such a lacuna in its remedies.

[97] To analyze this issue it is helpful to turn to first principles. Before doing so, I note that the trial judge relied on McGrail v. Phillips, 2018 ONSC 3571, 83 B.L.R. (5th) 271 (Div. Ct.), at para. 33, for the proposition that the directors owe a duty only to the corporate general partner, not to the limited partnership itself. The Divisional Court in that case in turn cited to ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 26 O.R. (3d) 481 (C.A.). McGrail is not binding on this court. Moreover, the problem with relying on ScotiaMcLeod, and by extension McGrail, is that ScotiaMcLeod did not feature a fiduciary duty claim. The court's comments regarding the personal liability of directors were in the context of claims in tort and are of limited assistance in analyzing a claim for breach of fiduciary duty.

[98] In the present case, we are dealing with a limited partnership, which is a hybrid organization that combines elements of partnership law and the law of corporations. A limited partnership consists of a general partner, who manages the affairs of the limited partnership and has liability for all its debts and obligations and at least one limited partner, whose liability is restricted to the amount they contributed or agreed to contribute to the limited partnership. The general partner owes a fiduciary duty to the limited partners. Limited partnerships are not a distinct legal entity. Despite this, the law permits a limited partnership to act as a distinct legal entity for certain limited purposes. A limited partnership can, for example, bring and defend actions: Neil Guthrie, “Some Lacunae in the Law of Limited Partnerships” (2009) 88 Can Bar Rev 147 at 148-49.

[99] The question is whether Varma and Madra's fiduciary duty should expand to include a duty to the limited partnership. In my view, it should. Varma and Madra conducted themselves in a manner that clearly breached their duties to EVP GP. This is not a situation where they were balancing the corporation's interests against those of the limited partnership. Instead, they acted solely in their self-interest and contrary to the interests of both the general partner and the limited partnership. For that reason, they are being sued by both Fund I and EVP GP.

[100] Where, as here, the directors ignore the interests of the general partners and the limited partnership and act solely in their self-interest, the concept of a director’s fiduciary duty should be flexible enough to include duties to both the general partner and the limited partnership. Further, it should come as no surprise to the corporate directors that the limited partnership, which stands in a fiduciary relationship to the general partner and whose interests are supposed to be safeguarded, should have a right to claim against them personally.

[101] In a limited partnership the raison d’ être of the general partner is to manage the business operations of the limited partnership and shield the limited partners from the unlimited liability they would face in a partnership. The use of the corporate form by the general partner is in turn designed to limit its liability exposure. It would be inequitable if the corporate form could be used to insulate directors who are in breach of their duties to the general partner and who have caused damages to the limited partnership. Given the unique structure of limited partnerships, the common law should impose a fiduciary duty on corporate directors of the general partner towards the limited partnership.

[102] It is well established that the “categories of fiduciary relationship are never closed”: Frame v. Smith, [1987] 2 S.C.R. 99, at para. 36; see also Guerin v. R., [1984] 2 S.C.R. 335 at 384. Certain status relationships—solicitor-client or doctor-patient, for example—give rise to a per se fiduciary relationship. In other circumstances, courts can find an ad hoc fiduciary duty. Such a duty arises where: (1) the fiduciary has the discretionary power to affect the vulnerable party’s legal or practical interests and (2) the fiduciary has made an express or implied undertaking that it will exercise the discretionary power in the vulnerable party’s best interests: Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247, at paras. 66, 83.

[103] Varma and Madra owed the limited partnership an ad hoc fiduciary duty. Both the limited partners and the limited partnership constituted a class of vulnerable and defined beneficiaries, whose legal and substantial practical interests stood to be and in fact were adversely affected by Varma and Madra’s exercise of discretion. Varma and Madra’s undertaking arose from the nature of the business relationship itself—a general partner operates on behalf of the limited partnership—as well as from the Limited Partnership Agreement, which recognized the duty of the general partners towards the limited partners and the limited partnership.

[104] Further, I note that certain jurisdictions in the United States have similarly determined that the liability owed by a general partner to the limited partnership should be expanded: see Colin P. Marks, “Piercing the Corporate Veil” (2015) 19 Lewis & Clark L Rev 73 at 83; J. William Callison & Maureen A. Sullivan, Partnership Law & Practice (St. Paul, MN: Thomson Reuters, 2021) at § 22:18; In re Harwood, 637 F (3d) 615 at 622 (5th Cir 2011); One seminal American case is In re USACafes, L.P. Litig., 600 A (2d) 43 (Del Ch 1991). Delaware courts have consistently upheld and in certain cases expanded the reach of that decision: Marks, at 83, 85. In USACafes, Chancellor Allen drew an analogy to corporate trustees:

While the parties cite no case treating the specific question whether directors of a corporate general partner are fiduciaries for the limited partnership, a large number of trust cases do stand for a principle that would extend a fiduciary duty to such persons in certain circumstances. The problem comes up in trust law because modernly corporations may serve as trustees of express trusts. Thus, the question has arisen whether directors of a corporate trustee may personally owe duties of loyalty to cestui que trusts of the corporation. A leading authority states the accepted answer:

The directors and officers of [a corporate trustee] are certainly under a duty to the beneficiaries not to convert to their own use property of the trust administered by the corporation. . . . Furthermore, the directors and officers are under a duty to the beneficiaries of trusts administered by the corporation not to cause the corporation to misappropriate the property. . . . The breach of trust need not, however, be a misappropriation. . . . Any officer [director cases are cited in support here] who knowingly causes the corporation to commit a breach of trust causing loss . . . is personally liable to the beneficiary of the trust. . . .

Moreover, a director or officer of a trust institution who improperly acquires an interest in the property of a trust administered by the institution is subject to personal liability. He is accountable for any profit. . . . Even where the trustee [itself] is not liable, however, because it had no knowledge that the director was making the purchase . . ., the director . . . is liable to the beneficiaries. . . . The directors and officers are in a fiduciary relation not merely to the [corporation] . . . but to the beneficiaries of the trust administered by the [corporation].

[105] Chancellor Allen also made the following comments that are particularly pertinent to the circumstances of the case at bar:

The theory underlying fiduciary duties is consistent with recognition that a director of a corporate general partner bears such a duty towards the limited partnership. That duty, of course, extends only to dealings with the partnership's property or affecting its business, but, so limited, its existence seems apparent in any number of circumstances. Consider, for example, a classic self-dealing transaction: assume that a majority of the board of the corporate general partner formed a new entity and then caused the general partner to sell partnership assets to the new entity at an unfairly small price, injuring the partnership and its limited partners. Can it be imagined that such persons have not breached a duty to the partnership itself? And does it not make perfect sense to say that the gist of the offense is a breach of the equitable duty of loyalty that is placed upon a fiduciary? [1]

[106] I agree with and adopt Chancellor Allen’s analysis. In my view, for the reasons discussed above, the law of fiduciary duty must hold Madra and Varma to account. Accordingly, I would find that they are both liable to Fund I for their fiduciary breaches as directors of EVP GP.

(g) Cross-Appeal

[107] The trial judge based the amount of the disgorgement award on the proportion of shares of Xtreme Labs that Fund I held at the time of the transaction. Her reasoning is summarized at paragraphs 297 to 298 of her reasons:

[297] By concealing the existence of the Hatch Labs Equity, Amar and Sunny (working with Chamath/El Investco) deprived Fund I of the opportunity to take it into account on the sale of its shares of Xtreme Labs, to renegotiate any terms of sale or to decide not to sell its shares of Xtreme Labs at that time. Further, as a direct result of this concealment, Amar, Sunny, and Chamath/El Investco were able to profit from Fund I's interest in the Hatch Labs Equity. In my view, they should not be entitled to retain the profits attributable to their wrongdoing. A disgorgement order is required to serve a deterrent purpose in this case.

[298] In determining the extent of this equitable relief, however, I agree that the disgorgement order should only apply to the profits that correspond to Fund I's 41.82% interest in the Hatch Labs Equity. Those are the only profits that flow from the breach of fiduciary duty. Concealment of the Hatch Labs Equity deprived Fund I from realizing 41.82% of the profits from the sale of the Hatch Labs Equity. Any disgorgement order beyond that would result in Fund I receiving profits to which it was not otherwise entitled. [33]

[108] The cases cited in footnote 33, Olson v. Gullo, (1994), 17 O.R. (3d) 790 (C.A.) and Rochwerg v. Truster (2002), 58 O.R. (3d) 687 (C.A.), are relied upon by the Appellants on the cross-appeal.

[109] The Respondents submit that the trial judge committed an error in principle because prophylactic disgorgement is aimed not at what the beneficiaries lost but rather at what the wrongdoers gained. They say that the apportioned disgorgement award issued by the trial judge represents an outcome where the wrongdoers are no worse off than if they had never breached fiduciary duties in the first place – meaning no deterrence has been achieved. Thus, they argue that disgorgement should be ordered for all profits made from the Hatch Labs Equity sale, which is $29.5 million (U.S.).

[110] The Appellants submit that the trial judge followed the law correctly and that there is no causal connection between the additional profits sought and any wrongdoing found to have been committed against Fund I. There is, in their submission, no right to profits unrelated to the breach. They note that Fund I has no claim to the remaining 58.18% of the profits, and no other shareholders of Xtreme Labs sought or established a fiduciary breach against the Appellants that could ground disgorgement of this portion of the profits.

[111] The leading case on disgorgement of profits is Strother v. 3464920 Canada Inc., 2007 SCC 24, [2007] 2 S.C.R. 177, where the Supreme Court stated:

74. This Court has repeatedly stated that "[e]quitable remedies are always subject to the discretion of the court". (internal citations omitted) In Neil, the Court stated emphatically: "It is one thing to demonstrate a breach of loyalty. It is quite another to arrive at an appropriate remedy" (para. 36).

75. Monarch seeks "disgorgement" of profit earned by Strother and Davis. Such a remedy may be directed to either or both of two equitable purposes. Firstly, is a prophylactic purpose, aptly described as appropriating for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest.

(Chan v. Zacharia (1984), 154 C.L.R. 178, per Deane J., at p. 198)

76. The second potential purpose is restitutionary, i.e. to restore to the beneficiary profit which properly belongs to the beneficiary, but which has been wrongly appropriated by the fiduciary in breach of its duty. …

77. The concept of the prophylactic purpose is well summarized in the Davis factum as follows:

[W]here a conflict or significant possibility of conflict existed between the fiduciary's duty and his or her personal interest in the pursuit or receipt of such profits . . . equity requires disgorgement of any profits received even where the beneficiary has suffered no loss because of the need to deter fiduciary faithlessness and preserve the integrity of the fiduciary relationship. [Emphasis omitted; para. 152.]

Where, as here, disgorgement is imposed to serve a prophylactic purpose, the relevant causation is the breach of a fiduciary duty and the defendant's gain (not the plaintiff's loss). Denying Strother profit generated by the financial interest that constituted his conflict teaches faithless fiduciaries that conflicts of interest do not pay. The prophylactic purpose thereby advances the policy of equity, even at the expense of a windfall to the wronged beneficiary.

[112] In my view, it is evident that the disgorgement order was imposed to serve a prophylactic purpose. Indeed, the trial judge stated explicitly that a "disgorgement order is required to serve a deterrent purpose in this case." Further, there is a clear nexus between the breach of the fiduciary duties and the gains as the profits were secured as a direct result of the breach. Thus, the necessary causal connection has been established.

[113] In the circumstances, the trial judge was obliged to fashion a remedy that would have a deterrent impact. I agree with counsel for the Respondents that simply ordering the Appellants to pay the Respondents what they would otherwise have been entitled to receive serves as no disincentive. A party considering breaching a fiduciary duty could reasonably look at the trial judge's decision and conclude that in a worst-case scenario, they would only be forced to pay over to the aggrieved beneficiary what the beneficiary was always owed, thereby profiting from the breach of their fiduciary duties.

[114] The Appellants' reliance on Olson and Rochwerg is also misplaced. In those cases, which were decided under the Partnership Act, R.S.O. 1990, c. P.5, the courts did not impose disgorgement orders for a prophylactic purpose; they were made for restitutionary purposes. Thus, these authorities are of no assistance to the court in this case where the trial judge chose to make the order for a prophylactic purpose. Similarly, the Appellants' argument about the Respondents receiving a windfall fails because, in the case of a prophylactic disgorgement order, the focus of the inquiry is not the beneficiary's loss but the gain of the faithless fiduciary. This is so even if there is a potential windfall to the beneficiary: Strother, at para. 77.

[115] The question that remains is whether, in fashioning a prophylactic disgorgement order, the court is required to order disgorgement of all ill-gotten gains or whether it can make an order that achieves its deterrent purposes but does not require full disgorgement. When this issue was put to counsel for the Respondents, she took the position that the jurisprudence appears to call for full disgorgement. On the other hand, counsel for the Appellants took no position on this issue. In other words, they offered no assistance to the court regarding a sum short of full disgorgement that would meet the deterrent purpose.

[116] There may well be circumstances where it would be inequitable to order a faithless fiduciary to disgorge all profits. Equity seeks what is fair and what is fair should be determined with flexibility, not by means of hard and fast rules. For that reason, I would not endorse an inflexible rule that full disgorgement of all profits must be ordered in all cases, but nor would I speculate on the sorts of reasons that may justify something less than full disgorgement. I note that Australian courts have grappled with the circumstances in which full disgorgement ought to be made and whether there should be a rebuttable presumption that full disgorgement is appropriate: see e.g. Warman International Ltd v. Dwyer, [1995] HCA 18, at paras. 33-35. I decline to decide these questions today, as counsel for the Appellants failed to address either point.

[117] There is nothing to suggest that a partial disgorgement order should be made in the case at bar. Certainly, counsel for the Appellants did not argue for such an order nor did he offer any suggested amount for such an award in response to questions from the court. In these circumstances, an order of disgorgement of all profits – $29.5 million (U.S.) – is in my view appropriate.

Part V – Disposition

[118] I would dismiss the appeals of the Palihapitiya Appellants and the Varma/Madra Appellants. I would allow the cross-appeal.

[119] Regarding costs of the appeals and cross-appeal, the parties may make written submissions. The Respondents' submissions are due within two weeks of the release of these reasons. They shall be no more than five pages in length plus a costs outline. The Palihapitiya Appellants and the Varma/Madra Appellants' submissions are also limited to five pages each, and they are both required to file a costs outline. Those submissions are due one week after receiving the Respondents' cost submissions. The Respondents may file reply submissions of no more than three pages within a week of receiving the Appellants’ costs submissions.

Released: December 1, 2021 “CWH” “C.W. Hourigan J.A.” “I agree. Grant Huscroft J.A.” “I agree. S. Coroza J.A.”

[1] See also Ben Barnes, Do Fiduciaries of Fiduciaries Owe Duties? (2019), online: American Bar Association https://www.americanbar.org/groups/litigation/committees/business-torts-unfair-competition/practice/2019/imposition-fiduciary-duties-departing-llc-members1/