Court of Appeal for Ontario

Date: 20220201 Docket: C69658

van Rensburg and Roberts JJ.A. and Tzimas J. (ad hoc)

Between

AOD Corporation Applicant (Appellant)

and

Miramare Investment Incorporated and Alain Mercier Respondents (Respondents)

Counsel: Stéphane Émard-Chabot, for the appellant Pierre Champagne, for the respondent, Miramare Investment Incorporated Alain Mercier, acting in person

Heard: November 22, 2021

On appeal from the judgment of Justice Pierre E. Roger of the Superior Court of Justice dated June 15, 2021, with reasons reported at 2021 ONSC 4280.

Reasons for Decision

Overview

[1] This appeal involves the application of the indoor management rule in relation to the parties’ January 30, 2012 patent agreement (“the January 30, 2012 agreement”) concerning the appellant’s intellectual property. At immediate stake is the right to own and monetize approved patents, in particular a patent granted in the United States in January 2018 that will expire in 2025.

[2] The appellant is a corporation incorporated under the Canada Business Corporations Act, R.S.C., 1985, c. C-44 (“CBCA”), with its head office in the province of Québec. It appeals the dismissal of its application for a declaration that the January 30, 2012 agreement was invalid and argues that it is the sole owner of the granted patent on the following grounds.

[3] First, the appellant says that the application judge erred in law in finding there were no restrictions on the appellant entering into the January 30, 2012 agreement. The appellant relies on the provisions of s. 189(3) of the CBCA and argues that the sale of its intellectual property represented all or substantially all of the appellant’s property and was not made in the ordinary course of business. As such, the transaction required the approval by special resolution of two thirds of its shareholders. The appellant submits that the January 30, 2012 agreement is invalid because the requisite approval was not obtained. This argument was not made before the application judge.

[4] Second, and relatedly, the appellant submits that the application judge made a palpable and overriding error in determining that the respondent, Miramare Investment Incorporated (“Miramare”), did not have any knowledge of any irregularities in the approval of the January 30, 2012 agreement through Miramare’s representative, Warren Johnson. According to the appellant, the indoor management rule does not apply to regularize any irregularities in the approval of the January 30, 2012 agreement because Miramare, through Mr. Johnson, had actual knowledge of the irregularities.

[5] At the conclusion of the hearing of the appeal, we dismissed the appeal with costs of $16,000, inclusive of disbursements and applicable taxes, to Miramare, for reasons to follow. These are those reasons.

Factual Matrix

[6] The appellant’s predecessor, Wrapped Apps Corporation (“WAC”), originally owned the patent application for the patent in issue under the January 30, 2012 agreement (“the Patent”). WAC had financial difficulties in 2008 and its intellectual property consisting of several pending patent applications, including the application for the Patent, was transferred to its secured creditors. After the transfer, Mr. Mercier, the then operating mind, president, director and shareholder of both WAC and the appellant, acted as trustee for the secured creditors, who maintained an interest in the pending patent applications. The secured creditors were given a ten-year option, expiring in May 2019, to convert their interest into shares of the appellant. Most, but not all of them, did.

[7] Following negotiations, on July 13, 2011, the appellant and Miramare, under the temporary designation “NI” (defined in the agreement as “new investors legal name to be supplied later”), entered into a licensing agreement and option to purchase the patent rights held by the WAC secured creditors (“the July 13, 2011 agreement”). The WAC secured creditors who were the owners of WAC’s intellectual property and who held options in the appellant were also parties to this agreement. The agreement noted that “[i]t is understood that at some point the [WAC] debenture holders and AOD shareholders become one”. Mr. Mercier signed the agreement “[o]n behalf of AOD/WAC Debenture Holders”.

[8] Under the July 13, 2011 agreement, Miramare was authorized to take over the processing of the appellant’s patent applications and assumed all attendant risks and costs. Miramare was given an exclusive license to exploit any of the appellant’s patents that Miramare was successful in having approved; and acquired an option to buy any approved patent for an amount of up to $107,000 and 2.5% of any subsequent sale of the patent to a third party.

[9] In November 2011, Mr. Mercier reported to the appellant’s stakeholders that the appellant had entered into the July 13, 2011 agreement.

[10] The parties entered into the January 30, 2012 agreement so that Miramare could replace the unincorporated moniker of NI and assume the 2011 agreement on the same terms as previously agreed to in 2011. Paragraph 19 provided that the agreement “is binding from the date of acceptance of the original Agreement in Principle between NI and AOD dated June 25, 2011 and supersedes that agreement in full.” The agreement also provided that the security holders had assigned their interests in WAC’s intellectual property to the appellant. It further stipulated in paragraph 22 that Alain Mercier “warrants he has authority to execute this agreement as Trustee on behalf of [the appellant] and the Wrapped Apps Debenture Holders.” He signed the January 30, 2012 agreement as “Trustee”.

[11] Miramare performed its obligations under the January 30, 2012 agreement. Upon the approval of the Patent in January 2018, Miramare notified the appellant that it would exercise its option to purchase the Patent. The appellant objected, taking the position for the first time that the January 30, 2012 agreement was not valid. The parties attempted to negotiate a resolution. They failed to do so, and the present litigation ensued.

[12] Before the application judge, the appellant argued that the January 30, 2012 agreement was invalid because Mr. Mercier did not have authority to sign the agreement on behalf of the appellant. Contrary to the provisions of a unanimous shareholder agreement, and to the knowledge of Miramare, two thirds of the shareholders did not approve the agreement.

[13] The application judge thoroughly reviewed the relevant factual matrix. He found that the appellant had failed to prove the existence of any binding unanimous shareholder agreement, or of any restrictions on Mr. Mercier’s authority, as president and director, to enter into the January 30, 2012 agreement on behalf of the appellant. The application judge found that the indoor management rule under common law and the provisions of s. 18 of the CBCA applied, and that Miramare was unaware of any alleged restrictions on Mr. Mercier’s authority. Further, there was nothing that could raise a suspicion of any alleged irregularity that should have caused the Miramare to make inquiries. Accordingly, he dismissed the application.

Analysis

[14] At the hearing of the appeal, the appellant conceded that Mr. Mercier had the requisite authority to enter into the January 30, 2012 agreement and was no longer relying on the alleged unanimous shareholder agreement. However, it argues that the application judge erred by failing to address the provisions of s. 189(3) of the CBCA and in finding that the indoor management rule applies in the circumstances of this case.

[15] Subsection 189(3) provides that the “sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation requires the approval of the shareholders in accordance with subsections (4) to (8).” Subsection 8 confirms that: “A sale, lease or exchange referred to in subsection (3) is adopted when the holders of each class or series entitled to vote thereon have approved of the sale, lease or exchange by a special resolution.” “Special resolution” is defined under s. 2(1) of the CBCA to mean “a resolution passed by a majority of not less than two-thirds of the votes cast by the shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution”.

[16] We do not give effect to this argument for two reasons.

[17] First, this argument was raised for the first time on appeal. There is no reference to s. 189(3) in the Notice of Application. As a general rule, an appellate court will not entertain a new issue for the first time on appeal since prejudice will result to the respondent because of the inability to call evidence in response to the new issue. The burden is on the appellant to persuade the appellate court that the evidentiary record is sufficient to permit the determination of the new issue: Kaiman v. Graham, 2009 ONCA 77, 75 R.P.R. (4th) 157, at para. 18. In our view, the general rule applies in this case and this court should not entertain the new issue raised by the appellant.

[18] As this issue was not raised on the application, no evidence was adduced as to whether the transaction represented “all or substantially all the property of a corporation other than in the ordinary course of business of the corporation”. We do not have the benefit of any factual findings on this issue by the application judge. Nor are we able to determine this issue based on the evidence in the record; the evidence concerning the assets and business of the appellant is equivocal on these issues.

[19] Second, the application judge made the factual finding, rightly in our view, that Miramare did not have any knowledge of any irregularity concerning the appellant’s internal processes that should have caused Miramare to make further inquiries with respect to any approvals that may have been required. This finding precludes the application of s. 189(3) because it triggers the application of s. 18(1) of the CBCA and the indoor management rule at common law.

[20] Section 18(1) incorporates the indoor management rule at common law. That rule provides that parties dealing with a corporation, acting in good faith and without knowledge of any irregularity, are entitled to assume that a corporation's internal policies and proceedings have been followed and complied with: The Midas Investment Corporation v. Bank of Montreal, 2016 ONSC 3003, at para. 4. For the purposes of this appeal, the relevant provisions of s. 18(1) are as follows:

18 (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that

(a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;

(d) a person held out by a corporation as a director, officer, agent or mandatary of the corporation has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a director, officer, agent or mandatary;

(e) a document issued by any director, officer, agent or mandatary of a corporation with actual or usual authority to issue the document is not valid or genuine; or

(f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.

[Emphasis added.]

[21] We see no error in the application judge’s finding that Miramare had no knowledge of any irregularity; his finding was firmly rooted in the record. Mr. Johnson resigned from WAC’s board in 2002, almost ten years before the negotiation of the agreements in issue. Mr. Johnson was not a director or an officer of the appellant. Neither he nor Miramare had any involvement in the operations or governance of the appellant. The application judge also referenced and accepted Mr. Johnson’s unchallenged affidavit evidence that he had no knowledge of any limitation on Mr. Mercier’s authority when he signed the July 13, 2011 and January 30, 2012 agreements. Mr. Mercier could not explain how Miramare or Mr. Johnson would know that he lacked authority to enter into those agreements nor could the appellant point to any document or evidence that would limit Mr. Mercier’s authority to enter into those agreements.

[22] As a result, there is no basis to interfere with the application judge’s determination that the January 30, 2012 agreement was valid.

Disposition

[23] For these reasons we dismissed the appeal, with costs to Miramare in the amount of $16,000, inclusive of disbursements and applicable taxes.

“K. van Rensburg J.A.”

“L.B. Roberts J.A.”

“E. Ria Tzimas, J. (ad hoc)”

Footnote

[1] Alain Mercier appeared but made no written or oral submissions.