CITATION: Durkacz v. FSD Pharma Inc., 2021 ONSC 3332
DIVISIONAL COURT FILE NO.: 234/21
DATE: 20210510
SUPERIOR COURT OF JUSTICE – ONTARIO
DIVISIONAL COURT
RE: ANTHONY DURKACZ, Applicant/Respondent
AND:
FSD PHARMA INC., RAZA BOKHARI, JAMES DATIN, STEVEN BUYER, GERALD GOLDBERG, LARRY KAISER, AND ROBERT J. CIARUFOLLI, Respondents/Appellant
BEFORE: D. L. Corbett, Lederer and Penny JJ.
COUNSEL: R.S.M. Woods and Doug McLeod, for the Applicant/Respondent
Simon Bieber, Michael Darcy, Jocelyn Howell and Chris Grisdale, for the Respondents/Appellants
HEARD at Toronto by Videoconference: May 3, 2021
Lederer J
Overview
[1] This is the appeal of an application heard by, and a decision made by, McEwen J, sitting on the Commercial Court of the Ontario Superior Court on an urgent basis. It arises as part of a corporate dispute and respects the alleged failure of the appellant company, FSD Pharma Inc., to properly respond to the requisition for a shareholder meeting. The requisition was made on January 4, 2021 and sought a meeting of the shareholders no later than March 15, 2021. At a meeting held on January 21, 2021, the Board of Directors disregarded the requisition and appointed June 29, 2021 as the date for the annual general meeting of shareholders to deal with all the outstanding issues to be dealt with by the shareholders, including any raised by the requisition.
[2] The requisitioning shareholders included the Respondent Anthony Durkacz, one of three founders, a director and shareholder of FDS Pharma Inc. and another of the founding shareholders and, at the time a director, Zeeshan Saeed. They were unhappy with the date selected for the meeting. The issues were important and the appointed date too far in the future. The requisitioning shareholders announced that a meeting of the shareholders to deal with the issues they had raised would take place on March 31, 2021. They went further. On February 4, 2021 they commenced an application to confirm their ability to call a meeting on that date. At a case conference the following day, February 5, 2021, the application was scheduled for a two-hour hearing on March 4, 2021. The application was heard on that day and, taking account of the urgency, the application judge rendered his decision the next day, March 5, 2021. He ordered, in part:
- There was to be one meeting dealing with all outstanding issues.
- The meeting was to take place on May 14, 2021.
- The meeting was to be conducted by an independent chair.
- Directors opposing the requisition were restrained from casting the votes associated with shares issued to them, or entities related to them, since January 4, 2021.
[3] FDS Pharma Inc. appealed this order. The Notice of Appeal and the Factum of the appellant raised two issues. The appellant sought an order: (1) setting the meeting for the day scheduled by the Board of Directors (June 29, 2021) and (2) removing the restriction of voting shares that had been issued after January 4, 2021 to the directors opposing the requisition. At the outset of the hearing before this Court, counsel for the appellant withdrew the request that the orders for date of the meeting of shareholders and the independent chair be changed. The only remaining issue was the restriction on voting rights. The fundamental premise of the appeal lies in the submission that to limit or restrict voting rights: a) there must have been an impropriety in issuance of the shares to which the voting rights attach b) there must be a finding of fact to that effect; and that, in this case; c) the reasons of the application judge do not make such a finding. It is acknowledged that there is no specific statement made by the application judge to that effect. Nonetheless counsel for the respondent, Anthony Durkacz, submitted that the reasons are plain. The judge accepted that the issuance of the shares was improper insofar as they were issued after the requisition had been made and this application commenced and were issued with the intention, and effect, of diluting the voting power of the requisitioning shareholders relative to their opponents.
Background
[4] To understand the foundation for this conclusion it is important to place the voting restriction within the overall context of the company’s response to the requisition. Raza Bokhari is a director and the Chief Executive Officer of the company. The response to the requisition was at his direction.
[5] Raza Bokhari did not address the applicant’s requisition immediately. He determined to deal with it at a meeting of the Board of Directors he had previously scheduled. This was the meeting of January 21, 2021 to which I have already referred. The briefing books for that meeting, as delivered to Anthony Durkacz and Zeeshan Saeed, did not contain the financial report of the Chief Financial Officer of FSD Pharma Inc. or the presentation of its “President, Biosciences”. The financial report and the presentation were deleted from these two briefing books but present in the briefing books sent to all the other directors. On cross-examination Raza Bokhari testified that he had redacted the copies of the board books provided to Anthony Durkacz and Zeeshan Saeed based on his “executive authority” and explained that he was under no obligation to tell them about the redactions. Anthony Durkacz and Zeeshan Saeed did not attend the meeting held on January 21, 2021. Raza Bokhari did not have the “executive authority” to redact significant reports from the briefing books directed to Anthony Durkacz and Zeeshan Saeed. His failure to advise them of the redaction only exacerbates the issue raised by this unfortunate conduct. Nor was this the only misstep leading to the meeting of January 21, 2021. FSD Pharma Inc. was a week late in providing the requisitioning shareholders with the names and addresses of its registered shareholders. The company ignored the request for the corporate minute book, notwithstanding the right of Anthony Durkacz and Zeeshan Saeed to see it, as directors..
[6] Under the direction of Raza Bokhari, actions were taken to confront those who led the requisition of the meeting of shareholders. Raza Bokhari instructed the corporate counsel of FSD Pharma Inc. to write Anthony Durkacz and Zeeshan Saeed to advise them that they were both being investigated by a special committee of the Board of Directors for alleged misconduct.
[7] On January 25, 2021, at 11:25 PM, Raza Bokhari emailed Zeeshan Saeed dismissing Zeeshan Saeed as president of FSD Pharma Inc. for cause. In the letter Raza Bokhari indicated that the termination of his employment contract resulted in the deemed resignation of Zeeshan Saeed from all positions he held as an officer, director or employee as well as the termination of all of his stock options.
[8] Zachary Dutton was a founder of Prismic Pharmaceuticals Inc., a company that had been purchased by FSD Pharma Inc. As part of the purchase, Zachary Dutton received a number of Class B shares of FSD Pharma Inc. and continued to work as a consultant. Zachary Dutton supported the directors (shareholders) requisitioning the meeting. He was no longer working regularly. He had left the company during 2020 under the terms of a separation agreement. It covered the payment of severance over the course of 10 months and required him to provide 12 hours of consulting services per month. On the instructions of Raza Bokari, Zachary Dutton was told that, given his support for the requisition, he should not expect to receive any further payment under the separation agreement and that Raza Bokari might attempt to claw back previous payments. Zachary Dutton was told that he had made a mistake by joining the requisitioning shareholders. On February 4, 2021 FSD Pharma Inc. terminated the separation agreement on the basis that the conduct of Zachary Dutton had made it “impossible for the management team of the company to rely on and trust [Zachary Dutton] and the services [he] would have provided.”
[9] The company then moved to issue additional shares through “At the Market” offerings. As the name implies, these shares were made available on the open market. It is not known who purchased them, but the impact was to reduce the voting power of the requisitioning shareholders. There were two such offerings. The first had been approved by the Board of Directors including Anthony Durkacz and Zeeshan Saeed during July 2020 but up until February 1, 2021 only 53,848 shares had been issued. In the 10 days between February 1 and 10, 2021 a total of 7,356,326 Class B shares were issued under this offering.
[10] At a meeting on February 10, 2021, a determination was made to implement another “At the Market” offering. Anthony Durkacz was given approximately three hours’ notice of the proposed meeting. Zeeshan Saeed received no notice. He had, by then, been removed as a director by the actions of Raza Bokhari. The directors were provided with no written material to support the share offering. Nonetheless, the offering was approved. It is unclear how many shares were issued under this offering. Anthony Durkacz believes that FSD Pharma Inc. issued about 60% of the shares authorized by this second “At the Market” offering. At the hearing counsel for the respondent advised that, in the interim, it had become known that in fact 100% of this offering had been taken up.
[11] I pause to point out that much of this was specifically referred to by the application judge in the endorsement that he made. He noted that on December 20, 2020 Raza Bokari sent a letter to Zeeshan Saeed making serious allegations of personal misconduct against him and suspending him. The application judge went on to record that, on January 25, 2021, Raza Bokhari again wrote to Zeeshan Saeed notifying him that he was being terminated as the president of FSD Pharma Inc., for cause. The endorsement goes on that this was written “again with serious allegations for which there is little if any documentary support in the file record”. The application judge also referred to Zachary Dutton as having been “threatened not to support [Anthony Durkacz]”. He also made reference to the “At the Market” issuance of shares. The application judge noted that Raza Bokhari and those directors who joined him in opposing the requisition had stated “that they are not aware as to who purchased the approximately 7.5 million shares issued in January” and to his determination that “[i]f evidence surfaces to the contrary and/or shares were purchased by entities/persons related to [those directors], the Applicant [Anthony Durkacz] may return to the Court to make submissions…”. The application judge did not make specific reference to the redacting of the briefing books provided to Anthony Durkacz and Zeeshan Saeed, the delay in providing the names and addresses of the registered shareholders in advance of the meeting of January 25, 2021 or the failure to make the minute book available. He did note that Board Minutes were provided to Anthony Durkacz “which appear to be incomplete as important financial documents are missing.”
[12] The application judge went on to observe that “there are other allegations of misconduct on both sides including allegations against the Applicant [Anthony Durkacz] of misleading [FSD Pharma Inc.] with respect to his interest in Lucid [a company he proposed be purchased by FSD Pharma Inc.] and attempts to schedule Board Meetings when he knew others, including Bokhari, were not available.” He did not “propose to list them all.” He then concluded: “I find, however, that based on the above and the other allegations in the filed record, I am satisfied that legitimate issues have been raised by the Applicant (and for that matter by the [directors opposing the requisition] as against the Applicant) regarding corporate governance.”
[13] It is in this context, and with this finding, that the issue of shares to Raza Bokhari and certain other directors was raised and considered. At the meeting of February 10, 2021, a resolution was passed awarding Raza Bokhari $2.5 million in compensation for his services in 2021, payable in FSD Pharma Inc. Class B shares. The company immediately issued the shares to Raza Bokhari based on a formula in the resolution approving the payment. Together with the shares issued, after the requisition was received, to other directors opposing the requisition a total of 1,349,765 Class B shares were issued to those directors and management in compensation for their services in 2021. In listing his concerns, the application judge included that “in early January 2021, [the directors opposed to the requisition] issued large amounts of new shares for sale and awarded themselves compensation via the receipt of certain shares” He was clearly aware of this issue. It was among the issues that caused him to be satisfied that the applicant (Anthony Durkacz) had raise legitimate issues concerning corporate governance. Nonetheless, the appellants take the position that in the absence of a specific finding of impropriety associated with the issuance of the shares to the directors opposing the requisition, the reasons are insufficient to support the order restraining the directors from voting those shares.
Analysis
[14] Reasons serve three purposes:
As explained in R.E.M., a trial judge’s reasons serve three main functions — to explain the decision to the parties, to provide public accountability and to permit effective appellate review. These functions are fulfilled if the reasons for judgment explain the basis for the decision reached. The question is not whether a different verdict could have been reached on the evidence.
(R. v. H.S.B. 2008 SCC at para. 8)
[15] The absence of a specific finding in respect of any particular alleged wrong (in this case impropriety in the issuance of the shares to the directors) in the reason provided is not the test on which this, or any appeal, should be determined:
However, an appeal court cannot intervene merely because it believes the trial judge did a poor job of expressing herself. Nor, is a failure to give adequate reasons a free standing basis for appeal. At para. 20 of Walker, Binnie J. states:
Equally, however, Sheppard holds that “[t]he appellate court is not given the power to intervene simply because it thinks the trial court did a poor job of expressing itself” (para. 26).
[16] The paragraph goes on to explain what is required for reasons to be sufficient:
Reasons are sufficient if they are responsive to the case’s live issues and the parties’ key arguments. Their sufficiency should be measured not in the abstract, but as they respond to the substance of what was in issue. . . . The duty to give reasons “should be given a functional and purposeful interpretation” and the failure to live up to the duty does not provide “a free-standing right of appeal” or “in itself confe[r] entitlement to appellate intervention” (para. 53)
(F.H. v. McDougall, 2008 SCC 53 at para. 99 quoting R. v. Walker, 2008 SCC 34 at para. 20)
[17] Not every step in the progress to resolution needs to be explained for reasons to be sufficient:
Nor is the question whether the reasons detail every step of the reasoning process or refer to every piece of evidence or argument led by counsel. The task for the appellate court is simply to ensure that, read in the context of the entire record, the trial judge’s reasons demonstrate that he or she was alive to and resolved the central issues before the court.
(R. v. H.S.B.. 2008 SCC at para. 8)
[18] Viewed in this light it is plain the reasons of the application judge do not suffer from being insufficient merely because he does not explicitly state a finding of impropriety in the issuance of shares to the directors opposing the requisition. Understood from the perspective of the record (and the application judge’s reasons) as a whole, it is clear the application judge was concerned about the actions taken by both sides of the dispute but particularly those of Raza Bokhari and his confederates. His reasons note:
- Zeeshan Saeed was, in the absence of any documentary support, subjected to serious allegations of personal misconduct and terminated “for cause.”
- Zachary Dutton was threatened not to support the requisition and his consultancy prematurely ended.
- Board Minutes provided to Anthony Durkacz were incomplete; the financial documents were missing.
- The fact that 7.5 million shares had been issued in January (presumably in response to one or both of the “At the Market” offerings) and no one could advise who had purchased them.
- the directors opposed to the requisition also awarded themselves a large number of new shares as 2021 “compensation”. and
- There were other allegations which he did not list.
[19] It is also relevant context that the application judge decided to override the Board’s decision to hold the annual general meeting in June 2021 and ordered that an independent chair, not Raza Bokhari, preside over the meeting. He did so on the basis of his conclusion that the Board (including its Chair, Raza Bokhari) was not acting in good faith and in the best interests of the company. The appeal of these two decisions was abandoned at the outset of the appeal.
[20] Viewed in this overall context, the reasons are not only sufficient to support the finding that “legitimate issues” had been raised about corporate governance but that there was a demonstrated impropriety in the actions taken by the directors opposing the requisition (Maudore Minerals Limited v. Harbour Foundation 11 O.R.(3d) 660 at para.108). That impropriety arises from the overwhelming inference that the directors opposing the requisition issued themselves shares for the sole purpose of diluting the voting power of the requisitioning shareholders, and thus for the purpose of entrenching the opposing directors in control of the company. Examined from the perspective of the entire record the concern for the issuance of shares to the directors opposing the requisition is clear and the remedy (the restriction on voting) appropriate.
[21] It may be that, given more time and less urgency, the concern could have been more clearly expressed but these reasons, as they are, respond to the issues such that the parties can understand the rationale and the concern for the actions of the directors opposing the requisition. Certainly, they are sufficient to permit effective appellate review.
[22] The appellants submit this is not the end of the matter. If the reasons are sufficient there is still an error of law in the failure of the application judge to adhere to the “business judgment rule.” The “business judgment rule” is not a legal principle. It is a presumption that directors or officers act on an informed basis, in good faith, and in the best interests of the corporation and is thus rebuttable:
[I]t is a precondition to the application of the [business judgment] rule that the court must determine that the directors of acted honestly, prudently, in good faith and on a reasonable belief that the transaction is in the best interest of the company.
(Corporacion Americana de Equipamientos Urbanos S.L. Olifas Marketing Group Inc. 2003 22758 (ON SC), [2003] OJ No. 3368 at para. 13)
[23] The application judge recognized that the business judgment rule would require him to defer to the business judgment of those responsible for the decisions taken if they were acting honestly, in good faith with a view to the best interests of the company. He found it was inappropriate to do so. He found that there were legitimate issues raised about the governance of FSD Pharma Inc. and that much of what had happened was not in the best interests of the corporation. It was open to the judge hearing the application to accept that the various actions taken by FSD Pharma Inc. as a concerted and directed effort to limit the ability of those who support the requisition to fully take part in the decisions to be made and on that basis to set aside reliance on the business judgment rule. It is difficult, if not impossible to see the actions taken as coincidental and motivated by an understanding of what is in the best interest of the company. Finally, the appellants submit that if the issuance of the shares to the directors opposing the requisition is found to be improper, which they deny, it is because that issuance offends the Ontario Business Corporations Act R.S.O 1990, c. B. 16, s. 23(3) which states:
A share shall not be issued until the consideration for the share is fully paid in money or in property or past service that is not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.
[24] The proposition, if upheld, would be that these shares were distributed in return for work done in 2021. They were issued during February. How could they be compensation for work done in 2021 when it was provided less than two months after the year began? Counsel for the appellants submitted that if this was the concern, the court did not have the jurisdiction to restrict the vote, it should have (would have) cancelled the shares yet no mention of this was made by the application judge.
[25] The appellant’s argument misses the point. The application judge less concerned with the legality of the share issue than with the impact of the action taken by the directors opposing the requisition on the ability of decisions to be made in a fair and proper way at the pending meeting of shareholders. His authority for the orders he made does not arise from a breach of s. 23(3) but from s. 106(1):
If for any reason it is impracticable to call a meeting of shareholders of a corporation in the manner in which meetings of those shareholders may be called or to conduct the meeting in the manner prescribed by the by-laws, the articles and this Act, or if for any other reason the court thinks fit, the court, upon the application of a director or a shareholder entitled to vote at the meeting, may order a meeting to be called, held and conducted in such manner as the court directs and upon such terms as to security for the costs of holding the meeting or otherwise as the court deems fit.
[26] Confronted with what had been done in the name of FSD Pharma Inc., the application judge made an order directed at creating an atmosphere for the proper and balanced consideration of the issues that require determination by the shareholders. This is demonstrated by the requirement that there be one meeting to decide all issues, an independent Chair and the restriction on the directors opposing the requisition from voting the shares they obtained after the requisition was made.
Conclusion
[27] For these reasons the appeal is dismissed.
Costs
[28] As agreed by the parties, costs are to be paid by the appellants to the respondent in the amount of $12,500, payable forthwith.
Lederer, J.
I agree _______________________________
Corbett, J.
I agree _______________________________
Penny, J.
Date: May 7, 2021