minicounsel

COURT FILE NO.: 01-CV-221418CP

DATE: 20120801

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

RICHARD MANDEVILLE, WISMAR GREAVES, MARCUS JORDAN and ANTHONY BOWEN

Plaintiffs

and

THE MANUFACTURERS LIFE INSURANCE COMPANY

Defendant

Proceedings under the Class Proceedings Act, 1992

Harvey T. Strosberg, Q.C

Linda R. Rothstein

Richard P. Stephenson

David B. Williams

Jonathan Foreman

Patricia A. Speight

Trevor Guy

for the Plaintiffs

Sheila R. Block

Wendy M. Matheson

David Outerbridge

Sandeep J. Joshi

Molly Reynolds

James Gotowiec

Crawford G. Smith

for the Defendant

HEARD: March 5, 6, 7, 8, 12, 13, 14, 15, 20, 21, April 10, 11, 12, 13, 16, 17, 18, 23,24 25 and 30, May 2, 3, 4, 7, 15, 16, 17 and 18, 2012

Newbould J.

INDEX

Page No.

Nature of action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fact Finding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Brief history of Manulife . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sale of the Barbados business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Approval of the regulators

(a) Regulatory approval in Barbados . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) Regulatory approval in Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Demutualization of Manulife . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Langdon Hall June 1996 meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusions on the intent of Manulife to demutualize . . . . . . . . . . . . . . . . . . . . . . . .

Duty of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(i) Forseeability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(ii) Proximity analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(iii) Policy issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(iv) Conclusion on duty of care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Causation on duty of care issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Alternative theories of liability

(a) No extinguishment of ownership rights . . . . . . . . . . . . . . . . . . . . . . .

(b) Failure to compensate for lost ownership rights . . . . . . . . . . . . . . . . .

Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a) Variable Share Allocation Component . . . . . . . . . . . . . . . . . . . . . . .

(b) Fixed Allocation Share Component . . . . . . . . . . . . . . . . . . . . . . . . . .

(d) Conclusion on damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Damages on alternative liability theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Answers to common issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103

Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104

Nature of action

1This class action arises from the sale by the defendant (“Manulife”) of its insurance business in Barbados in December 1996 to the Life of Barbados, a Barbadian insurance company (“LOB”) and the subsequent demutualization of Manulife announced in January 1998 and completed in September 1999. The plaintiffs claim on behalf of a class of some 8,000 persons in Barbados whose participating policies with Manulife were transferred to LOB in the December 1996 sale.

2The Insurance Companies Act (“ICA”) permits mutual life insurance companies to issue both participating and non-participating policies. A participating policy is a policy issued by a company that entitles its holder to participate in the profits of the company. A mutual insurance company has the discretion to declare a dividend for participating policyholders in accordance with an established dividend policy. Holders of non-participating policies are not entitled to receive such dividends. A mutual life insurance company has no shareholders.

3When Manulife demutualized, its participating policyholders at the time were paid the value of Manulife in shares or cash in the amount of $9 billion¹. Because the Barbados policyholders² were no longer Manulife policyholders, they received none of that value. They claim that Manulife owed them a duty of care and a fiduciary duty at the time of the December, 1996 sale to LOB to take steps to ensure that when Manulife demutualized, they would participate in the distribution of the value of Manulife as if they were still participating policyholders of Manulife.

4What the rights of participating policyholders of a mutual insurance company were is a central question in this action. Such policyholders were described in various documents, including documents published by Manulife, as the owners of the company. What those ownership rights were at the time of the sale of the Barbadian business to LOB is not agreed by the parties. It is agreed that participating policyholders had contractual rights to receive dividends if declared by the board of directors, a statutory right to nominate directors and to vote at meetings of the company, and the right to share in the property of the company in the event of a winding-up due to insolvency. At issue is the right of participating policyholders to the value of the company, including its surplus, prior to any demutualization.

5The main issue in this action is whether at the time of the sale of the Barbados business to LOB in 1996, Manulife sufficiently anticipated that it would mutualize in the future so as to give rise to a duty to preserve in some way the rights of the Barbados participating policyholders to share in the value of Manulife when it demutualized.

Fact finding

6The events in question took place many years ago. Memory of past events is difficult, and this case was no exception. The most crucial fact involves the intention of Manulife in 1996, some 16 years ago.

7In this case, as will be seen, I have not accepted as reliable much of the evidence of Manulife’s personnel. This has essentially been an issue of reliability rather than credibility. I have come to the conclusion that a large part of the evidence given by them involved reconstruction rather than actual memory. This is an all too common human thing to do when trying to remember events from times long past. Reconstruction can be either inadvertent or advertent. In either case, when it occurs, it is something that the trier of fact must consider in weighing evidence.

8In such a case as this, contemporaneous documents are of critical importance in considering what took place and why. The most satisfactory judicial test of the reliability of evidence lies in its harmony or lack of harmony with the preponderance of probabilities disclosed by the facts and circumstances of the particular case. In this case, I have relied on the contemporaneous documentation as being particularly helpful in reaching conclusions as to the preponderance of probabilities.

Brief history of Manulife

9Manulife was incorporated as a stock company on June 23, 1887 and had a capital stock consisting of 300,000 shares of a par value of $10 each, of which 150,000 shares were issued and outstanding.

10On December 20, 1957, the Canadian and British Insurance Companies Act was amended to allow companies to convert into mutual insurance companies. The conversion was termed as a “mutualization.” Mutualization was a process under which all of the stock of an insurer was bought back by the insurer and written down to par and retired, at which point it became a mutual company without capital stock whose members were its participating policyholders.

11In 1958, Manulife began the process of mutualization, whereby its shareholders were bought out over five years. The motivation for this was a concern of a hostile take-over if it remained a stock company. This concern led most of the major insurance companies in Canada to mutualize.

12On April 29, 1958, Manulife’s President, George Holmes, sent a letter to the holders of participating policies of Manulife. He wrote that “when mutualization is complete, all directors will be Policyholders’ Directors and the Company will be wholly owned by the policyholders.”

13Manulife became a successful mutual insurance company, conducting business in many parts of the world, including the United States and Hong Kong. In 1984, the company's total assets reached $10 billion. By 1986, Manulife’s total insurance in force reached $100 billion. In 1994, Manulife purchased Confederation Life's group life and health insurance business. In 1996, it reported net operating income of $503 million, making it the first Canadian life insurer to pass the half-billion dollar mark in earnings.

14However, because of changes in the market place, competition in the financial sector had intensified and insurance companies wanted greater access to capital to achieve their business goals. Mutual insurance companies, however, had a problem in that because they did not have common shares, access to capital was harder for them than it was for public stock companies. For that reason, mutual companies in Canada, the United States and elsewhere began to consider demutualizing, and may of them eventually did so.

15The demutualization of mutual insurance companies became lawful in Canada under the ICA enacted in 1991 which expressly permitted demutualization. The statute left to the regulatory process the power to make regulations to determine when and how demutualization could occur. In 1993, regulations were promulgated permitting small cap mutual companies with capital of less than $7.5 billion to demutualize. Following that regulation, the large mutual insurance companies in Canada, including Manulife, took steps to persuade the government to permit them to demutualize.

16In June 1996 the government released a White Paper entitled 1997 Review of Financial Sector Legislation: Proposals for Change in which it announced its intention to permit all mutual companies to demutualize.

17On January 19, 1998, the board of directors of Manulife asked management to prepare a plan of demutualization, and on the following day Manulife publicly announced its intention to demutualize. This was 13 months after the sale of the Barbados business to LOB had closed.

18In August 1998 the government published draft regulations to implement the proposed changes and the final regulation to permit demutualization of the large cap insurance companies came into force in March, 1999.

19Manulife’s demutualization plan was approved by the board of directors in May 1999 and the eligible policyholders of Manulife voted on and approved the plan of demutualization at a special meeting in July 1999. The demutualization became effective on September 23, 1999.

Sale of the Barbados business

20In 1990, Manulife decided to sell its businesses in the Caribbean-Atlantic region. It had carried on in that region since nearly its inception. Manulife began selling policies in Barbados in 1894. The basic reason for wanting to exit this region was that from a financial and management perspective, the business was too small to operate effectively and growth prospects were poor.

21On June 11, 1990, Manulife announced that it had agreed to sell its Caribbean-Atlantic operation to Global Life, a subsidiary of a Caribbean life insurance company named Life of Jamaica. Included in the agreement was the sale of the branch operations of Manulife in the Bahamas, Barbados, Bermuda, the Cayman Islands and Puerto Rico. The sale of most of Manulife’s Caribbean insurance business proceeded in the early 1990s, ultimately not as a single block but in several separate transactions.

22However the sale of the Barbados business to Life of Jamaica did not proceed. Manulife proposed a sale of the business to Life of Jamaica and sent a draft of the agreement to the Supervisor of Insurance in Barbados at the time, Mr. Wismar Greaves, now a representative plaintiff. Under the Barbados legislation, his certificate of sanction to the sale was required. He had a number of concerns, one of which had to do with the surplus. On December 31, 1991, he took the position with Manulife that he would not sanction the sale unless his office was assured that all surpluses belonging to the existing policyholders were either distributed to them in an equitable manner or remained in the life fund transferred if the continuing insurer was a mutual company.

23On January 17, 1992, Manulife advised Mr. Greaves that it would cease to offer new contracts of insurance in Barbados effective January 24, 1992, that all of its employees would be terminated at the end of January and that it had appointed LOB to provide local service to policyholders.

24In 1995, by which time Mr. Greaves was no longer the Supervisor of Insurance in Barbados, Manulife and LOB signed a letter of intent to transfer Manulife’s Barbados insurance business to LOB. The letter of intent expired in accordance with its terms in October 1995. In May 1996, Manulife and LOB entered into an agreement to transfer Manulife’s Barbados insurance business to LOB (the “Transfer Agreement”). This agreement later was approved by the Supervisor of Insurance in Barbados and by the appropriate Minister in Canada on the recommendation of the Office of the Superintendent of Financial Institutions (“OFSI”). Its effective date was December 31, 1996.

25Under the terms of the Transfer Agreement:

(a) Manulife transferred to LOB the benefit and burden of those life insurance policies and annuity contracts issued or assumed by Manulife out of its Barbados branch in respect of policyholders in Barbados that were in force on December 31, 1994 (the “Barbados Policies”). The Barbados Policies included all of the participating policies owned by the members of the plaintiff class.

(b) LOB assumed all of the obligations and liabilities of Manulife under the Barbados Policies, and acquired the benefit of all the rights of Manulife in respect of the Barbados Policies.

(d) LOB was:

(i) precluded from reducing the dividend scales for participating Barbados Policies unless there was a commensurate downward adjustment to the dividend scales applicable to LOB policies in Barbados that were in force on December 31, 1994;

(ii) required to pay a dividend on each Barbados Policy in an amount not less than the dividend paid by Manulife in respect of that policy in 1994, provided the terms and conditions of each policy remained unchanged, all premiums due to the date of the dividend payment were paid, and LOB paid a dividend to its ordinary shareholders during the 12-month period immediately preceding the payment date for the policyholder dividend.

(f) Manulife transferred to LOB assets with a value agreed by the parties to be sufficient, in conjunction with future premium payments, to meet all future obligations under the Barbados Policies.

(g) LOB was required to establish, prior to the effective date of the Transfer Agreement, and to maintain a capital/surplus ratio of at least 150% calculated on rules consistent with the rules established by OSFI for life insurance companies, in order to maintain satisfactory security for the transferred policyholders.

(h) The purchase price paid to Manulife by LOB was $9 million Barbadian (C$5.7 million).

26The Transfer Agreement provided that it was governed by and was to be construed in accordance with the laws of Barbados, and that the courts of Barbados were to have jurisdiction for all purposes of or in connection with it. Further the Barbados Policies provided that they were governed by the law of Barbados, and the Barbados Insurance Act provided that the policies were governed by the law of Barbados and were subject to the jurisdiction of the courts of Barbados.

Approval by the regulators

27Under Barbadian law, the Transfer Agreement had to be approved by the Supervisor of Insurance. Under Canadian law, the Transfer Agreement had to be approved by the Minister of Finance on the recommendation of the superintendent of OFSI.

(a) Regulatory approval in Barbados

28Under section 129 of the Barbados Insurance Act, and also under the terms of the policies issued to the Barbados policyholders, the policies were governed by the law of Barbados and subject to the jurisdiction of the courts of Barbados. The Transfer Agreement between Manulife and LOB also provided that it was to be governed and construed in accordance with the law of Barbados.

29The Barbados Insurance Act required that when a company wished to transfer any part of its insurance business in Barbados to another company, the company had to obtain the sanction of the Supervisor of Insurance. Section 34(2) provided that the Supervisor might sanction the transfer unconditionally or subject to such conditions as he specified in writing. Under section 35 A (4), the Supervisor could not sanction the transfer if he was not satisfied that the transfer was in the public interest.

30A formal application had to be made to the Supervisor supported by internal actuarial reports of both companies, in this case of Manulife and LOB, and the report of an independent actuary regarding the appropriateness and benefits of the proposed transfer. Notice of the application had to be given and objections could be made to it. A hearing by the Supervisor was required.

31Objections were made to the Supervisor, including an objection from the plaintiff Mr. Greaves, who objected on the basis that compensation was not being provided for the loss of policyholders’ mutuality rights, including the loss of benefits to be paid in the event of a demutualization of Manulife.

32Mr. Guy was a senior vice-president and Chief Actuary of Manulife at the time. He submitted a report to the Supervisor in Barbados. It contained nothing about the loss of any mutuality or demutualization rights of the Barbados policyholders. He testified that he did not address those topics because he felt they were not as important as the issues which were in his report and that if the Supervisor in Barbados required him to comment on any issue, he would come back to Mr. Guy for that purpose. That did not occur. On cross-examination, Mr. Guy said that he concluded that those rights had no material value and so he did not consider it worthwhile referring to them in his report.

33Michael McGuinness of Eckler Partners, an actuary in Canada, was retained by Manulife as the independent actuary on the transfer of the Barbados policies to LOB. A report from him as an independent actuary was required for both the Barbados and Canadian regulatory approvals. Mr. McGuinness prepared several drafts of his report, each of which was provided to Manulife. His first draft did not discuss the effect on the Barbados policyholders in the event of a future demutualization of Manulife. Ms. Margolian of Manulife twice provided draft wording to Mr. McGuinness, with the approval of Mr. Guy. Mr. McGuinness inserted verbatim the second draft from Ms. Margolian in his final report as follows:

The transferred policyholders also lose their rights under the special circumstances of Manulife undergoing a demutualization. It is doubtful what, if any, portion of surplus the participating policyholders would be entitled to in the event of a demutualization. Furthermore, the management of Manulife have stated that the company has no intention of demutualizing at present and that demutualization is not contemplated in any of its business plans. Under the circumstances, the likelihood of demutualization is remote and these rights have no material value.

34The first draft of Mr. McGuiness’ report did not contain this language. The notes of Mr. McGuinness state that Ms. Margolian was concerned that the way Mr. McGuiness had discussed this issue in an early draft might encourage objections from policyholders at any court hearing in Barbados, and Ms. Margolian agreed on cross-examination that she probably said something to that effect. This led her to drafting the language for Mr. McGuiness, with Mr. Guy’s approval, which ended up in his report.³

35The Supervisor of Insurance in Barbados decided to retain his own actuary to provide him with an actuarial report on the transfer from Manulife to LOB. Mr. Arnold was an actuary in the U.K. with the firm of Hymens Robertson. He was retained in June 1996 by the Supervisor to review the actuarial terms of the transfer.

36Mr. Arnold was provided by the Supervisor with copies of Mr. Guy’s report and Mr. McGuinness’ draft report. Mr. Arnold and his partner communicated with Mr. Guy of Manulife to obtain information he wished to consider. Some of the information was provided. Included in the information sought was information has to how the dividend scales for the Barbados business were determined and their relation to the rest of the Manulife business. This information was not provided, but instead a statement from Mr. Guy was given that stated that the dividend scales had not been changed for several years pending the sale of the business, and were based on the underlying experience of the Barbados business. Mr. Arnold was not provided with information about the dividend scales of other regions in which Manulife did business.

37Mr. Arnold had a concern regarded embedded values in the business that were going to be retained by Manulife. Specifically, his concern was that some of this embedded value at least should be provided to the Barbados policyholders. The concept of embedded values derives from the conservative way in which future liabilities on insurance policies issued by an insurer are reserved. An insurer will assume for the purpose of calculating liabilities that the interest to be earned on the premiums collected, and thus available to pay policy liabilities, will be less than what is expected to be earned. Over time, as the income earned is greater than calculated in the reserves, it results in additional money available to pay policy liabilities. On the transfer of a book of business such as occurred in Barbados, there is an issue as to what the embedded value is and what is to happen to it. In this case, Manulife negotiated to be paid by LOB what it calculated to be the embedded value, being Barbados $9 million (C$5.7miillion).

38Mr. Arnold wrote Mr. Guy regarding the embedded value and took the position that under the proposed transfer, the remaining Manulife policyholders would enjoy a windfall profit representing the embedded value of the transferred business that was remaining with Manulife with the Barbados policyholders receiving none of it. He asked for comments. Manulife did not want any of this amount going to the Barbados policyholders and was concerned with the precedent effect it would cause. Mr. Guy disagreed with Mr. Arnold and said so in his reply to him.

39The draft report of Mr. McGuinness provided to Mr. Arnold said that if the proposed transfer had not been planned, it is almost certain that there would have been a reduction in dividend scales for this business in 1991. Where that information came from was not apparent. It also contained the statement that management of Manulife had confirmed that Manulife had no intention of demutualizing at present and that the chances of demutualization were remote.

40Mr. Arnold prepared a draft report and circulated it. The report recommended a special bonus or dividend to be paid to the Barbados policyholders of, say, one year’s normal dividend of B $2.2 million. His report also said:

The transferring policyholders are being asked to support a transfer which gives them no incentive but rather the threat that their dividends might suffer if it does not go through. If such incentive were present, it would considerably mitigate any concerns or reservations that there may be regarding loss of security, loss of mutuality and the assets retained by Manulife. A fair and practical solution would be to implement a special dividend if the transfer proceeds.

41Manulife was against any payment being made to the Barbados policyholders. Mr. Guy and Mr. Clark, a partner of Mr. McGuinness, took steps to try to convince Mr. Arnold to change his opinion. They each talked to Mr. Arnold without success. Mr. Clark referred to this effort as “lobbying” Mr. Arnold. By this time, the final report of Mr. McGuinness had been delivered and the plaintiffs contend that the actions of Mr. Clark, a partner of Mr. McGuinness, indicate that Mr. McGuinness’ firm was not independent of Manulife.

42Before Mr. Arnold wrote and signed his final report, Mr. Guy of Manulife sent him proposed language for the conclusion of his report, which Mr. Guy had discussed with Mr. Clark. That language, had Mr. Arnold included it in his final report, concluded that the transfer was in the best interests of the Barbados policyholders without any additional compensation being paid to them.

43Mr. Arnold declined to use the language in his final report of November 11, 1998 but he did soften the language somewhat, including referring to the "prospect" rather than the "threat" that the Barbados policyholder’s dividends might suffer if the transfer did not take effect. He maintained that some compensation would be equitable although he did not in his report state the amount that he had previously referred to in his draft report. However, in a letter to the Supervisor of the same date, he referred to his previous statement that Barbados $2.2 million should be considered to be paid to the Barbados policyholders and said that he was still of the opinion that that amount was the correct order of magnitude. He stated that neither Manulife nor LOB had been able to evidence to his satisfaction that some reasonable proportion of the Barbados $9 million should not be for the policyholder's benefit. He said the reason for removing the specific reference in his final report to the form and cost of benefit was to permit the parties and to Manulife in particular “room for manoeuver”.

44Mr. Arnold testified that the payment that he was suggesting should be made to the Barbados policyholders had nothing to do with payment to compensate them for the loss of benefits in the event that Manulife demutualized. He said that potential demutualization rights were not an explicit concern, that demutualization had not really taken off in the way that it eventually did and that he had seen from the draft report of Mr. McGuinness that Manulife was not considering demutualization. He said that as management of Manulife had said that it had no intention to demutualize, rights flowing from a demutualization were a non-issue for him and he had not been retained to assess the value of loss of rights in the surplus of a financial healthy insurance company in the event of a demutualization.

45The Supervisor of Insurance, Mr. Carrington, held a hearing on November 14, 1996. Statements were made by the participants, but not under oath. Mr. Greaves attended and expressed his objections to the transfer. Mr. Guy attended, along with Mr. Peter Rubenovitch of Manulife. Mr. Guy made a presentation to the effect that the transfer was beneficial to the Barbados policyholders because of dividend commitments that were being were being made by LOB and the benefits of having a local company carry on the business. He provided a copy of the report of Mr. McGuinness which had stated that based on statements of management of Manulife, the likelihood of demutualization was remote. Mr. Guy also said the following regarding demutualization:

Now, in the case of Manulife, first of all we do not have any plans to demutualize, and I would feel very uncomfortable talking to you today about you know the fact that sometimes in some countries policyholders get to share a surplus under demutualization if I felt that in the not-too-distant future Manulife is going to demutualize shortly after transferring this business, that's not going to happen-we have no plans to do that.

46The Supervisor closed the hearing by saying that the significant issue was whether the policyholders of Manulife should be paid some sort of compensation for the membership rights "in the circumstance of the demutualization in Barbados". What he meant by a demutualization in Barbados was not explained, but presumably he was referring to the Transfer Agreement with LOB. He said he was going to make a decision that he considered to be fair, equitable and in the best interest of all the persons concerned.

47Later that day, Mr. Guy and Mr. Rubenovitch, along with Mr. Alleyne of LOB, met with the Supervisor. Mr. Alleyne said he would be making a proposal to the Supervisor and he may have mentioned the specifics. The meeting was not lengthy.

48On the same day, LOB faxed to the Supervisor a statement that in recognition of the concerns of the participating policyholders, it would pay a special dividend of $18 for each $1000 of insurance to the beneficiary of the policy on the death of the life insured or the maturity date of the policy. The statement said that the gross amount of the special dividend was B$6.4 million. On the following day it sent another fax to the Supervisor raising that payment to $20 and said that the gross amount was B$7.2 million. To be noted is that the payment would not be made to the Barbados policyholders but rather to the beneficiaries of the policies.

49On November 25, 1996 the Supervisor sanctioned the Transfer Agreement subject to the condition that LOB, in recognition of the concerns of the participating policyholders of Barbados, make payment of a special dividend equal to Barbados $20 for each $1000 of insurance to the beneficiary of such participating policy on the death of the life insured or the maturity date of the policy.

50Under Barbadian law, anyone dissatisfied with the decision of the Supervisor was entitled to appeal the decision to a judge of the Barbados High Court, with a right of appeal from the judge to the Court of Appeal with leave, and from there to the Judicial Committee of the Privy Council with leave. As well, the decision of the Supervisor could have been challenged by a judicial review proceeding. None of these steps were taken by Mr. Greaves or any other objector.

(b) Regulatory approval in Canada

51In Canada, the ICA required that the Transfer Agreement between Manulife and LOB be approved by the responsible Minister, in this case the Secretary of State (International Financial Institutions) Finance, on the advice of the Superintendent of OFSI.

52As part of its application for approval, Manulife provided OFSI with the actuarial report of Mr. McGuinness of Eckler Partners, the independent actuary for Manulife, the actuarial report of Mr. Arnold, the actuary retained by the Barbados Supervisor of Insurance and the decision of the Barbados Supervisor sanctioning the Transfer Agreement on the condition that LOB pay the special dividend to the beneficiaries of the Barbados policies.

53On December 18, 1996, John Thompson, the Deputy Superintendent of OFSI, recommended to the Minister that he approve the Transfer Agreement and the approval by the Minister was signed on December 20, 1996.

54Mr. Thompson testified that in reviewing a transfer, OFSI would look at it to be satisfied that both the transferring and transferee companies were financially sound enough to meet obligations to policyholders and to look at the treatment of policyholders to ensure that the policyholders being transferred out were not unusually advantaged or disadvantaged and that the remaining policyholders were not unusually advantaged or disadvantaged in the process. He also testified on cross-examination that in the case of the transfer in question, OFSI was not determining as a matter of law what reasonable and prudent steps Manulife was required to take in order to protect the rights of the Barbados policyholders.

55OFSI places great reliance on the opinion of the independent actuary retained by the applicant, in this case the opinion of Mr. McGuinness. Its regulations require that an independent actuary be retained and that the actuary’s opinion on the fairness of the transaction be provided to OFSI. In his memorandum to the Minister, Mr. Thompson pointed out that the independent actuary had concluded that the transaction would, on balance, be beneficial to the transferring policyholders and existing LOB policyholders and would have no material effect on other Manulife policyholders. That report of Mr. McGuinness, dated July 19, 1996, contained the statement that management of Manulife had stated that the company has no intention of demutualizing at present, that demutualization is not contemplated in any of its business plans and that under the circumstances, the likelihood of demutualization is remote and these rights have no material value.

Demutualization of Manulife

56When Manulife decided to demutualize is a central bone of contention between the parties, and a close look at the evidence is required.

57There were three CEOs during the relevant time. The first was Mr. Tom DiGiacomo who was the CEO and president of Manulife from 1987 to 1990 and the chairman of the board, CEO and president of Manulife from 1990 to August 23, 1993 when he resigned at the request of the board. The second was Mr. William Blundell, who was the acting CEO and chairman of the board from August 23, 1993 to February, 1994. The third was Mr. Dominick D’Alessandro, who became CEO and chairman of the board in February, 1994.

58In the late 1980s or early 1990s Equitable Life in the United States demutualized and that became a trigger for the exploration of the possibility of Manulife and other large mutual insurance companies in Canada demutualizing. Mr. DiGiacomo's evidence was at that time the banks were making noises about getting into the insurance business and if Manulife was going to compete as a major financial institution, it had to have access to capital, which meant demutualization. A committee of CEOs was established by the Canadian Life & Health Insurance Association (“CLHIA”) to consider issues regarding demutualization, and Mr. DiGiacomo and CEOs from Sun Life, Canada Life, Confederation Life and Mutual Life were on the committee. At Mr. DiGiacomo’s request, an ad hoc committee on mutuality at Manulife to explore the issues involved in demutualization was established by the executive committee of Manulife on April 15, 1993.

59Mr. DiGiacomo’s evidence was that by August 1993, when he left the Manulife, the strategic direction of Manulife was clearly towards demutualization, although there had been no plan to do so. Mr. Tom Kierans became a director of Manulife in 1990. He was on the ad hoc committee on mutuality. At a meeting of the board on March 19, 1993, Mr. DiGiacomo made a presentation on a number of issues. The minutes of the meeting record that he elaborated on the principles to guide the company's future. One of the principles was that "We Will Begin Letting Our Decisions Be Influenced by the Assumption that Demutualization Is Inevitable". Mr. Kierans testified that his reaction, and that of most board members, was that demutualization was somewhere from 5 to 25 years off. He testified that the reality was that while Mr. DiGiacomo was going through all of the material, there was a growing dissatisfaction on the part of the board with what was regarded as hypothetical issues and a growing dissatisfaction with Mr. DiGiacomo’s performance. Mr. Blundell's evidence was to the same effect and he testified that the principle that demutualization was inevitable was not accepted by the board at that meeting.

60The last meeting of the committee on mutuality appears to have been held on March 30, 1994, shortly after Mr. D’Alessandro came to Manulife. It included a review of a legal structure project that was looking at possible future structures for Manulife. One of the reasons for this was that Manulife was considering transferring its policies sold in the United States and Hong Kong to subsidiaries, and demutualization was being looked at in connection with that. The minutes record that management’s preliminary conclusion was that it would be premature at that time to come to any decisions on the issue of demutualization, but rather leave options open. It appears that this was the last meeting of this committee.

61In May 1994 Mr. D'Alessandro drafted a letter to a board member Eden Martin who had spoken strongly at the board meeting that month that Manulife should demutualize. Mr. D'Alessandro wrote that he agreed that Manulife should probably demutualize at some point, primarily because of the need for capital and the managerial discipline and performance being a stock company would bring. He said however that he believed that there were more pressing issues for Manulife to deal with at that moment and that it would be at least a few years before Manulife could seriously entertain the prospect of demutualization. Mr. D'Alessandro could not recall whether the letter was sent, but he acknowledged that it reflected his thinking at the time.

62The ICA and other comprehensive financial legislation enacted in 1992 had all contained sunset clauses requiring Parliament to enact new legislation by March 31, 1997. In 1995 Manulife, along with other industry participants, made representations to the Ministry of Finance and other persons in Ottawa to the effect that various amendments should be made to the ICA and its regulations that would permit large mutual insurance companies to have flexibility as to how they would be structured in the future, including the flexibility to demutualize. As well, the views of Mr. D'Alessandro were sought by OSFI on key issues, including demutualization and capital raising issues that would need to be dealt with in the 1997 legislative review process for the ICA.

63In early 1996, while demutualization was not yet a priority for Mr. D'Alessandro, he was keeping tabs on the issue and the four major mutual life companies, being Manulife, Mutual Life, Sun Life and Great West Life were working in concert in their submissions to the regulators on what a demutualization regime for large-cap insurers would look like and to influence what the White Paper might say about that. By January 1996 it was felt that the working group of the four majors had gone as far as it could and that the next step would be for the CEOs of each of those four companies to meet with more senior levels in OSFI to attempt to reach accommodation on outstanding issues regarding demutualization regulations.

64At a Manulife board of directors’ orientation session held in February 1996, Mr. D'Alessandro indicated that a future orientation session on mutuality would be held. Mr. D'Alessandro testified that he felt that by that stage demutualization was a topic that he felt they needed to know a lot about. By May 15, 1996 it was planned that a half-day would be set aside in the fall for the board to have an opportunity to discuss the concept of mutuality, and Mr. D'Alessandro acknowledged that by then demutualization was on the industry radar. The White Paper had been expected to be released during the week of May 6, but was delayed and likely to be released by late May. It was expected that the White Paper would deal with a number of issues, including access to capital/demutualization. At a management committee meeting on May 17, 1996 attended by all senior management of Manulife, including Mr. D'Alessandro, the current trend in demutualization legislation was briefly discussed. Mr. D'Alessandro's evidence is that while demutualization at this time was an important issue that he took seriously and an issue being considered by Manulife, no decision had yet been made by Manulife to demutualize.

65The White Paper was tabled by the Minister of Finance on June 19, 1996. It referred to the fact that in 1992 enactments had been made to permit small mutual life companies to demutualize and it stated that the larger mutual life insurance companies had asked that a process for demutualization be introduced for them as well. The White Paper stated that the government proposed to extend the demutualization regime to all mutual life companies. It referred to a number of key principles in the demutualization regulations that had existed for the small mutual life companies, which it said would be retained. The White Paper stated that on a demutualization, a fair value would have to be placed on the company that was to be allocated to policyholders, along with a requirement for an independent opinion from an independent actuary as to the value of benefits to be provided to policyholders. While the 1993 regulations for the small mutual companies had permitted a holding company structure for demutualization that would not involve any distribution of fair value to policyholders, the White Paper did not say that this would be permitted for the large mutual companies.

66The White Paper also proposed that the larger mutual life insurance companies would be required to remain widely held after demutualization so that no person could have a significant interest in the demutualized company. This addressed a concern of the industry, including Manulife, that after a company became demutualized and converted into a stock company, it would be susceptible to a takeover by a large financial institution such as a bank.

67On June 20, the day following the release of the White Paper, the CLHIA sent to the four major mutual life companies, including Manulife, excerpts from the White Paper dealing with participating shares and demutualization, and these were circulated to the management committee of Manulife.

68Shortly after the White Paper was released, a strategic planning session for the senior executives of Manulife was held at Langdon Hall on June 23-25, 1996. Minutes of that meeting included the following, which is relied on by the plaintiffs:

DDA [Mr. D'Alessandro] plans to initiate a strategy to the Board to pursue demutualization. In order to demutualize, we have to increase our earnings and we need to get to 14% long before the year 2000. There was strong support for this from the group. Demutualizing will provide access to capital, a very objective measurement of our value, more flexibility and it drives excellence. We need to ensure we do it on our own timetable, which will probably mean fairly soon, before rating agencies and market forces us. But also need to take advantage of our mutual status to merge with other mutuals. Timing is essential.

Actions

• DAG [Mr. Guloien] to look into whether we would have to keep a par surplus fund in the event of a demutualization.

• Geoff [Mr. Guy] to put some sessions on the Management Committee agenda to cover pads.

69I will deal separately with the evidence of the meeting at Langdon Hall.

70In the fall of 1996, Mr. Guy was attending industry meetings. On October 21, 1996, three weeks before the hearing of the Supervisor in Barbados, he reported on an insurance industry meeting he had attended at Langdon Hall the week before in which he said he had not seen any information that an alternative version of demutualization would be acceptable to OSFI, i.e. an alternative to a full demutualization regime.

71On the morning of December 12, 1996 the board of Manulife together with the Corporate Governance Committee met. A corporate strategy update was presented by Mr. D'Alessandro. It contained a section on 1997 priorities that contained nothing about demutualization. At the end there was a section under the heading Manulife in the year 2000 that included a bullet point-“A publicly traded company?” Mr. D'Alessandro acknowledged on cross-examination that he discussed the possibility that Manulife could be a publicly-traded stock company by 2000 because demutualization was an issue that was prevalent and surfacing as something affecting the insurance industry around world and there were developments in Canada that caused him to want to think about Manulife’s legal status.

72On the afternoon of the same day, the board of Manulife met in a session devoted to mutuality. The purpose of the meeting was to increase the board’s understanding of the issues surrounding the concept of mutuality, including demutualization and what was likely to be the regulatory environment.

73Each year Mr. D'Alessandro prepared a document containing his personal non-financial objectives for the coming year, and discussed them with the chairman of the board. The extent to which he achieved these objectives was a factor in the total remuneration he would receive for the year. The personal objectives of Mr. D'Alessandro for 1996 dated January 23, 1996 and for 1997 dated January 14, 1997 contained nothing about demutualization. I accept Mr. D'Alessandro’s evidence that if he intended to effect a demutualization in either of those years, it would be inconceivable that he would not have included demutualization in his personal objective memorandum that he discussed with Mr. Blundell, the chairman of the board.

74On January 17, 1997, Mr. Guy, the chief actuary at Manulife, included in his personal objectives for 1997, which was discussed with Mr. D'Alessandro, a statement that he believed that Manulife had to prepare for demutualization and that he would like to begin a study of demutualization with the objective of creating a workable demutualization plan which should see the company demutualize in two to five years. Mr. D'Alessandro testified that what Mr. Guy said made sense to him and he approved it. On March 3, 1997 Mr. Guy said in a memorandum to Mr. D'Alessandro that he wanted to conduct a study to determine the preferred method of demutualization, the interim steps that should be taken to position Manulife for possible demutualization and the timeframe for both making the decision and executing a demutualization process. Mr. D'Alessandro authorized Mr. Guy to proceed and asked Mr. Guy to form a working group.

75On April 14, 1997 a dinner of the life industry CEOs was arranged with Mr. John Palmer, the superintendent of OFSI. Mr. D'Alessandro was by this time quite familiar with the issues surrounding demutualization. A briefing memorandum for Mr. D'Alessandro, with which Mr. D'Alessandro agreed, stated that the message that should be given to the Superintendent was that demutualization was an issue of the first order of importance and that the government should move expeditiously on this matter. This is a clear recognition that demutualization was at that time a matter of prime importance to Manulife. There is nothing in particular that had occurred in the past several months that would have made Manulife suddenly come to that view, and it is fair to conclude that that had been the view of Manulife for some time.

76Another strategic planning session was held at Langdon Hall on June 12 to 14, 1997. Demutualization was a topic on the agenda. A discussion of a full demutualization or a mutual holding company regime was discussed. It was agreed that a decision should be made by September 1^st whether Manulife should actively pursue further research into a structure other than a full demutualization. In a July 14, 1997 note, Mr. D'Alessandro said that he thought the sooner an update was made to the board on demutualization, the better and he was thinking of September.

77On August 19, 1997 Great West Life announced its acquisition of London Life. Mr. D'Alessandro testified that Manulife had earlier been approached by London Life which had indicated an interest in teaming up with Manulife but that Manulife did not have the capital to acquire London Life. Mr. D'Alessandro testified that when he learned of the acquisition by Great West Life, he became absolutely convinced of the need to demutualize.

78On August 27, 1997 Mr. Guy recommended to senior management, including Mr. D'Alessandro, that the preferred restructuring option for Manulife was a full demutualization. Mr. D'Alessandro testified that he agreed with this. A mutual holding structure had been proposed in the United States, where Manulife had a huge business, and it had been controversial. Manulife did not want to have a problem with consumer advocates who would be critical of a mutual holding structure and knew as well that a mutual holding structure was a problem for the Canadian regulators. So the decision was made to go with a full demutualization in which the parent company was transformed from a mutual insurance company to a stock company. By September 2^nd, a full demutualization was agreed by the senior management team as the preferred option.

79While a presentation made to the board of directors’ subcommittee on corporate structure on October 2, 1997 laid out six possible demutualization models, it was not the view of management that there were such viable options. In a memorandum of September 24, 1997 by Mr. Guy to senior executives, including Mr. D'Alessandro and Mr. Guloien, dealing with the presentation to be made to the subcommittee, Mr. Guy said that he deliberately did not give a recommendation against mutual holding companies since he did not want to have a paper trail to the board recommending anything at this stage. He said that was why the section spoke of the pros and cons without a definitive recommendation.

80On November 25, 1997 Mr. Guloien made a presentation to the board of directors’ subcommittee on corporate structure. The minutes record approval of management’s recommendation that Manulife focus its future research on full demutualization. Included in the immediate issues listed was the timing of the announcement date and the implications of another Canadian mutual insurance company announcing a restructuring plan earlier than Manulife. The presentation stated that management believed that there was a significant "first mover advantage" in the demutualization process and that Manulife should be the first to announce its plans for demutualization. The subcommittee approved the recommendation of management.

81On December 8, 1997, Mutual Life announced its decision to demutualize.

82A full briefing on the issue of demutualization was provided to the board members at the board meeting of December 18, 1997. Mr. Baillie, the chairman of the subcommittee on corporate structure, reporting on their meetings. He said that both management and the subcommittee were of the view that the status quo was not really an option, i.e. the mutual structure has competitive shortcomings in today's marketplace. Mr. Guloien made a presentation of the various options. The minutes record his recommendation that management focuses future research on full demutualization. The need for confidentiality was stressed. A concern that if an intent to demutualize was leaked before the date for the demutualization was announced, persons could buy mutual policies with a view only to acquiring rights on the demutualization or, if demutualization did not proceed for some reason, they would cancel their policies and Manulife would have paid commissions to agents who sold the policies. The minutes of the board meeting state that the board "encouraged management to focus its future research on full demutualization".

83Manulife contends that nothing was decided at the board meeting of December 18, 1997 other than a decision to engage in future research. One cannot help but question this slant put on what the board was doing. The status quo was not an option, particularly as Mutual Life had announced its intention to demutualize. More than research on full demutualization was clearly contemplated by the Manulife board and there was no further research done before the decision was announced the following month. What was recorded in the minutes must be looked at in the context of a need to make public any decision to demutualize and the company was not yet quite prepared to take that step. While in corporate governance terms any decision to demutualize was a decision for the board of directors, as a practical matter the die had been cast months before this meeting of the board when Mr. D'Alessandro and senior management determined to proceed with a full demutualization and it is obvious that the board was ready to agree with management.

84A board meeting by conference call was held on January 19, 1998. The purpose of the meeting was to deal with demutualization. Prior to that date, Manulife had presented its proposal to OSFI and was given verbal support to the approach. The board was advised that actuarial, accounting, investment banking and legal counsel had now been retained. The resolution proposed by management was approved. It resolved among other things (i) that management was directed to prepare and submit to the board for its consideration a plan to demutualize by converting the company to a company with common shares in accordance with the ICA and its regulations to be issued and other applicable laws in and out of Canada; (ii) that the plan was to provide that the only persons who could receive shares or other consideration would be owners of participating policies on the date of the first public announcement of the resolution (i.e. the next day).

85On January 20, 1998 Manulife announced that it had asked management to prepare a plan for conversion of the company from a mutual life insurance company to an investor-owned publicly traded stock company and that a demutualized plan if approved by the board and regulators, would be submitted to a policyholder vote in 1999.

86In an interview published in the Manulife newsletter to its employees dated February, 1998, Mr. D'Alessandro said he had been talking about the possibility of demutualization for the past four years. That statement was one that was carefully approved by management and legal advisors, as was all material published by Manulife about the decision to demutualize, and in my view it was an accurate statement. As early as May 1994 Mr. D'Alessandro had drafted his letter to Mr. Martin, who had spoken strongly at the board meeting that month that Manulife should demutualize, in which Mr. D'Alessandro wrote that he agreed that Manulife should probably demutualize at some point, primarily because of the need for capital and the managerial discipline and performance being a stock company would bring.

87At the time of the announcement on January 20, 1998 of the intent of Manulife to demutualize, there was no legislation in Canada permitting Manulife to demutualize. The legislative change to permit demutualization as proposed in the June 1996 White Paper was not implemented until the passage of amendments to the ICA and applicable regulations in March 1999. The regulations provided that an eligible policyholder entitled to receive benefits from the demutualization was one who was a policyholder on the date of the publication of the company of its intent to develop a conversion plan, which in the case of Manulife was on January 20, 1998.

88Manulife’s demutualization plan was approved by the board of directors in May 1999. Eligible policyholders of Manulife voted on and approved the plan of demutualization at a special meeting of eligible policyholders in July 1999. The demutualization of Manulife was made effective on September 23, 1999 by letters patent of conversion issued under the ICA. Under that plan, as the plaintiffs were no longer policyholders of Manulife on January 20, 1998, they were not eligible to participate in the value of the company paid out to its participating policyholders.

Langdon Hall June 1996 meeting

89As stated, the plaintiffs rely on a statement contained in the minutes of an executive strategic planning session held at Langdon Hall on June 23-25, 1996, which was shortly after the White Paper was issued. Included in the minutes is the following:

Actions

DAG [Mr. Guloien] to look into whether we would have to keep a par surplus in the event of a demutualization.
Geoff to put some sessions on the Management Committee agenda to cover pads

90The minutes were prepared by Ms. Jennifer Rowe. Ms. Rowe has a B. Comm. from McMaster. She is currently the senior managing director and head of corporate marketing and communications with Manulife Asset Management. She joined Manulife in 1991. In 1996 she was in the business development group at Manulife as a business development analyst. She was responsible for helping to develop the agenda and co-ordinate items for the meetings. She attended the meetings to co-ordinate logistics and to take notes. She was the only person assigned to take notes of the discussions, which she said was one of her main functions at the meetings. She thinks, but is not a hundred percent sure, that she took her notes on a laptop.

91The minutes in question were circulated to the management committee on August 15, 1996, not quite two months after the session at Langdon Hall. Ms. Rowe testified that she prepared the minutes from her notes, which she was unable to locate. She could not remember when she prepared the minutes. They were sent out with a memorandum in which she asked the recipients to review them and let her know if they had any comments or changes. The memorandum also said that she had more detailed minutes for each session and offered to send them detailed copies for any of the sessions if anyone wanted them. Ms. Rowe testified that she could not recall if the detailed minutes she referred to were her notes from her computer or were more detailed minutes she later prepared. Included in the persons sent the minutes were Mr. D'Alessandro and Mr. Guloien. She testified that she could not remember if she received back comments from anyone but that if she had she likely would have made changes to reflect the comments. She also did not recall if anyone asked her for her more detailed minutes for any session.

92Ms. Rowe testified that she recalls that there was a discussion about demutualization, although she does not recall how it came up or when. She said she recalls only one comment made by she thinks Mr. Peter Hutchinson who asked if demutualization was a good thing as it would make the company as a stock company more short term focused. She said that comment didn’t spark a discussion on it. She cannot recall who spoke about demutualization, or who said what. She said she listened carefully and tried to capture the gist of the discussions that were going on. With respect to the paragraph regarding demutualization, Ms. Rowe testified that she knows that she summarized what Mr. D'Alessandro said and what was said.

93Neither the agenda for the Langdon Hall sessions nor the materials sent out in advance nor any materials or presentations handed out at the sessions made any reference to the topic of demutualization. Mr. Guloien, who was then Senior VP of business development, was responsible for the agenda for the sessions. He testified that he did not remember any discussion about demutualization, but that as the White Paper had just come out, one would presume that someone would mention it at the meeting. He testified that while he did not recall, he is sure he would have received the minutes of the meeting sent out by Ms. Rowe. He does not recall making any changes. With respect to the action item that was recorded for him to follow up on, the answer provided by Manulife’s solicitors in answer to an undertaking given on discovery was that Mr. Guloien recalls that he looked into the issue but did not have any specific recollection of his efforts other than to conclude that no par surplus fund would be necessary.

94Mr. D'Alessandro testified in chief that he vaguely recalled receiving the minutes from Ms. Rowe but he is not sure he read them. He testified that he did not remember that there was any discussion of demutualization at the session, by which he said he meant that he did not remember one way or another, i.e. there may or may not have been such a discussion. On cross-examination, Mr. D'Alessandro acknowledged the accuracy of his evidence given on discovery that while he did not recall any discussion of demutualization, it is logical that it would have been discussed. He said further that if it had been discussed in a meaningful way, it would have been included in his memo shortly after the sessions that he sent to the executive committee summarizing the major points coming out of the meetings. In that memorandum, Mr. D'Alessandro listed five points, none of which referred to demutualization.

95What may or may not have been said at a session some sixteen years ago is obviously something that would strain anyone’s memory, and I do not at all question the sincerity of the evidence of Mr. Guloien or Mr. D'Alessandro of what they could or could not recall. My review of all of the evidence however leads me to the conclusion that Mr. D'Alessandro made statements of the sort recorded in the paragraph in question, other than the statement in the third sentence that “there was strong support for this from the group”. There is no reason to think that Ms. Rowe did not accurately record the gist of what was said, and I accept her evidence on that.

96While Ms. Rowe quite understandably could not recall if Mr. D'Alessandro made all of the statements in the minute, it is to be noted that she made reference to others talking when referring to the support from the group to the idea of getting to 14% before 2000. There is no reference to anyone else in the rest of the paragraph other than Mr. D'Alessandro.

97It is also logical that there would have been some discussion of demutualization. Manulife had been involved in making representations to OSFI and the Ministry of Finance on policies regarding demutualization that it wished to see being enacted, and the White Paper had just come out and dealt with that topic. Mr. D'Alessandro acknowledged in his evidence that demutualization was an important issue for Manulife and for him. Demutualization had been discussed one month earlier at the Manulife management committee meeting. Mr. Guloien’s presumption that someone would mention the topic at the session makes sense.

98There are also other indications in the evidence that support the conclusion that Mr. D'Alessandro made the statements. The reference in the minutes to the need to get to 14% is a reference to getting to a return of 14% on equity. That was Mr. D'Alessandro’s idea. He had first said after being hired as CEO of Manulife that his goal was to reach a 14% return on equity, which was seen by most at the time as an ambitious and perhaps unreachable target. The reference to “demutualization will provide access to capital, an objective measurement of our value, more flexibility and it drives excellence” was a notion that Mr. D'Alessandro had held for some time, as early as his statement in his draft letter to Mr. Martin in May, 1994, and he held those views in the June 1996 period. There is a reference in the minutes to the need to ensure that Manulife needs “to do it on our own timetable”. Mr. D'Alessandro acknowledged on cross-examination that it was fair to say that as early as the summer of 1996 he foresaw the need for Manulife to consider the demutualization issue on its own time-line. That is quite consistent with the Langdon Hall minutes.

99The reference to “fairly soon… before market forces us” is consistent with the view expressed later when a more detailed study of mutualization was undertaken that Manulife wanted to be the first of the large insurers in Canada to demutualize and consistent with the view expressed by Mr. Guloien that if one of their peers first announced an intent to demutualize, that would increase pressure on Manulife to do likewise (which turned out to be what happened when Mutual Life first announced its intention in December 1997). It is also consistent with the views of Mr. D'Alessandro, who in May, 1997 said in an address to an insurance conference that he would not be surprised to see one of the large Canadian mutual companies demutualize at some point and that would have an important effect on all of the other mutuals. These ideas would clearly have been understood by the time of the Langdon Hall meeting.

100It is important, however, to recognize what the statements were and what they were not. What was recorded may not have been verbatim. While the statement indicated an intention to pursue demutualization, the timing was far from precise, and the possibility of acquiring another mutual company before doing so was referred to. When exactly it was intended to pursue a demutualization strategy with the board was not stated. It is evident from the lack of any reference to demutualization in the material prior to the meetings or in Mr. D'Alessandro’s summary of the main points coming out of the meeting, or in his goals for 1996 or 1997 or the business plans of Manulife for those years, that demutualization was not at all high on his list.

101That does not mean, however, that demutualization was not on Mr. D'Alessandro’s or Manulife’s radar screen. It was. It was an important issue for him and the purport of what I find he stated at the Langdon Hall meeting was that demutualization was something he anticipated would likely happen for Manulife at some point in the future. But there were obviously other matters of more pressing concern to him and Manulife.

Conclusions on the intent of Manulife to demutualize

102As previously referred to, Manulife made two public statements in 1996 regarding the prospects of demutualization. The first was the language that was sent to Mr. McGuinness, the independent actuary, which he included in his report that was sent by Manulife to OFSI and to the Supervisor of Insurance in Barbados. That language, approved by Mr. Guy, stated:

103The second was the statement made by Mr. Guy to the Supervisor of Insurance in Barbados in November, 1996 which stated:

104Were these statements fair characterizations of the prevailing thinking of Manulife at the time? I have concluded that they were not.

105I accept that Manulife had not included demutualization in its business plans at the outset of 1996 or 1997 and that no decision to demutualize had been taken at the time the Transfer Agreement was signed or during the process leading to regulatory approval in Barbados and Canada. But on my view of all of the evidence, some of which I have already referred to, and I so find, while no decision to demutualize had been taken by management or the board of directors, there was at that time a recognition by Mr. D'Alessandro and Manulife senior management that it was likely that in due course Manulife would demutualize and that more likely than not it would involve a full demutualization with the value of Manulife being paid out to the participating policyholders.

106The statement that “the likelihood of demutualization is remote and these rights have no material value” does not comport with the evidence. Mr. Guy testified that the words “the likelihood of demutualization is remote” were carefully chosen and meant that the possibility of demutualization was remote. Those words conveyed the idea of remoteness in prospect rather than remoteness in time. The possibility of Manulife demutualizing was not remote. Mr. D'Alessandro recognized that very early on, as he said in April, 1994 in his draft letter to Mr. Martin, a director of Manulife, that Manulife should probably demutualize at some point, primarily because of the need for capital and the managerial discipline and performance being a stock company would bring. I recognize that this statement of Mr. D'Alessandro was made shortly after he arrived at Manulife and it would perhaps be unfair to take it as a strong statement that Manulife will likely demutualize. But it indicates that Mr. D'Alessandro recognized early on the benefits of demutualization, and he confirmed that the letter contained what was his thinking at the time. After that, Manulife was actively taking steps itself and through the CLIHA to persuade the Canadian government to permit it to demutualize, and Mr. D'Alessandro’s statement at the Langdon Hall meeting in June, 2006 was a far cry from a statement that demutualization was unlikely or remote.

107On his cross-examination, Mr. Guy acknowledged that in a deposition given in December, 2000 he said that his sense was that by the mid-1990s “once Dominic [Mr. D'Alessandro] had come in and settled down with his management team, which probably took him a year or so, then I think if you’d have asked them they would have said one day this [demutualization] will happen”. Mr. Guy said that was also his personal view in the mid-1990s.

108Three weeks before he attended the hearing in Barbados, Mr. Guy reported to senior management at Manulife on October 21, 1996 that at an insurance industry meeting he had attended at Langdon Hall the week before he had not seen any information that an alternative version of demutualization would be acceptable to OSFI, i.e. an alternative to a full demutualization regime. He went on to say that “we do not have to decide yet what to do about demutualization”. Demutualization was clearly a subject in his mind and he was not indicating in the least that the likelihood of demutualization was remote.

109Within two months of appearing before the Supervisor in Barbados, and 17 days after the effective date of the Transfer Agreement, Mr. Guy included in his memorandum to Mr. D'Alessandro on January 17, 1997 of his personal objectives for 1997 the following:

I believe that Manulife needs to prepare for demutualization. I would like to begin a study of demutualization…with the objective of creating a workable demutualization plan which could see the company demutualize within 2-5 years.

This too is a far cry from saying that the possibility of demutualization was remote.

110Another indication of Mr. Guy’s thinking was in a memorandum of May 28, 1997 to Mr. D'Alessandro, six months after his attendance at the Supervisor of Insurance’s hearing in Barbados, in which he expressed the view that Manulife should press forward with demutualization and that it should follow a classical approach in which the value of the company is distributed to the par policyholders in the form of shares. This too is a far cry from saying that the possibility of demutualization was remote.

111The statement of Mr. Guy to the Supervisor in Barbados that Manulife had no plans to demutualize in the not-too-distant future shortly after transferring the business is vague as to time but perhaps less open to question than the statement given to Mr. McGuinness and put in his report. But Mr. McGuinness’ report which contained the statement of Manulife’s intentions written by Manulife for him was provided by Mr. Guy to the Supervisor and Mr. Guy’s statement cannot be divorced from Mr. McGuinness’ report. Together they gave the impression that the probability of Manulife demutualizing was remote and the Barbados policyholders had no demutualization rights of any value. That is the impression taken by Mr. Arnold, the actuary retained by the Supervisor in Barbados, who was of the view based on the draft report of Mr. Mr. McGuinness and what he had learned of the views of management of Manulife that Manulife was not considering demutualization.

112Why would Manulife say that the likelihood of demutualization was remote? The answer I believe lies in Manulife’s view at the time as to what should be done with the surplus of the company, and its knowledge of the importance of the opinion of its chosen independent actuary in the regulatory process. The opinion of the independent actuary was vital to OFSI and required by the Supervisor in Barbados. If a view was expressed by the independent actuary that the rights of the Barbados policyholders on a potential demutualization were of value, that view would have had a negative effect on what Manulife was trying to do. It was of importance to Manulife that Mr. McGuinness not express such a view and why Manulife drafted the critical language for him that he included in his report.

113Manulife was strongly against recognizing any rights of the Barbados policyholders to an entitlement to payments on a demutualization. There was a strong view in Manulife that paying surplus to participating policyholders on a demutualization provided them with a windfall as the surplus was built up over many years before existing policyholders acquired their policies. This view continued to be asserted in argument at this trial. The view was that the surplus should remain in the company to be used in the business. In the language of Mr. Kierans and others on the mutuality committee of Manulife, this was treating the participating policyholders as customers rather than owners and it had a very significant impact on the treatment of those policyholders as concerns a sale of a block of business. Manulife was concerned that recognizing rights in the Barbados policyholders would create a negative precedent and might even lead to claims that the previous transfers of business in the other Caribbean countries by Manulife that did not recognize any participating policyholders’ rights on a demutualization should be reviewed.

114Mr. Robert Dowsett also provided reason why Manulife would not pay anything to the Barbados policyholders. He is a highly qualified actuary, and at 82 is still a very impressive and capable person. He was the president and CEO of Crown Life for 11 years from 1971 to 1982, and since then has been active in consulting to this day, first with Mercer and then on his own. He was called as a witness by the plaintiffs. His opinion was that on the terms of the deal which it struck with LOB, Manulife would never have paid any substantial amount to the Barbados policyholders as it would have depleted the capital protection ratio for all the remaining Manulife business and it would have meant that Manulife would have incurred a sizeable loss as a result of the transaction rather than the gain of $5.7 million that it booked. Mr. Dowsett was not challenged on this aspect of his opinion.

115At the hearing before the Supervisor in Barbados, Mr. Guy spoke of the value put on policyholders’ rights on a demutualization and he spoke of the experience in other countries. He said that OSFI had advised that what was important on a transfer of business was that the security of policyholders and their dividend expectations be maintained, and that OSFI did not place a material value on mutuality rights. It is difficult to understand how Mr. Guy could have made that statement in light of the Aetna transaction undertaken by Manulife in 1996 in which it sold a block of participating disability policies to Aetna, which was a stock company. Mr. Guy was advised in July, 1996, just four months before the hearing in Barbados, that OSFI wanted Manulife to make a statement that in the event of demutualization, the policyholders whose policies were being transferred to Aetna would be recognized as being part of Manulife and that while there was no specified obligation to the policyholders, their entitlement would be determined by the independent actuary at that time in accordance with such regulatory requirements. Mr. Guy approved a statement sent to their independent actuary on the Aetna transaction that went part way in complying with that request. Mr. Guy said nothing about the Aetna transaction to the Supervisor in Barbados.

116Mr. Guy did not include in his report as the chief actuary of Manulife that he filed with the Supervisor any discussion of the proprietary rights of the Barbados policyholders. His explanation that he did not because he did not think it was important is hard to credit, particularly as he acknowledged on cross-examination that Manulife had to consider those proprietary rights and he spoke of the issue in his statement to the Supervisor.

117Mr. Guy also did not disclose to the Supervisor or to Mr. Arnold, the actuary retained by the Supervisor, the White Paper that had been released earlier that year, the Hong Kong subsidiarization in 1993 in which Manulife protected the rights of the Hong Kong policyholders to participate in any future demutualization and the U.S subsidiarization in which Manulife intended to protect the U.S. policyholders in the same way when their policies were to be transferred to a Manulife subsidiary at the end of 1996. His explanation that he did not do so because he did not think they were of any importance to the Barbados policyholders is questionable. Nor did he disclose the Prudential/London Life transaction which took place in May, 1996, which Manulife was well aware of and took pains to find out what guarantee had been given to the policyholders of Prudential, a mutual company, whose policies were being transferred to London Life, a stock company under an assumption reinsurance agreement. In that transaction, Prudential undertook to its regulator to allow the transferring policyholders to participate in Prudential’s future demutualization. As a result, when Prudential ultimately demutualized in 2001, approximately US$340 million or C$530 million was paid out to Prudential’s former Canadian participating policyholders.

118By April, 2007 Mr. D'Alessandro believed that demutualization was a matter of the first order of importance and in a meeting with the Superintendent of OSFI gave the message that demutualization was an issue of the first order of importance and that the government should move expeditiously on this matter. This is a clear recognition that demutualization was at that time a matter of prime importance to Manulife. There is nothing in particular that had occurred in the past several months that would have made Manulife suddenly come to that view, and it is fair to conclude that it had been the view of Manulife for some time. Mr. D'Alessandro acknowledged in cross-examination that in the December 1996 board meeting, he raised the question of the possibility for Manulife to be a public traded company [i.e. demutualized] by 2000 because demutualization was a prevalent issue and there were developments in Canada that caused him to want to think about Manulife’s legal status.

119While there is no evidence that Mr. D'Alessandro was aware of the statement in the report of Mr. McGuinness drafted by Ms. Margolian and Mr. Guy that demutualization was remote, Mr. D'Alessandro’s belief of the order of importance of demutualization was far different from the statement of Ms. Margolian and Mr. Guy contained in the report of Mr. McGuinness given to the Supervisor in Barbados in December five months earlier that demutualization was remote.

120Manulife relies on evidence from Mr. D'Alessandro and Mr. Guloien to the effect that as late as October and November 1997 there was hesitation in recommending any demutualization because of takeover concerns and the possibility of potential mergers with mutual companies which might be easier if Manulife remained a mutual company. It is contended that from this evidence one can draw the conclusion that it is not possible to say that in 2006 at the time of the Transfer Agreement with LOB and the regulatory proceedings to approve it that there was likely to be a demutualization. My conclusion from the evidence is that this argument relies too heavily on testimony that is far more reconstruction than recollection and which ignores other evidence of the circumstances in which things were written or said.

121What is relied upon by Manulife is a minute of the board’s subcommittee on corporate structure held on October 2, 1997. This was the first meeting of the subcommittee and the minutes state that it was an informational meeting. The minute states that Mr. D'Alessandro explained his rationale for wanting to be cautious in approaching any decision on such an enormously complicated question as perhaps changing the company's structure, while not ruling it out. The minute also states that Mr. Guy commenced a presentation covering six possible financial restructuring models, two of which were a demutualization and a mutual holding company (a different form of demutualization).

122It would be a mistake, however, to draw from these minutes that Mr. D'Alessandro was still uncertain whether a demutualization should take place or in what form. Mr. D'Alessandro’ own evidence was that he had become convinced in August 1997 of the need to demutualize when he learned of the takeover of London Life by Great West Life and that by September 2, 1997 he and the senior management team of Manulife had determined that the preferred course for demutualization was a full demutualization in which the value of the company would be distributed to its participating policyholders. This statement of the determination of senior management by September 2, 1997 is supported by documentary evidence. The minute of October 2, 1997 does not state that Mr. D'Alessandro was still cautious in the sense that he did not know what he wanted to recommend that should be done. When asked in chief about the minute, it was quite apparent that Mr. D'Alessandro did not have a recollection of what he had said at the meeting, which is hardly surprising in that it had taken place 15 years earlier, and when asked if he had any memory of what he was testifying to about the minute, he readily acknowledged that he did not have a specific memory as it was too long ago.

123As for the six alternate financial restructuring models discussed by Mr. Guy at the meeting of October 2, 1997, it is important to recall Mr. Guy's memorandum of September 24, 1997 to senior executives, including Mr. D'Alessandro and Mr. Guloien, dealing with the presentation to be made to the subcommittee. Mr. Guy said that he deliberately did not give a recommendation against mutual holding companies since he did not want to have a paper trail to the board recommending anything at this stage. He said that was why the section spoke of the pros and cons without a definitive recommendation.

124Manulife also relies upon notes taken by Mr. Guloien of the meeting of the subcommittee on October 2, 1997. Mr. Guloien's notes, which are cryptic, contain notes of comments regarding the criteria for demutualization attributed to Mr. D'Alessandro. The notes state "mutual: slow death", "promotes mediocrity", "but is cure worse than disease?" And "do we see it responsible to become a product line of RBC? – Fundamental nature of company". Again, these notes do not state that Mr. D'Alessandro still had these concerns or was unsure of what he wanted to recommend.

125In chief, Mr. Guloien was shown his note of October 2, 1997 and asked if he knew what Mr. D'Alessandro's views were in October 1997. His answer began with the words "I guess" and he went on to say that Mr. D'Alessandro "used to raise" a concern that Manulife could end up becoming a department of RBC. The question was rather suggestive in its terms, but even so the answer of Mr. Guloien on its face did not state that Mr. D'Alessandro's concern about RBC was one that he held as late as October 1997. I do not fault Mr. Guloien, but it was quite clear throughout his testimony that he had little recollection of events 15 years earlier, which again is hardly surprising. When shown the same note of Mr. Guloien, Mr. D'Alessandro explained that he had worked for RBC in the early 80s and he knew the power of the franchise and the risk of being taken over if Manulife did not perform. He also referred to the "widely-held" rule that had been Canadian policy for some time that required the shares of financial institutions to be widely held, which he strongly believed was appropriate.

126When asked in chief if in October 1997 he knew whether he would be successful in being listened to by the policymakers regarding the widely-held rule, Mr. D'Alessandro said he did not know. The question would have been far more appropriate, and the answer more reliable, had the date not been included in the question but rather the question had been as to his recollection, if any, as to when he thought it likely that the widely-held rule would prevail.

127Any real concern appeared to have been overcome before October 1997, certainly by the time that Mr. D'Alessandro had become convinced of the need to demutualize after learning of the takeover of London Life by Great West Life and of the agreed recommendation for a full demutualization model. In further questioning at the end of his evidence, Mr. D'Alessandro said that Manulife did not make the decision to demutualize because of concerns about RBC at all. That answer is consistent with the February 1998 Manulife News special issue which contained an interview with Mr. D'Alessandro shortly after the announcement that Manulife intended to demutualize. That newsletter, along with all other public statements of Manulife regarding the demutualization, was carefully reviewed for its accuracy, including review by Manulife lawyers. In answer to a question in the newsletter as to whether Manulife could be setting itself up as a target for takeover, Mr. D'Alessandro was quoted as saying that it was important to remember that current Canadian legislation precluded takeover and that the Insurance Companies Act required domestic insurance companies to be widely held, meaning that no one could own more than 10% of Manulife stock, making a takeover impossible. He stated that Manulife expected that this rule would remain in place for some time. The White Paper in 1996 had said that as contemplated in the current legislation, the larger mutual life insurance companies would be required to remain widely held after a conversion and that regulations to define the meaning of “widely held” would be promulgated to clarify that no person might have a significant interest in the converted company.

128Mr. Guloien's notes also contains the cryptic comments "go slow is not imprudent", "big decision" and "merger opportunities – mutual co, other institutions". Mr. D'Alessandro was shown these notes and asked his view about the issue of merger opportunities, which he did by explaining that a merger would become more complicated after the legal status of the company had changed. It is evident that he had little if any recollection of any such discussion at that meeting 15 years earlier saying, "but that may have been in the back of my mind… ". The cryptic notes are not at all inconsistent with the notion that Mr. D'Alessandro was reviewing the thinking that he had gone through, not his current thoughts. There was no evidence that by this late stage in October 1997 Mr. D'Alessandro was pursuing any potential merger with any other mutual company. He had already been convinced of the need to demutualize.

129In my view, the evidence is clear that when presentations were being made to the subcommittee on October 2, 1997 and later on November 25, 1997, and to the full board on December 18, 1997, they did not reflect a doubt on the part of Mr. D'Alessandro to demutualize because of concerns regarding a potential takeover of Manulife or a desire to merge with another mutual company. These matters were not impediments to Mr. D'Alessandro insofar as wanting to demutualize were concerned. It is evident that Messrs. Guy, Guloien and Mr. D'Alessandro were reviewing the various matters with the subcommittee and the full board, not with a view of saying these are the options and we will need in the future to decide what to recommend, but rather with a view to educating the directors on the topic of demutualization and discussing the pros and cons and explaining why options had been, in the words of Mr. Guloien, “thoughtfully rejected”.

130Manulife contends that in 1996 it was not known whether it would be possible to demutualize by using a mutual holding company model in which the surplus would remain in the company rather than being allocated to the participating policyholders. There is no doubt that in internal committees at Manulife, different models, including a mutual holding company model, were looked at for some time well into 1997 as well as a full demutualization in considering what model would be preferable for Manulife. That does not mean, however, that Manulife management thought it likely that Manulife would eventually be authorized to use a holding company model. Or putting it the other way, it does not mean that Manulife management thought it unlikely that participating policyholders would be allocated the value or surplus on a demutualization.

131In terms of likelihood, the evidence indicates that it was recognized by Manulife that any right to demutualize would likely carry with it the obligation to allocate the value of Manulife to its participating policyholders. The regulations for smaller mutual insurance companies in 1993 had permitted both a full demutualization, in which the value of the company was to be allocated to the participating policyholders, and a mutual holding company demutualization. The White Paper released in June, 1996, however, stated specifically that the government intended to require a full demutualization model for the larger mutual insurance companies. In particular, it stated:

The demutualization regulations embody a number of key principles which are important to guiding the demutualization process, and which would be retained. These include a requirement to place a fair value on the company and to allocate that value to policyholders, along with a requirement than an independent expert provide an opinion on the fairness and equity of the value placed on the company and on the method and assumptions used to calculate that value. An independent actuary’s opinion on the fairness and equity of the nature, amount and value of benefits to be provided to policyholders is also required.

132While White Papers are not legislation, they are important statements of government policy. I do not accept the view of Mr. Kierans and others who said that the White Paper was merely a request by government for the views of persons in the industry and little could be taken from it.

133Manulife made clear in its submissions to the Michigan regulator in 1999 regarding the subsidiarization of its U.S. business that the White Paper was of importance. It stated in a letter of February 16, 1999:

In light of the demutualization of mutual insurance companies in the United States, the United Kingdom and Australia and the statement by the Department of Finance (Canada) in a June, 1996 White Paper, that the Canadian demutualization regime would be extended to all mutual life companies, the large Canadian mutual insurance companies began to look at the possibility of demutualization more closely….

134The White Paper was not, as contended by Manulife, just a starting conversation with the industry. While it is well known that governments sometimes do things differently from what is proposed in a White Paper, this was not a new initiative that the government was proposing, but a continuation of its regulations for smaller mutual companies and their application to larger mutual companies like Manulife. Mr. Daniels, the president of the CLIHA at the time of the White Paper, and previously the deputy minister in more than one department of the federal government, testified that the White Paper as an important statement of government policy, which in my view it was. The fact that there was room for further consultation with the industry does not mean that the statement in the White Paper regarding demutualization, which was described as a key principle, was only an initial request for discussion that could lead to a substantially different result. Mr. Daniels fairly described the provisions in the White Paper dealing with demutualization as saying while they were not written in stone, they appeared to be the Government’s intent.

135Prior to the White Paper, there had been discussions for at least a year and a half among OSFI, the Ministry of Finance, the CLHIA, a working group of the four large mutual life insurance companies, and executives of those companies. In 1995, OSFI on behalf of itself and a Department of Finance working group released a paper dealing with access to capital for large mutual life insurance companies, including demutualization, in which it sought reaction to its recommendations and to seek views regarding options for moving forward. Manulife responded to it in June, 1995 with a lengthy submission to the Department of Finance. In December, 1995 the OSFI/Finance working group released another paper. In January, 1996 Peter Maddaugh of Torys on behalf of the working group of the four large companies sent draft provisions for the ICA and its regulations. As Mr. D'Alessandro acknowledged, the four large mutual companies were making submissions to the regulators in an effort to influence the forthcoming White Paper.

136Manulife personnel were in communication with officials from OFSI on a regular basis, and at no time after the White Paper did OFSI ever give any indication that it might change its mind on this issue. Mr. Daniels of CLHIA, who was intimately involved in the discussion process with the government after the White Paper, agreed in his evidence that after the White Paper, the government never resiled at all from its position on demutualization contained in the White Paper.

137Mr. Kierans, who was a member of the board’s subcommittee on corporate structure dealing with the issue of demutualization, acknowledged on cross-examination that in 1996 the only prudent operating assumption for the board of Manulife was that the regulations would reflect the White Paper, although the CEO’s of the four large mutual insurers might lobby the government to change its declaration of intent in the White Paper. He also said on cross-examination that the key change that signaled participating policyholders should be treated as the owners and not customers of a mutual life insurance company was government policy contained in the White Paper. This was a reference to the debate within actuarial circles as to whether the surplus belonged to participating policyholders or to the company. The fact that Mr. Kierans agreed that it was the White Paper that signaled the change belies the notion that little should have been taken from the White Paper.

138I do not accept Mr. Guy’s evidence that when he and Ms. Margolian drafted the language that ended up in Mr. McGuiness’ actuarial report, there were no clear guidelines issued by the government and he had no understanding of what form a demutualization would take, it being “totally uncertain”. Mr. Guy made these statements in cross-examination in an attempt to justify the language drafted by him and Ms. Margolian.

139After the White Paper was released, Mr. Guy participated in industry discussions regarding its topics. On October 21, 1996, three weeks before he attended the hearing before the Superintendent of Insurance in Barbados, Mr. Guy reported to senior management at Manulife that at an insurance industry meeting he had attended at Langdon Hall the week before he had not seen any information that an alternative version of demutualization would be acceptable to OSFI, i.e. an alternative to a full demutualization regime. He knew about the recommendation in the White Paper and was keeping abreast to see if there would be any changes forthcoming from the regulator.

140Mr. Fishbaum, an expert actuary called by Manulife, acknowledged on cross-examination that by the time of the White Paper in 1996, the actuarial profession had said that it needed a practical solution regarding demutualizations, and that practical solution was to give the value of the company to the participating policyholders.

141Manulife refers to submissions that it made in October, 1997 to the MacKay Task Force that had been established by the government to look into the financial services industry in Canada, including banks and insurance companies. The insurance industry, including Manulife, wanted to be in a position to effectively compete with the banks, and argued that there was a need to rebalance the powers of the banks and life insurance companies to ensure a level playing field. One of the recommendations of Manulife in its submission to the task force was that demutualization recommendations should provide a company with flexibility of determining the appropriate method of distribution upon a conversion and that a range of permissible demutualization models be made available for the industry, including a holding company model. Exactly why Manulife was making this particular submission is unclear, as management had already decided that its preferred course was to have a full demutualization. The fact that Manulife was making this submission was no guarantee that the government would look seriously at it, and there is no evidence that Manulife thought otherwise.

142One month later Mr. John Palmer, the OSFI Superintendent spoke at an industry seminar. He referred to submissions made by various companies to the MacKay task force. His notes indicate that companies had requested flexibility that would permit financial institutions to operate within a holding company structure. While his notes indicate at the opening of the topic that it remained an open question whether a mutual holding company structure was appropriate for larger companies, his notes made clear that both he and his predecessor Michael Mackenzie were against a holding company structure for larger financial institutions. Manulife could not have been blind to that view when it sent in its submissions to the Mackay task force.

143It is also contended by Manulife that one could not be certain what the government would do and thus a demutualization was not foreseeable. I do not accept that. The White Paper had indicated the Government’s intent to permit large mutual life insurance companies to demutualize. Mr. Guloien took a leading role in the demutualization process in Manulife in 1997. He said on cross-examination that Manulife commenced its demutualization study on the operating assumption that if, after all the hard work and thought, it came to the view that it made sense to demutualize, it was very likely that the government would allow such a demutualization. `

144The fact that in 1996 at the time of the Transfer Agreement with LOB there was no legislation or regulations permitting demutualization for the large insurers such as Manulife does not mean that it could not be foreseeable that Manulife might demutualize. That was also the situation on January 20, 1998 when Manulife announced its intention to demutualize. Manulife does not, and could not, suggest that it was not foreseeable in January 1998 that it might demutualize. Mr. Kierans admitted that after January 20, 1998, Manulife would not have felt it appropriate to complete a transaction similar in the nature to the LOB transaction which would extinguish the rights of the participating policyholders, which is a recognition that a demutualization was certainly likely by that date.

145Manulife also points to the evidence of Mr. D'Alessandro that there was doubt up to the eleventh hour as to whether the Prime Minister was going to approve the regulations allowing large mutual life insurance companies to demutualize. At the Prime Minister’s request, Mr. D'Alessandro met with him. The Prime Minister wanted his assurance that Manulife would not sell the company to U.S. bankers. Mr. D'Alessandro led him through the demutualization legislation that provided for the “widely-held rule” with a majority of directors to be Canadian residents, and after that he said that the resistance of the Prime Minister went away. I recognize that this sort of thing can happen at the eleventh hour, but in terms of likelihood, the assumption of Mr. Guloien that the government would allow a demutualization if Manulife decided to go that route is the more likely. The government process leading to the demutualization regulations was thorough and once the Prime Minister was taken through that by someone like Mr. D'Alessandro, whom he respected, what was likely came to pass.

146My conclusion on the evidence is that while the provisions in the White Paper were not, in the words of Mr. Daniels, written in stone, they were important statements of the Government’s intent. There was no certainty on the issue, but the operating assumption, and likelihood, was that they would be carried into effect, which is exactly what happened. While management continued to look at various models, there is no indication in the evidence that they thought they had any prospect of changing the Government’s intent as stated in the White Paper.

147Manulife contends that it was the board of directors who had to make the decision on demutualization, and that such a decision was not made until January, 1998 when the board resolved that management prepare a plan of demutualization. It is contended that the board consisted of very senior knowledgeable businessmen and it could not be assumed that they would agree to a demutualization. Thus it is contended that it was not foreseeable in 1996 at the time of the LOB transaction that there would be a demutualization.

148Undoubtedly Manulife had the benefit of a very strong board of directors. That does not mean, however, that the board did not pay attention to what management recommended. The board did not have many sessions dealing with demutualization. There was an educational seminar lasting one afternoon in December, 1996. On August 21, 1997 the subcommittee on corporate governance was established. It had 6 directors and first met on October 2, 1997. The minute of that meeting stated that there was a preliminary discussion on what it was expected of the subcommittee and it was agreed that the subcommittee would look to management for its recommendation as part of the subcommittee’s ongoing examination of these issues. That would hardly be unusual. The decision on demutualization was not a process driven by the board, but by management. Unlike the DiGiacomo era, the board was pleased with the leadership shown by Mr. D'Alessandro who was viewed as someone who built consensus before making recommendations to the board.

149On October 16, 1997 it was reported to the corporate governance committee of the board that management was working internally on a recommendation to be put before the subcommittee in December. A presentation to the subcommittee dated November 18, 1997 recommended a full demutualization and stated that management believes there is a significant “first mover advantage” in the demutualization process and that Manulife should be the first to announce its plans for demutualization. At the board meeting of December 18, 1997 the board accepted the recommendation to work towards a full demutualization. The sub-committee accepted that view. That was the first full meeting of the board dealing with mutualization since December, 1996 and there had been only two meetings of the subcommittee dealing with demutualization. The next meeting of the board was the telephone meeting on January 18, 1998 when it was decided to proceed with a plan of demutualization that was announced the next day.

150I recognize that the ultimate decision was one for the board of directors to make. However, the board had full confidence in Mr. D'Alessandro and his management team. While there obviously was no certainty in what the board would decide, it would have been unlikely for the board to ignore all the work that management had done and not accept the recommendation of Mr. D'Alessandro, management and the board sub-committee. The subcommittee of the board at the outset had said that it was looking to management for its recommendation, and one would not expect the full board to do anything differently. In terms of likelihood, the inference I draw is that it was likely that the board would accept management’s recommendation. There is no evidence whatsoever that management had any concern about that.

151In summary, I find that while no decision to demutualize had been taken by management or the board of directors, there was at the time of the LOB transaction a recognition by Mr. D'Alessandro and Manulife senior management that it was likely that in due course Manulife would demutualize and that more likely than not it would involve a full demutualization with the surplus being paid out to the participating policyholders.

Duty of Care

152The primary submission of the plaintiffs is that Manulife was negligent when it structured and executed the transaction with LOB in the manner it did. The plaintiffs accept for this argument that the proprietary rights of the plaintiffs as participating policyholders were extinguished by the sanction of the Supervisor of Insurance in Barbados, but contend that Manulife was obliged before taking the steps leading to that sanction to take steps to protect the rights of the plaintiffs.

153The plaintiffs acknowledge that the courts have not previously considered the question of the nature of the duty owed by a mutual insurance company to its participating policyholders in situations similar to those raised in the instant case. As a result, this case does not fall within the previously recognized relationships giving rise to a duty of care. In such circumstances, the court is required to consider and apply the Anns test to determine whether it is appropriate to recognize a duty of care.

154 Anns v. Merton London Borough Council, [1978] A.C. 728 established a two-part test for establishing a duty of care. This test was adopted by the Supreme Court of Canada in Kamloops (City of) v. Nielsen, 1984 CanLII 21 (SCC), [1984] 2 S.C.R. 2 and several subsequent decisions including Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 CanLII 105 (SCC), [1992] 1 S.C.R. 1021; Hercules Managements Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165; Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., 1997 CanLII 307 (SCC), [1997] 3 S.C.R. 1210; Ryan v. Victoria (City), 1999 CanLII 706 (SCC), [1999] 1 SCR 201; Syl Apps Secure Treatment Centre v. B.D., 2007 SCC 38, [2007] 3 S.C.R. 83; Hill v. Hamilton-Wentworth Regional Police Services Board, 2007 SCC 41; and Mustapha v. Culligan of Canada Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114. The test was restated in Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537 by McLachlin C.J. and Major J. who stated:

In brief compass, we suggest that at this stage in the evolution of the law, both in Canada and abroad, the Anns analysis is best understood as follows.

At the first stage of the Anns test, two questions arise: (1) was the harm that occurred the reasonably foreseeable consequence of the defendant's act? and (2) are there reasons, notwithstanding the proximity between the parties established in the first part of this test, that tort liability should not be recognized here? The proximity analysis involved at the first stage of the Anns test focuses on factors arising from the relationship between the plaintiff and the defendant. These factors include questions of policy, in the broad sense of that word. If forseeability and proximity are established at the first stage, a prima facie duty of care arises.

At the second stage of the Anns test, the question still remains whether there are residual policy considerations outside the relationship of the parties that may negative the imposition of a duty of care. It may be, as the Privy Council suggests in Yuen Kun Yeu, that such considerations will not often prevail. However, we think it useful expressly to ask, before imposing a new duty of care, whether despite forseeability and proximity of relationship, there are other policy reasons why the duty should not be imposed.

(i) Forseeability

155The plaintiffs rely on the following statement of Major J. in Ryan v. Victoria (City), 1999 CanLII 706 (SCC), [1999] 1 SCR 201 at para. 23 as authority for the proposition that the threshold for the first step in Anns is a low one:

The first step of the Anns/Kamloops test presents a relatively low threshold. In order to establish a prima facie duty of care, it must be shown that a relationship of “proximity” existed between the parties such that it was reasonably foreseeable that a careless act by the Railways could result in injury to the appellant.

156There is authority in Ontario that forseeability of the possibility of resultant harm is inadequate to establish a duty of care. Rather, it involves the likelihood that such harm will result from the alleged wrongdoer’s conduct. See Garratt v. Orillia Power Distribution Corp. (2008), 2008 ONCA 422, 90 O.R. (3d) 161 (C.A.) at para. 48 per Watt J.A. However, in Mustapha v. Culligan of Canada Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114, McLachlin C.J. described the terms “probable’ and “possible” as misleading and described the forseeability requirement for a duty of care as a “real risk” and not “far-fetched”. She stated:

Much has been written on how probable or likely a harm needs to be in order to be considered reasonably foreseeable. The parties raise the question of whether a reasonably foreseeable harm is one whose occurrence is probable or merely possible. In my view, these terms are misleading. Any harm which has actually occurred is "possible"; it is therefore clear that possibility alone does not provide a meaningful standard for the application of reasonable forseeability. The degree of probability that would satisfy the reasonable forseeability requirement was described in The Wagon Mound (No. 2) as a "real risk", i.e. "one which would occur to the mind of a reasonable man in the position of the defendan[t] ... and which he would not brush aside as far-fetched" (Overseas Tankship (U.K.) Ltd. v. Miller Steamship Co. Pty., [1967] A.C. 617 (P.C.), at p. 643).

157Manulife contends that for a legal duty to exist, the plaintiff must have a legal right that the law recognizes as warranting protection and that under the duty of care analysis, therefore, what must be reasonably foreseeable to the defendant is that its conduct would harm the plaintiffs’ legal rights. In the case of personal injury or damage to physical property, the legal right against such injury or damage is evident and forseeability is typically uncontroversial. Manulife contends that the same is not true in this case as there was no legal right in the plaintiffs to continue to be policyholders with a right to vote and no legal right to participate in a demutualization that might occur.

158Reliance by Manulife for this proposition is placed on an article by Professor E. J. Weinrib “The Disintegration of Duty” (2006) 31 Advocates’ Quarterly, 212 and a statement of Cardozo Ch. J. in the celebrated case of Palsgraf v. Long Island Railroad Company (1928), 248 NY 339. In Palsgraf, Cardozo Ch. J. stated “Negligence is not actionable unless it involves the invasion of a legally protected interest, the violation of a right.” Palsgraf involved an issue of whether a duty arguably owed to one person (a person boarding a train) could give rise to a duty to another (a passenger on the platform) not forseeably at risk.

159I do not see the article by Professor Weinrib as supporting the position of Manulife. Professor Weinrib points out that traditionally tort law concerned itself with injuries to rights, but that courts in Canada, referring to the adoption of the Anns test, have abandoned the traditional framework of liability for economic loss and the basis of a defendant’s liability has shifted from injuring a right to inflicting a loss, subject to the limitation of a policy-based notion of proximity and the limitation of residual policy concerns outside of the relationship between the parties in the second stage of the analysis. He asserts that the two-stage test of Anns has radically altered negligence law in Canada.⁴

160I do not think that the statement of Cardozo Ch. J. is today a sine qua non for there to be a duty of care under the Anns test. The forseeability requirement of the first test does not refer to a legal right to be protected, but rather to the question of whether the action or inaction of a defendant is likely to cause harm to a plaintiff. I do think, however, that whether the interest a plaintiff seeks to protect is a legally protected interest may be a policy factor to take into account.

161Support for the conclusion that it is not necessary for the forseeability requirement that a legal interest of a plaintiff is present can be found in the cases that have held that there can be liability for economic loss caused by a negligent misrepresentation, not because some legal right is to be protected, but rather on the notion of reasonable reliance by a plaintiff. See Russell Brown, Pure Economic Loss in Canadian Negligence Law (Lexis Nexis) at p. 41. It can also be found in disappointed beneficiary cases in which a negligent solicitor retained to draw a will has been held liable to third parties, who had no legal right, whom the testator intended to benefit. See Hall v. Bennett Estate (2003), 2003 CanLII 7157 (ON CA), 64 O.R. (3d) 191 (C.A.) and its discussion of the applicability of the two-stage Anns test to determine whether a duty of care arises. See also Linden and Feldthusen, Canadian Tort Law, 9th ed. (Lexis Nexis) at p. 476-7.

162I have held that while no decision to demutualize had been taken by management or the board of directors at the time of the LOB transaction and the regulatory approvals process, there was at that time a recognition by Mr. D'Alessandro and Manulife senior management that it was likely that in due course Manulife would demutualize and that more likely than it not would involve a full demutualization with the surplus being paid out to the participating policyholders.

163In the language of McLachlin C.J. in Cooper, was that recognition, and the resulting failure of the Barbados policyholders to receive anything on the demutualization, a reasonably foreseeable consequence of Manulife’s actions? Or as put by her in Mustapha, was it a "real risk", i.e. "one which would occur to the mind of a reasonable man in the position of the defendant ... and which he would not brush aside as far-fetched". In my view, and I so find, it clearly was a reasonably foreseeable consequence. There was a real risk that Manulife would in due course demutualize and that the statutory regime in place would require that the value in Manulife be paid to its participating policyholders. Manulife was well aware that in the event that it demutualized, the terms of the Transfer Agreement that it had with LOB meant that the plaintiffs would no longer be policyholders of a Manulife policy and thus not eligible to participate in a demutualization. Thus these matters were reasonably foreseeable.

(ii) Proximity analysis

164The next issue is whether there was sufficient proximity between the parties to conclude that there was a prima facie duty of care under the first part of the Anns test.

165What is meant by proximity is not easily discerned. In Hercules Managements Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165, La Forest J. said that the term “proximity” is nothing more than a label expressing a result, judgment or conclusion and that it does not, in and of itself, provide a principled basis on which to make a legal determination. In Cooper, McLachlin C.J. and Major. J. quoted La Forest J. in Hercules as saying:

The label "proximity", as it was used by Lord Wilberforce in Anns, supra, was clearly intended to connote that the circumstances of the relationship inhering between the plaintiff and the defendant are of such a nature that the defendant may be said to be under an obligation to be mindful of the plaintiff's legitimate interests in conducting his or her affairs.

166McLachlin C.J. and Major J. further stated in Cooper:

Defining the relationship may involve looking at expectations, representations, reliance, and the property or other interests involved. Essentially, these are factors that allow us to evaluate the closeness of the relationship between the plaintiff and the defendant and to determine whether it is just and fair having regard to that relationship to impose a duty of care in law upon the defendant.
The factors which may satisfy the requirement of proximity are diverse and depend on the circumstances of the case. One searches in vain for a single unifying characteristic. As stated by McLachlin J. (as she then was) in Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 CanLII 105 (SCC), [1992] 1 S.C.R. 1021, at p. 1151: "[p]roximity may be usefully viewed, not so much as a test in itself, but as a broad concept which is capable of subsuming different categories of cases involving different factors".

167In Norsk, McLachlin J. also stated that “In determining whether liability should be extended to a new situation, courts will have regard to the factors traditionally relevant to proximity such as the relationship between the parties, physical propinquity, assumed or imposed obligations and close causal connection. And they will insist on sufficient special factors to avoid the imposition of indeterminate and unreasonable liability.” In Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., 1997 CanLII 307 (SCC), [1997] 3 S.C.R. 1210, McLachlin J. stated:

As in Hercules, the decision as to whether a prima facie duty of care exists requires an investigation into whether the defendant and the plaintiff can be said to be in a relationship of proximity or neighbourhood. Proximity exists on a given set of facts if the defendant may be said to be under an obligation to be mindful of the plaintiff's legitimate interests in conducting his or her affairs: Hercules, at para. 28.

168There has been great debate in this case whether Manulife was owned by its participating policyholders before it demutualized, and what that meant. The plaintiffs assert that the participating policyholders were the owners, including the Barbados policyholders, and that is a factor that leads to the recognition of proximity satisfactory to create a duty of care on the part of Manulife to protect the Barbados policyholders at the time of the LOB transaction.

169There is no question but that while actuaries debated the issue of ownership, and Manulife internally treated its participating policyholders as customers rather than owners, Manulife consistently took the position publicly with its policyholders and regulators, including OFSI, the CRA in Canada and the IRS in the U.S., that the par policyholders “owned” Manulife. This first occurred in 1958 when Manulife mutualized and thereafter. In 1994, the Osler Hoskin firm made a series of submissions to CRA on behalf of Manulife in furtherance of an advance tax ruling request that Manulife had made with respect to its proposed subsidiarization of its Hong Kong business. In the course of those submissions, Osler Hoskin went so far as to state:

Manulife is a mutual insurance company and is owned by its members. As such, its participating policyholders have, in addition to insurance under their policies, “ownership” rights - - namely the right to vote in electing the board of directors, the right to participate in a demutualization, wind-up or distribution of the assets of the mutual company. These rights of the participating policyholders arise by virtue of Manulife’s status; participating policyholders of a stock company such as MIL do not have such rights, and such rights cannot be transferred by Manulife to MIL by reinsurance, or otherwise.

170I do not understand how the last sentence could have been properly made. Under the Canadian and Barbadian insurance legislation, the policies of participating policyholders could be transferred, as they were in the Barbados sale to LOB, and the plaintiffs accept that the transfer was authorized. Their case is that Manulife was obliged not to make that transfer without protecting the Barbados policyholders, not that the transfer could not be made.

171The plaintiffs led expert accounting evidence to the effect that the accounting treatment of the participating policies indicated that these policyholders were the owners of Manulife. The defendant led contrary expert evidence. I did not find this evidence helpful. How an accountant treats these things does not in my view indicate ownership or non-ownership, which is a legal rather than an accounting issue.

172There is no doubt that the participating policyholders of Manulife were entitled, as owners of Manulife, to the value or surplus of Manulife on a demutualization, and likely so at that time of the Transfer Agreement with LOB. Such an ownership interest however was not absolute, and it was extinguished when a policy lapsed, matured or the insured died. The issue is whether the interests of the Barbados policyholders ought to have been protected, and in my view what exactly was encompassed by the word “owner” is not determinative. I agree with the plaintiffs, however, that this relationship by the Barbados policyholders to Manulife by reason of their status as “owners”, whatever its meaning, is a key factor in considering the proximity of that relationship.

173In my view, absent policy considerations, there was sufficient proximity, together with forseeability, to establish a prima facie duty of care owed by Manulife to the plaintiffs. The plaintiffs were participating policyholders of Manulife. They were not an indeterminate class. Manulife had stopped selling policies in Barbados. So long as the Barbados policyholders’ policies were in good standing, they had rights to nominate directors and to vote at meetings of the company, rights to the surplus of the company on any winding-up due to insolvency, rights to dividends when declared by the board of Manulife and likely rights to be allocated the value of Manulife on a demutualization.

174There are statutory rights to protect participating policyholders and statutory obligations of the chief actuary of a life insurance company, the intent of which, as stated in the guidelines of the Canadian Institute of Actuaries, is to ensure the fair and equitable treatment of participating policyholders.

175Mr. Guy was the Chief Actuary of Manulife at the time of the LOB transaction. In the hearing in Barbados before the Supervisor of Insurance, Mr. Guy stated “My role as the company’s Chief Actuary is to ensure that the interests of the policyholders are protected” and “This is a core function of my job”. Nothing could be plainer to indicate a proximate relationship between the participating policyholders in Barbados and Manulife.

176In discussing the rights of the participating policyholders in the U.S. and Hong Kong subsidiarization transactions, Mr. Guy’s evidence was that Manulife absolutely had to consider those rights and had to come up with a construct which either preserved those rights or recognized those rights in some other manner. Those rights were preserved in those transactions. Mr. Guy acknowledged that those rights were not preserved in the LOB transaction, but that they were considered and regarded as less important than other benefits which he said the Barbados policyholders obtained. It is clear, whether or not one agrees with the appropriateness of the benefits said to have been provided to the Barbados policyholders, that their interests were considered by Manulife. That is a strong indication of the proximity between Manulife and the Barbados policyholders.

(iii) Policy issues

177A number of policy arguments have been raised by Manulife against the imposition of a duty of care. Whether these policy arguments rightfully belong to the first part of the Anns test (policy in the broad sense of the word arising from the relationship between the plaintiff and the defendant) or to the second part of the test (residual policy concerns outside of the relationship between the parties), as per Cooper, is difficult to discern but perhaps unimportant so long as they are considered. Most of the policy arguments raised by Manulife in my view to not preclude the imposition of a duty of care. However, in the end result, I have concluded that for certain policy reasons, no duty of care should be imposed in this case on Manulife.

178Manulife contends that to impose a duty of care between it and the Barbados policyholders would place Manulife in breach of its disclosure obligations under securities legislation, which generally do not permit a reporting issuer such as Manulife to prematurely disclose a material change before a corporate decision has been made. Manulife contends that no decision had been made at the time of the LOB transaction and it would have been impermissible for it to make any disclosure to the Supervisor in Barbados that it was reasonably foreseeable that Manulife might demutualize. With respect, I think this argument misses the point. It was Manulife's decision to have Mr. Guy attend the hearing in Barbados. It was his decision to speak at the hearing. He did not have to make any statement. If he thought that it was reasonably foreseeable that Manulife might demutualize, and if that would have been in breach of securities regulations, for which there was no expert evidence called, his choice was to say nothing about that prospect. In his report as chief actuary, he had not included any statement about loss of demutualization rights or their value.

179I agree with the plaintiffs that the claim is not about what Manulife did or did not say, but rather what Manulife did or did not do. The claim is that steps should have been taken to protect the Barbados policyholders so that they could benefit under a future demutualization. Their claim is that Manulife provided such protection to other participating policyholders in the Hong Kong and U.S. subsidiarizations without any premature disclosure concerns, and ought to have done the same with respect to them.

180Manulife also contends that to impose a duty of care in the circumstances would have put the board of directors in an impossible conflict of interest because the directors’ fiduciary duty is one owed to the company and not to its stakeholders, and where conflicting stakeholder interests arise, it falls to the directors to resolve them in accordance with their fiduciary duty to act in the best interests of the company. They rely upon BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560 at para. 66.

181There are several problems with this contention. The LOB transaction was not put to the board of directors for approval and thus there could be no suggestion that they considered that there would be conflicting stakeholder interests if the Barbados policyholders were protected. More fundamentally, however, in BCE, the Court stated clearly at para. 44 that a director’s duty to take reasonable care, unlike a director’s fiduciary duty, is not owed solely to the corporation and thus may be the basis for liability to other stakeholders. Also, this case does not concern the issue of duties owed by corporate directors. They have not been sued. It is Manulife that is the defendant and the issue is whether a duty of care was owed by Manulife to the plaintiffs.

182Manulife contends that as the relationship between the Barbados policyholders and Manulife is governed by a contract, no duty of care should be imposed. I do not agree. The existence of a contract is no bar to recognition of a duty of care under the Anns principles. See Central Trust Co. v. Rafuse, 1986 CanLII 29 (SCC), [1986] 2 S.C.R. 147 at paras. 48-49.

183Manulife contends that what the plaintiffs seek in their claim is an impermissible collateral attack on the decisions of regulators in Barbados and Canada approving the Transfer Agreement, and rely on Boucher v. Stelco Inc., 2005 SCC 64, [2005] 3 S.C.R. 279. As well they point out that both statutory regimes in Barbados and Canada provided for certain appeal or judicial review rights from the decisions approving the Transfer Agreement and that these appeal rights were not exercised by Mr. Greaves or any other policyholder.

184Under section 35A (4)(d)(ii) of the Barbados Insurance Act, the sanction of Supervisor is discretionary, and the Supervisor must be satisfied that the transfer in question is in the public interest. These interests go beyond the interests of the transferred policyholders, and include the interests of Barbados and its economy and the insurance industry in Barbados, the interests of LOB’s policyholders, shareholders and creditors, the capital position of LOB and its ability to meet future obligations and the interests of Manulife and its other policyholders. Claude Denbow, an expert on Barbados law called by Manulife, stated in his report that one of the factors a Supervisor would take into account was whether the transfer was fair to the policyholders as a whole or whether it was prejudicial to their interests. Where he got that from was not stated other than by reference to the statutory provisions, which however do not provide any test other than what is in the public interest. In his testimony he added that in his view in order to have a transfer approved, it would be necessary to convince the Supervisor that it was fair and equitable.

185The Supervisor can approve a transfer subject to conditions if he likes. In this case the Supervisor approved the Transfer Agreement subject to a condition that LOB pay the special premium to the beneficiaries of the transferred policies. Manulife had refused to make any such payment. The effect of the sanction of the Barbados Supervisor was that the Barbados policyholders lost any contractual rights under their policies against Manulife.

186In Canada, a transfer must be approved by the responsible Minister, in this case the Secretary of State (International Financial Institutions) Finance, on the advice of the Superintendent of OFSI. There is no section in the ICA that states what the test is that must be met before the Minister can approve the transfer. Section 254(2) simply provides that a company, with the approval of the Minister, may enter into a transfer all or a portion of its policies. Mr. Thompson, the Deputy Superintendent of OFSI who recommended to the Minister that he approve the Transfer Agreement, agreed on cross-examination that OSFI does not know the precise reason why the Minister approves a transfer. It could be for reasons articulated in the OSFI recommendation or for other reasons.

187The constituting statute for OSFI is the Office of the Superintendent of Financial Institutions Act. Section 4(2) defines its objects, including the object of supervising financial institutions in order to determine whether they are in sound financial condition. Section 4(3) provides:

In pursuing its objects, the Office shall strive to protect the rights and interests of depositors, policyholders and creditors of financial institutions, having regard to the need to allow financial institutions to compete effectively and take reasonable risks.

188This provision would doubtless apply to OSFI in deciding whether to recommend a transfer of insurance policies to the Minister. Mr. Thompson testified that in reviewing an insurance transfer, OSFI would look with an eye to ensuring that the transferring and transferee company would be in a financial condition to meet their obligations to all policyholders and also look to the treatment of policyholders to be sure that the transferred policyholders were not unusually advantaged or disadvantaged.

189The recommendation in this case from OSFI stated that the independent actuary retained by Manulife [Mr. McGuinness] had concluded that the transfer would on balance be beneficial to the transferring and existing LOB policyholders and have no material effect on the other Manulife policyholders. In an accompanying memorandum, under the heading Consideration, the first paragraph is blanked out and what it stated is not in evidence. The documents were obtained under the access to information legislation and the deletions were made by the government before releasing them. The consent of the Minister was simply indicated by his signature under the words “I agree” (to the transfer).

190I do not think that Boucher is of assistance to Manulife. In Boucher, the Ontario Superintendent of Pensions ordered a partial wind-up of a pension plan and approved the wind-up report which gave Ontario employees early retirement benefits. For Quebec employees, the report approved by the Superintendent of Pensions applied Quebec law under which their pensions were deferred until their normal retirement age. The Ontario Superintendent had jurisdiction to do so under an interprovincial agreement. Rather than challenging the decision of the Ontario Superintendent, Quebec employees commenced an action in Quebec against Stelco claiming to have contractual rights to early retirement benefits. It was held that the very issue raised in the Quebec action had been decided by the Ontario Superintendent and that res judicata principles prevented it from being raised again in Quebec. The Court referred to the danger of not applying res judicata principles as being an illustration of the danger of a collateral attack on the decision of the Ontario Superintendent. Stelco would have been prevented under Ontario law from paying early retirement benefits to the Quebec employees and been required under Quebec law, if the employees were successful in Quebec, to pay those early retirement benefits.

191Unlike Boucher, in which the relief sought in Quebec could not be obtained unless the decision of the Ontario Superintendent were changed, the relief sought by the Barbados policyholders in this action was not the issue decided by the regulators in Barbados or Canada. It may be that the Supervisor in Barbados considered that the transfer was fair to the Barbados policyholders, although that is not really known. His certificate of sanction recited that both companies had complied with the Insurance Act of Barbados and other such matters, and it also recited the agreement of LOB to pay a special dividend to the beneficiaries of the transferred policies.

192What OSFI itself though about fairness is not known. In recommending the approval of the transfer to the Minister, it referred to the opinion of the independent actuary retained by Manulife. Its memorandum stated that based on its review of the proposed transaction and the conclusions of the independent actuary, it recommended the approval. It is apparent, as Mr. Thompson said is the norm, that OSFI relies heavily on the opinion of the independent actuary retained by the transferor.

193Whether the plaintiffs were entitled to be protected in the event of a future demutualization was not an issue before either the Supervisor in Barbados or the Minister in Canada. Mr. Denbow acknowledged in cross-examination that while he had not been asked to opine on the issue, he thought it would be hard to argue under Barbados law that any tort claims or claims for breach of fiduciary duty were released.

194On cross-examination, Mr. Thompson agreed that in making a recommendation, OSFI was (i) not reaching any conclusion as a matter of law with respect to the question of whether or not Manulife’s philosophy concerning policyholder rights was correct; (ii) not determining as a matter of law the precise constellation of legal rights that a Barbados participating policyholder had vis-à-vis Manulife; (iii) not determining as a matter of law what reasonable or prudent steps Manulife was required to take in order to protect the rights of the transferred Barbados policyholders; (iv) not determining whether as a matter of law the effect of the Barbados approval was to extinguish the legal rights of the Barbados policyholders, or whether the Barbados Supervisor had the power to do so.⁵

195This case is remarkably similar to Jeffery v. London Life Insurance Company (2011), 2011 ONCA 683, 90 B.L.R. (4th) 1 (Ont. C.A.). In that case, Great West Life acquired London Life, using as part of the payment, a transfer of $220 million from the participating accounts of the participating policyholders of each company. Mercer was appointed an independent actuary to review the transactions involving the transfers from the par accounts (the “PAT”s) and reported that in its view, the PAT’s were fair and equitable to the participating policyholders. OSFI recommended that the Minister of Finance approve the transaction. In doing so, OSFI specifically referred to the contribution of the PAR accounts to the acquisition price as well as to the view expressed in the Mercer report that the PATs were fair and reasonable. The Minister on the recommendation of OSFI approved the acquisition.

196The trial judge held the PATs to be contrary to various sections of the ICA. It was argued unsuccessfully in the Court of Appeal that the trial judge erred in refusing to give weight to OSFI’s review of the legality of the PATs and OSFI’s determination that the PATs complied with the ICA. In rejecting that argument, the Court made statements apposite to this case. It stated:

Before turning to the appropriate remedy, we will address the appellants' submission that the trial judge erred in refusing to give weight to OSFI's review of the legality of the PATs and OSFI's determination that the PATs complied with the ICA.
In our view, OSFI's approval does not determine the legality of the PATs, and the fact that there was regulatory approval does not alter our conclusion that s. 331(4), s. 462 and s. 458 of the ICA were breached. In the circumstances of this case, there are four reasons for not according any deference to that approval. First, the trial in this case was not a judicial review of OSFI's decision to approve the PATs. While OSFI's review may have considered many of the same issues as those before the trial judge, OSFI's decision was not being challenged in the civil case.
Secondly, it is not clear on the record that OSFI considered the issue that we consider to be of critical importance, that is whether the PPEAs were assets within the meaning of GAAP. However, even if it did, this was an issue that was properly determined by the trial judge on the evidence before her. The parties called extensive evidence addressing the GAAP issue, much of it from experts. Ultimately, the trial judge concluded, as she was entitled to do on the evidence before her, that the PPEAs were not assets within the meaning of GAAP. While OSFI may have considered the question of GAAP compliance, it is not apparent that it had the benefit of evidence similar to the evidence before the trial judge. In any event, in the end, it was up to the court to make this determination based on the evidence at trial.
Thirdly, to the extent that the resolution of the s. 462 issue depended on an interpretation of the section, the court has jurisdiction to determine questions of statutory interpretation. A court is not bound by an interpretation by a regulatory body on a question of law. This is particularly the case when the court proceeding is not reviewing the regulatory decision.
Finally, we observe that the trial judge and this court do not have the benefit of OSFI's reasons for approving the PATs. Both parties at trial summoned OSFI witnesses to give evidence. OSFI challenged the summonses on the ground of deliberative secrecy. The trial judge made a ruling about the availability of the OSFI evidence: (2009), 2009 CanLII 55709 (ON SC), 80 C.C.L.I. (4th) 202 (S.C.J.). That ruling was appealed to this court: 2009 ONCA 819, 78 C.P.C. (6th) 23. Pursuant to this court's decision, the parties were permitted to ask OSFI witnesses if, in approving the PATs, they considered that the PATs complied with various sections of the ICA. The witnesses, however, were restricted from testifying about how, why and by whom the PATs were reviewed. The limited nature of the OSFI evidence weighs against this court deferring to OSFI's approval of the PATs.

197One difference is that our case does not involve a contention that a statute has been breached, but whether a tort claim exists entitling the Barbados policyholders to protection against a future demutualization. That clearly is not something that would fall within the jurisdiction of the Minister or OSFI, as admitted by Mr. Thompson, and hard to argue under Barbados law that any tort claims or claims for breach of fiduciary duty were released, as acknowledged by Mr. Denbow. Thus the comments in Jeffery in my view are even more applicable. Moreover, neither OSFI nor the Minister had the benefit of the evidence and legal argument before me on this issue. Whatever OSFI’s reasons for recommending that the LOB transfer be approved, neither OSFI nor the Minister nor the Supervisor in Barbados could determine the issue before me.

198Thus I do not see this case as running afoul of res judicata or abuse of process principles or involving an impermissible collateral attack on the regulatory decisions.

199Even if it were the case that the claim is a collateral attack on the regulatory decisions, it would be a matter of discretion whether the claim on that ground should be refused. See Danyluk v. Ainsworth, 2001 SCC 44, [2001] 2 S.C.R. 460 and R. v. Consolidated Maybrun Mines Ltd., 1998 CanLII 820 (SCC), [1998] 1 S.C.R. 706. I would not refuse the claim as being a collateral attack for a number of reasons. The report of Mr. McGuinness was based on the statement that the likelihood of demutualization was remote and that it had no material value, a statement drafted by Manulife and which on the evidence I have found not to have been the case. That report was obviously central to OSFI’s recommendation and it was also given to the Supervisor in Barbados and influenced the opinion of the actuary retained by the Supervisor in Barbados to advise him on the transfer. The regulatory proceedings in Barbados and Canada were not a lis between the plaintiffs and Manulife and no right to assert a claim in damages or lead evidence of the kind before me was available. The purpose of the legislative provisions in both countries was not to deal with such a claim, but to approve a transaction taking into account a myriad of factors other than solely the interests of the Barbados policyholders. The lack of any evidence as to what led OSFI or the Minister or the Supervisor in Barbados to take the steps they did weighs against deferring to the regulatory process, as it did in Jeffrey.

200Both statutory regimes in Barbados and Canada provided for certain appeal or judicial review rights from the decisions approving the Transfer Agreement. These rights were not exercised by Mr. Greaves or any other policyholder. I would not prevent the imposition of a duty of care on those grounds however. The cost of appealing or taking judicial review action as against the benefit to any one policyholder would be large if not prohibitive. One of the purposes of a class action is to obtain redress for a class of plaintiffs who individually could not afford to prosecute the action taking into account his or her relatively small individual damages. That would be the case here.

201Manulife contends as well that the relationship between the parties is governed by an insurance regulatory regime and that is not appropriate to overlay a different set of duties on top of this matrix of regulatory provisions.

202The fact that a relationship between a plaintiff and a defendant is governed in certain respects by a statutory scheme does not necessarily prevent the imposition of a duty of care. See Syl Apps Secure Treatment Centre v. B.D., 2007 SCC 38, [2007] 3 S.C.R. 83, at para. 27. Indeed, in Ryan v. Victoria (City) 1999 CanLII 706 (SCC), [1999] 1 S.C.R. 201, a duty of care was imposed on two railways for installing flanges on street-grade railway tracks in spite of their being installed in compliance with the statutory and regulatory requirements of the Railway Act.

203It is noteworthy in this case that the regulatory schemes in Barbados and Canada do not provide any redress to policyholders by way of providing for any claim that could be asserted against Manulife. While it can fairly be said that the regulatory regimes provide for the regulator to consider the interests of the policyholders whose policies are being transferred, they do not provide a remedy in damages to those policyholders who may have been harmed by the transfer, nor does the legislation purport to bar any civil cause of action. These factors led Feldman J.A. in Haskett v. Equifax Canada Inc. (2003), 2003 CanLII 32896 (ON CA), 63 O.R. (3d) 577 (C.A.) to conclude that the statutory scheme governing consumer reporting should not bar recognition of a cause of action in damages.

204Nor is the legislative schemes in question a comprehensive code of the kind discussed by Farley J. in Roman Corp. v. Peat Marwick Thorne, (1993), 12 B.L.R. (2d) 10, in which he declined to establish a duty of care at common law, stating that the provincial and federal legislation had created a comprehensive system of rules for the identification and correction of problems in the operation of financial institutions.

205However, where the relationship occurs in the context of a statutory scheme, the governing statute is a relevant context for assessing the sufficiency of the proximity between the parties. See Syl Apps, supra, at para. 27. In my view, this issue is the decisive factor in this case.

206The law imposes a duty of care in appropriate circumstances to prevent harm or injury to someone. What is the harm or injury suffered by the plaintiffs? It seems to me that it is not harm or injury that the plaintiffs have suffered, but rather the loss of a benefit had they remained policyholders of Manulife. However, the plaintiffs had no right to remain policyholders of Manulife. The statutory regimes in both Barbados and Canada authorized the transfer of the Barbados business to LOB, including the transfer of the plaintiffs’ policies to LOB.

207Manulife relies on guideline F-4 issued by OFSI in October 1992. It sets out the requirements of OFSI before recommending approval of a transaction to the Minister. Included is the need to provide a copy of a certificate of assumption that will be issued to holders of transferred policies stating that the assuming company has replaced the transferring company with respect to the rights and obligations of the insurer as set out in the policy or certificate in question. That was a term of the Transfer Agreement.

208On its face, the guidelines applied to all reinsurance agreements, yet the demutualization in Hong Kong was by way of indemnity reinsurance under which the policyholders remained as policyholders of Manulife and the demutualization in the U.S. was by way of assumption reinsurance but with a clause in the certificate of assumption that provided that in the event of a demutualization, the policyholders would be treated as remaining policyholders of Manulife. Mr. Thompson testified that the requirements of OSFI were not uniform but varied by case, and also indicated that in looking at subsidiarizations, more attention was paid to policyholders rights as the transactions were not carried out at arm’s length. Mr. Guy himself testified that Manulife could have protected the Barbados policyholders if it wished to do so, but chose not to. On the Aetna transaction in which Manulife transferred disability policies to Aetna by way of assumption reinsurance, OSFI required Manulife to make a statement to give some protection to the policyholders in the event of a demutualization. I would not conclude on the evidence that this particular provision of guideline F-4 was an impediment to Manulife protecting the Barbados policyholders if it wished to do so.

209The fact remains however that Manulife chose to sell the Barbados block of business by way of assumption reinsurance in which the Manulife policyholders did not remain policyholders of Manulife, and this was approved by the regulators in Barbados and Canada.

210The plaintiffs do not seek to set aside the regulatory authorizations to the Transfer Agreement in Barbados and Canada. They accept for the purposes of their argument that the effect of the authorizations was to extinguish their rights as policyholders of Manulife. By virtue of section 35B(1) of the Barbados Insurance Act, which applied to the Barbados policies and the Transfer Agreement, the Transfer Agreement, including its term that Manulife was released and discharged from all further obligations under the Barbados policies, was binding on the Barbados policyholders. Their case is that Manulife was obliged not to take the steps that it did to extinguish those rights and that a duty of care in law should be recognized in the circumstances.

211In the face of this regulatory regime authorizing the transfer, it cannot be said that the plaintiffs had any right to remain as policyholders of Manulife. If the Barbados policyholders had no such right, can it be said that Manulife was under a duty to protect their interests as policyholders and that a duty of care should be recognized? I do not think so. If they had no right to remain policyholders of Manulife because of a transfer authorized by the regulators, I would not extend tort law by imposing a duty on Manulife to protect and retain their interests as policyholders.

212This is not a case in which Manulife decided to sell the Barbados business out of some ulterior or improper motive. Manulife was selling its business in the Caribbean for legitimate reasons and the Barbados business was the last piece of its Caribbean business that was sold. While there is no doubt that Manulife could have sold this business in a manner that retained the Barbados policyholders as policyholders of Manulife, such as doing so by way of reinsurance under which the Barbados policyholders remained as policyholders of Manulife, the fact is that Manulife chose not to do so for legitimate business reasons and the regulatory regimes in both countries authorized it to do so.

(iv) Conclusion on duty of care

213In these circumstances I would not recognize a duty of care in this case owed by Manulife to the Barbados policyholders to take steps at the time of the transfer to LOB to enable them to participate in the distribution of Manulife’s value on a future demutualization.

Standard of Care

214I have held that a duty of care owed by Manulife to the Barbados policyholders to take steps to enable them to participate in the distribution of Manulife’s value on a demutualization should not be recognized.

215The need to consider the relevant standard of care and whether it was breached by Manulife thus need not dealt with. However, in case I am wrong in my conclusion that a tort should not be recognized, I will deal with the issue of standard of care.

216The concept of standard of care was summarized by the Supreme Court of Canada in Ryan v. Victoria (City), 1999 CanLII 706 (SCC), [1999] 1 S.C.R. 201 per Major J.:

Conduct is negligent if it creates an objectively unreasonable risk of harm. To avoid liability, a person must exercise the standard of care that would be expected of an ordinary, reasonable and prudent person in the same circumstances. The measure of what is reasonable depends on the facts of each case, including the likelihood of a known or foreseeable harm, the gravity of that harm, and the burden or cost which would be incurred to prevent the injury. In addition, one may look to external indicators of reasonable conduct, such as custom, industry practice, and statutory or regulatory standards.
Legislative standards are relevant to the common law standard of care, but the two are not necessarily co-extensive. The fact that a statute prescribes or prohibits certain activities may constitute evidence of reasonable conduct in a given situation, but it does not extinguish the underlying obligation of reasonableness. … By the same token, mere compliance with a statute does not, in and of itself, preclude a finding of civil liability. See Linden, supra, at p. 219. Statutory standards can, however, be highly relevant to the assessment of reasonable conduct in a particular case, and in fact may render reasonable an act or omission which would otherwise appear to be negligent. This allows courts to consider the legislative framework in which people and companies must operate, while at the same time recognizing that one cannot avoid the underlying obligation of reasonable care simply by discharging statutory duties.

217I have held that the failure of the Barbados policyholders to receive anything on the demutualization of Manulife was a reasonably foreseeable consequence of Manulife’s actions. Assuming there was a duty to protect the interests of those policyholders in obtaining the benefits of such a demutualization, did Manulife exercise the standard of care that would be expected of an ordinary, reasonable and prudent person in those circumstances? In my view it did not.

218Manulife took no steps to protect the rights of the Barbados policyholders on a future demutualization. Mr. Guy acknowledged that Manulife did not protect those rights and that it could have protected those right using an appropriate mechanism had it wished to do so. It took no such steps because, as I have found, it did not want to do so. It wanted to treat the participating policyholders as customers rather than owners and did not want to be obliged to pay out its surplus to participating policyholders on a demutualization if it did not have to. It was also concerned that recognizing rights in the Barbados policyholders would create a negative precedent and might lead to claims that the previous transfers of business in the other Caribbean countries by Manulife that did not recognize any demutualization policyholders’ rights should be reviewed.

219Mr. Guy, as the Chief Actuary of Manulife, was required to make a report on the transaction with LOB. In his report of April 24, 1996, he did not refer at all to the issue of the loss of the mutuality rights that was understood to arise from the transaction, nor did he address the impact of the loss of those rights on the interests of the policyholders, or whether that impact was adequately dealt with in the proposed transaction. His explanation for not doing so was that he did not think it was important. While I have some difficulty giving that explanation credit, it is an indication of a lack of concern for the Barbados policyholders’ rights rather than an indication of a balanced consideration of their rights and a risk to those rights by the terms of the transaction.

220While Manulife drafted language for its independent actuary Mr. McGuinness that the likelihood of demutualization was remote and the rights of the Barbados policyholders had no material value, I have not accepted that as being a valid statement or the prevailing thinking of Manulife at the time. It is no answer to the standard of care issue to assert that it was a reasonable position to take in considering the protection of the Barbados policyholders.

221Also, Manulife failed to provide Mr. McGuinness with information that could be considered relevant to the issue, including the information that Manulife had in its possession in June 1996 prior to the completion of the Ecklers report in respect of the Barbados transaction with respect to the its own transaction with Aetna, in which Manulife, at the instance of OSFI took explicit steps to seek to protect the interests of the transferred policyholders in the event of a future demutualization.

222Mr. McGuinness said in his draft report that but for the proposed transfer of the Barbados business, it is almost certain that the dividends would have been reduced in 1991 as they had been in other geographic areas. Where he got that information is unclear, but I do not accept it as proven. I shall deal later with this dividend issue.

223Mr. McGuinness also viewed as a benefit to the Barbados policyholders the fact that their policies would be administered locally. However, he did not consider in his report that this had been the situation since 1992 under the administration agreement made by Manulife with LOB. Mr. Fishbaum, an expert called by Manulife, conceded on cross-examination that the service levels for the Barbados policyholders would not really change from those under the administration agreement.

224I have considerable concern about how independent Mr. McGuinness and his company Ecklers actually were in this matter. Mr. McGuinness allowed Manulife to draft the critical portion of his report dealing with the probability and value of a future demutualization, including a redraft after Manulife had provided an earlier draft which Mr. McGuinness had not dealt with satisfactorily so far as Manulife was concerned. Ms. Margolian of Manulife was concerned that the way it had been drafted by Mr. McGuinness might encourage objection from policyholders in Barbados at any court hearing and gave that as a reason for wanting the report redrafted. That concern should have been no concern of Mr. McGuinness, and his acceding to the redraft done by Manulife is an indication of being prepared to do Manulife’s bidding. There is no evidence that Mr. McGuinness or others such as Mr. Clark at Ecklers who was very involved did any independent analysis on the subject of the possibility of Manulife demutualizing.

225It is clear that Ecklers were acting like consultants to Manulife in so far as the Caribbean sale of assets was concerned. Manulife drafted a policy document entitled Statement on Policyholder Rights and Entitlement to Surplus on the Proposed Transfers of Business in the Caribbean-Atlantic Region. At that time, Ecklers had been retained as independent actuaries on the proposals, including the transfer in Barbados. The policy document provided that the participating policyholders being transferred had no rights to any of the surplus.

226It is quite clear that this policy document was discussed in some detail with Mr. Clark of Ecklers, whose language ended up in the policy document. Mr. Clark held strong views on what should and should not be included in the proposed transfer. In so far as what should be included in their anticipated independent actuary report at that time, Mr. Clark wrote that the question of who “owned” Manulife’s surplus attributed to the Caribbean has “unfortunately been put on the table” [by Mr. Greaves, the then Supervisor in Barbados] and is “uncomfortably tied” to an issue in Canada as a result of the demutualization provisions in the ICA. He said “In writing our report on this transfer, we have to keep in mind the larger picture and not put any arguments on the record which could cause trouble later on”. That is, he was looking out for Manulife’s interests.

227The lack of Eckler’s independence from Manulife is also seen in the concern that Manulife had after seeing the opinion in the draft report from Hymans Robertson, the actuaries retained by the Barbados Supervisor of Insurance, which recommended that a special payment be made to the Barbados policyholders. Manulife was strongly against any such payment and saw the recommendation as a major problem. Mr. McGuinness and Mr. Clark became involved in efforts to have Mr. Arnold of Hymans Robertson change his opinion, including Mr. Clark and Mr. Guy talking directly to Mr. Arnold, which Mr. Clark referred to as “lobbying” Mr. Arnold. Mr. McGuinness and Mr. Clark also expressed concern that making a special payment to the Barbados policyholders would create a precedent for future transfers and lead to an “invidious” comparison between the Barbados transaction and the previous Caribbean transfers that could lead to their re-opening. These are not the actions of a truly independent actuary who had four months earlier provided an actuarial report. They are the actions of someone doing Manulife’s bidding.

228I recognize the evidence from actuaries that it is normal for them to communicate with each other, and that the world of qualified actuaries in Canada is small. However, the evidence leaves me with a sense that Ecklers were working hand and glove with Manulife to advance what Manulife saw as its interests, rather than just obtaining information from Manulife and then independently assessing it and opining on it.

229The terms of the sale of the Barbados policies to LOB that were eventually settled were in accordance with the Manulife policy statement. What is remarkable is that while the issue of who owned the surplus of Manulife was a legal issue, as acknowledged by Mr. Kierans and Mr. O’Connor on cross-examination, the policy of Manulife on this issue that the policyholders had no rights to the surplus was not reviewed or considered by any lawyers. It was considered and prepared by actuaries, including Mr. Bell of Manulife and Messrs. Clark and McGuinness of Ecklers. Mr. O’Connor of Manulife, who was the lawyer involved in the transaction, saw his role primarily as assisting in obtaining Canadian regulatory approval to the transfer. He thought the debate regarding entitlement to the surplus was merely an actuarial issue and he had no opinion on it and did not consider it from a legal standpoint. Without any legal advice on this issue, it is difficult for Manulife to contend that they carefully considered the rights of the Barbados policyholders.

230Manulife contends that its conduct served a social good, that the Barbados transfer was in the interests of the Barbados policyholders and of the two companies involved. It was found by the regulators to be fair and equitable, and was found by the Barbados regulator to be in the public interest. It contends that had the transfer not occurred, the Barbados policyholders’ dividend outlook would have suffered, with dividends reducing to zero over time.

231The Transfer Agreement provided some guarantees of dividend scales for the Barbados policyholders of Manulife to the level paid by Manulife in 1994 but also provided that those dividends could be increased or decreased depending on the performance of LOB. Mr. Guy contended in evidence that the terms of the deal were fair to the Barbados policyholders, particularly given the dividend guarantees. Implicit in this contention is that the dividends would not have remained at the same levels if there had been no deal with LOB. On cross-examination Mr. Guy testified that the dividends for the Barbados policyholders were under pressure through the 1990s and Manulife was not of a mind to hold those dividends. For reasons which I will explain, I do not accept this evidence of Mr. Guy.

232On October 22, 1996, Mr. Arnold of Hymans Robertson, retained by the Barbados Supervisor, issued his draft report. This appears to have been faxed to Manulife on the following day. In his report he recommended a special bonus be paid to the Barbados policyholders. The contemporaneous documentation prior to the release of his draft report does not support the notion that the dividends to the Barbados policyholders would likely be cut if the transfer to LOB did not take place. Rather it suggests that the argument was raised only after the draft Hymans Robertson report.

233Even after Manulife decided in 1992 not to continue selling policies in Barbados after it was not able to gain approval to sell its business from Mr. Greaves, the then Supervisor in Barbados, dividends to the Barbados policyholders were not cut.

234On March 23, 1994, during negotiations with LOB regarding a sale of the business to LOB, a meeting was held in Toronto between representatives of Manulife and LOB. On April 6, 1994 Mr. Alleyne, the Vice-President, Actuarial of LOB sent minutes of the meeting to Mr. Bell who was the Vice-President and General Manager for Manulife of the Caribbean-Atlantic region and also an actuary, and asked for confirmation of its accuracy or comments regarding any changes. The minutes recorded the following regarding dividends:

David Bell circulated a paper specifying the dividend scales of Manulife policies. He said that in view of the experience of the block to date, Manulife would have great difficulty in reducing dividends at this time. In the absence of a transfer, no reduction in dividend scales was scheduled for the next three years. In fact on the basis of Manulife’s investment experience if there was any movement it would be in an upward direction.⁶

235There is no evidence that anyone in Manulife took exception to this minute. Mr. Guy, who had become the chief actuary in 1993, testified that he did not agree with the statement. He was not on the sales team negotiating with LOB and he was not at the meeting. He said dividends were set on an annual basis and he would not have agreed to a three year commitment. Shortly after the meeting with LOB, Mr. Bell wrote to Mr. Guy and Ms. Schwartz, the Senior Vice President and General Manager, International Operations stating that he felt no change in the dividend scale was warranted. There is no written indication in the record that Mr. Guy demurred to this. In spite of Mr. Guy’s testimony, in fact the dividend scales were not changed at all prior to the agreement reached with LOB in 1996.

236The Supervisor in Barbados required a report in 1996 from Mr. Guy, which Mr. Guy thought unusual. Drafts were prepared by Mr. Bob Johnson, an actuary at Manulife. Mr. Guy reviewed the drafts and had discussions with Mr. Robinson about them. On April 22, 1996 Mr. Johnson sent Mr. Guy a draft and indicated that he had incorporated Mr. Guy’s request to include details regarding the dividend guarantee to the Barbados policyholders. The draft report stated:

The combined effect of these provisions should allow LOB to fulfill all the obligations under these policies as they may fall due, including dividends to participating policyholders at a scale comparable to what they might reasonably expect to receive were they to remain with Manulife.

237Mr. Guy testified that he was comfortable with the draft. The final version which he signed two days later on April 22, 1996 did not include this statement regarding the scale of dividends, but Mr. Guy testified that there were no material changes in the final report. I take his evidence to be that at that stage when the report was made and sent to the Supervisor in Barbados, Mr. Guy at that time was comfortable with the statement that the dividends for the Barbados policyholders that they would receive after the transfer to LOB were comparable to what they might reasonably expect to receive were they to remain with Manulife. That is, there was no indication at that time that they would be cut.

238Shortly after the draft Hymans Robertson report was received recommending a payment to the Barbados policyholders of say one year’s normal dividend, there were discussions between Mr. Guy and Mr. McGuinness of Ecklers. On October 24, 1996 Mr. McGuinness reported to Mr. Clarke that:

Geoff Guy has suggested making a comparison of the "excess" dividends which the Barbados policyholders have received during the last half-dozen years as a result of not cutting the dividend scale when the need to do so became apparent. It will be difficult to quantify the number, but it would be an interesting number to have-especially if it is comparable to one year’s dividend!

239On October 30, 1996 Mr. Clark asked Mr. Guy if he could opine that if Manulife had decided to run-off the Barbados policies rather than transferring them, there would have been a dividend cut because (i) Manulife was generally cutting dividends in all territories? or (ii) because policy and run-offs are relatively and increasingly expensive to administer?

240These communications make clear that Manulife and Ecklers were looking for some argument to counter the draft Hymans Robertson report. There was no statement at that time by Mr. Guy saying that the answer was that dividends would have been cut, which is not surprising taken the fact that since Manulife had decided to run-off the business in Barbados in 1992, the dividends had not been cut and the administration of the policies had been turned over to LOB.

241There is a Manulife document entitled Barbados Business Dividend History. It was prepared sometime in 1996, likely after the draft report from Hymans Robertson was received. It contained a review of investment returns from 1988 to 1995. The writer of the document concluded that there was not strong enough evidence to argue that Manulife had held dividends at levels that were unsupportable except perhaps for 1995. In that year the investment return had dropped from 6.8% in 1994 to 5.1%. This document is contrary to the evidence of Mr. Guy and also to the statement of Mr. McGuinness that the dividends would have been reduced in 1991 but for the proposed transaction with LOB.

242On all of the evidence, I do not accept Mr. Guy's evidence that the dividends of the Barbados policyholders had been under pressure throughout the 1990s and would have been reduced but for the transaction with LOB. Nor do I accept Mr. McGuinness’ statement that the dividends would have been reduced in 1991 but for the proposed transaction with LOB.

243Manulife relies on an expert report of Mr. Fishbaum who agreed with Mr. McGuinness’ report that the transfer was beneficial to the Barbados policyholders, essentially agreeing with the points made by Mr. McGuinness. For the same reasons, I do not accept Mr. Fishbaum’s views on the fairness of the transaction.

244As per Major J. in Ryan, one may look to external indicators of reasonable conduct, such as custom or industry practice in considering what a reasonable person would have done in meeting a standard of care. That seems to me to be of less importance in this case because Manulife does not say that they took any steps to preserve the rights of the Barbados policyholders to participate in a future demutualization and because Mr. Guy acknowledged that Manulife could have protected such rights by using an appropriate mechanism had it chosen to do so.

245Experts were called by both sides to opine on what industry practice was or was not. There was great debate by both sides as to which prior transactions were appropriate to consider. I must say that I did not find the expert evidence on this issue of usual practice to be very helpful. Each transaction looked at had its own unique facts.

246In his expert report filed on behalf of the plaintiffs, Mr. Prince looked at three transactions in which he said there had been preservation of participating policyholders’ rights on a demutualization. One case involved a transfer by Prudential of its Canadian business from itself, a mutual company, to London Life, a stock company, in which Prudential made a commitment to its U.S. regulator that required it to pay a substantial amount to its prior participating policyholders when it later demutualized. Another involved a transfer from New York Life of its Canadian business to Canada Life, both companies being mutual companies. Another, in 1998, after the transaction between Manulife and LOB, involved a transfer from Met Life of its Canadian business to Mutual Life in which an undertaking was given by Met Life to the Canadian regulator required in order to obtain regulatory approval to pay demutualization benefits to the transferred policyholders when Mutual Life later demutualized.

247Mr. Fishbaum for Manulife referred to two demutualization transactions, one being Laurentian in which a 1990 demutualization involved a holding company model in which policyholders rights were maintained in the new holding company structure. The other involved Wawanesa Life, a Manitoba company that demutualized in 1993 due to financial difficulties. The par account was valued at $4.8 million, which was the amount determined to be the value of the company, and, contrary to Mr. Fishbaum’s evidence in chief, that amount was allocated to the participating policyholders under an undertaking to increase the dividends to be paid to them over the next 15 years by 5% above the amounts otherwise payable. These were not transactions involving a sale of policies from a mutual company to a stock company, but in any event could hardly be said to be the “usual” way in which transfers of a book of policies took place.

248Mr. Dowsett opined in his reply report that there was little experience in 1996 with transfers of blocks of participating business from mutual life insurance companies under federal jurisdiction in Canada to other life companies. He said this in reply to a statement of Mr. Fishbaum that it was not the usual practice in Canada to retain mutuality benefits on a transfer of business. I think on the evidence that Mr. Dowsett was right in that opinion.

249Manulife refers to the prior transfers of its policies in the Caribbean as being examples of the usual practice to look at in this case. In none of those transactions were the benefits of any future demutualization preserved for the participating policyholders in those countries. The difficulty with that argument was that these other transactions were carried out under the same policy statement created by Manulife that also led to the LOB transaction in Barbados, and they could not be said to be independent evidence of a usual practice. Also, they were carried out in years prior to the LOB transaction, and whether the likelihood of demutualization was the same as at the time of the LOB transaction was not canvassed.

250As acknowledged by Mr. Guy, Manulife could have protected the Barbados policyholders had it wished to do so.

251Manulife could have structured the transaction as an indemnity reinsurance arrangement in which case the ownership and voting rights of the Barbados policyholders would not have been affected. Under such arrangements, Manulife could have transferred all of the responsibility for the administration of the policies, together with the right to receive premiums and the obligation to pay benefits to another insurer. While Manulife would remain liable under the policies, it could have been indemnified by the reinsurer for these risks. Manulife chose not to do this as it did not want to keep any financial responsibility. But if it had a duty of care to preserve the rights of the Barbados policyholders, this is one way it could have been done.

252In these circumstances the transferred Barbados policyholders would retain the right to vote at meetings of policyholders of Manulife. There is no evidence of any actual difficulty that such an arrangement would cause. The Barbados policyholders constituted a tiny fraction of the Manulife participating policyholders, being approximately 8,000 out of 750,000.

253Manulife contends that the cost of maintaining the Barbados policyholders would have been significant, although it led no evidence of what the costs would be. Mr. Dowsett, previously the president of Crown Life Insurance Company for 11 years and a highly qualified actuary, expressed the view that the cost to Manulife would only have been the cost of arranging access to the records for the Barbados policyholders after the transaction with LOB and then after demutualization, the administrative costs of dealing with 2 to 3 million additional shares of Manulife, which costs he said would have been modest compared to the value of the potential demutualization benefits of the Barbados policyholders.

254Mr. Prince also expressed the view that in the scheme of the overall transaction, the costs would have been negligible. He said that Manulife would routinely keep information on all terminated policyholders for a period of at least seven years and that LOB would be maintaining information on which policies continued to be active and could provide that information to Manulife when demutualization was being implemented.

255Mr. Fishbaum disagreed with these views of Mr. Dowsett and Mr. Prince. He said that neither seemed to have considered the significant cost or business implications of maintaining the vote. He said in chief that in his view, you would have people who were not part of the company getting a vote on the say of the company, which he said did not make sense. Mr Prince on cross-examination agreed that from a governance standpoint, it did not make sense for the transferred policyholders having a vote for the board of directors. Mr. Dowsett on cross-examination said that in his view it would have been acceptable for the transferred policyholders to continue to have a vote for the directors and should have been done if necessary to preserve their demutualization rights.

256I prefer the opinions of Mr. Dowsett and Mr. Prince in so far as the cost of maintaining the votes of the Barbados policyholders being minimal compared to the benefits to be gained by the Barbados policyholders. With respect to the governance issue of them retaining a vote for the board of directors, this problem is far more apparent than real. It is inconceivable that even if they exercised their right to vote they would have made any difference to the outcome of the vote.

257Manulife also raises the specter of having to continue to pay dividends to the Barbados policyholders, which would make no sense as they were to be paid dividends by LOB. Again, this problem is more apparent than real. Manulife would be entitled to declare no dividends to these policyholders, which would make sense as they were being paid dividends by LOB, and its decision could hardly be challenged. Indeed, Manulife asserted in argument that absent the transfer to LOB, the dividends would have been reduced to zero over time.

258In my view, if Manulife had a duty of care to protect the rights of the Barbados policyholders to participate in a future demutualization of Manulife, Manulife did not take reasonable steps to protect those rights and breached the standard of care required.

Causation on duty of care issue

259Manulife contends that the plaintiffs have not established that if Manulife was negligent, that negligence caused damage to the Barbados policyholders.

260The but-for test is the method by which factual causation is established. The plaintiff must show on a balance of probabilities that but for the defendant's negligent act, the injury would not have occurred. Inherent in the phrase "but for" is the requirement that the defendant's negligence was necessary to bring about the injury, in other words that the injury would not have occurred without the defendant's negligence. This is a factual inquiry. If the plaintiff does not establish this on a balance of probabilities, having regard to all the evidence, the action against the defendant fails. The "but for" causation test must be applied in a robust common sense fashion. See Clements v. Clements, 2012 SCC 32 at paras. 8 and 9 per McLachlin C.J.

261Assuming that Manulife owed a duty of care to protect the rights of the Barbados policyholders on a future demutualization and that they failed to act reasonably in protecting those rights contrary to the standard of care required, it seems clear that the resulting loss was caused by Manulife on a consideration of the but-for test. If Manulife had not made the Transfer Agreement on the terms that it did, but had rather caused a reinsurance arrangement or some other arrangement that protected the Barbados policyholders rights on a future demutualization, the loss of those rights would not have occurred.

262The regulators had to approve the LOB transaction, but that in my view cannot be said to be a loss caused not by Manulife but by the regulators in approving the transaction. The legal issue is well known. See Fridman, The Law of Torts in Canada (2d) p. 431-2 in which it is stated:

The problem of the independent action of a third person has arisen in other circumstances. The issue arises where the defendant has been negligent but that negligence in itself would not have caused harm to the plaintiff; only because of the additional conduct of a third person has the negligence of the defendant became capable of maturing or developing into a situation in which harm has been caused to the plaintiff. Examples abound….The question in all such cases is whether a person in the situation of the defendant could or ought to have foreseen that the intervention might occur. If so, then he will be responsible for what happened on the ground that he could have avoided it by taking precautions. If it was not foreseeable, there will be no liability….In the words of Estey J., “…the intervening conscious act of a third party will break the line of causation and relieve the party who may otherwise be negligent of liability, unless to a reasonable man in the same circumstances that conscious act would have been foreseeable. Then it becomes a foreseeable risk against which the defendant ought to have guarded.

263So far as the requirement for regulatory approval is concerned, the Supervisor in Barbados had before him the Transfer Agreement, with its terms. It was clearly foreseeable that he might approve the Transfer Agreement with its terms. He had no other agreement before him. Had he refused to approve the Transfer Agreement, the Barbados policyholders’ rights would not have been lost by virtue of his refusal to approve it. The same can be said for OSFI.

264Manulife contends that the Aetna and Prudential transactions were the only examples of third party insurance transfers at the relevant time that the plaintiffs could point to, and that if the same terms were used in the LOB transaction, the plaintiffs would not have received anything as under the 1999 regulations, they had to be policyholders at the time of the effective date of the plan of demutualization, i.e. at January 20, 1998. However, the form of the Aetna and Prudential transactions was not the only way to protect their rights, and as Mr. Guy testified, their rights could have been protected using an appropriate mechanism had Manulife chosen to do so. Manulife essentially argues standard of care issues, which are not apt on a causation analysis.

265Had causation been the issue, I would have held that the plaintiffs had established that Manulife caused the loss to the policyholders by not protecting their right to participate in the demutualization that later occurred.

Fiduciary Duty

266The plaintiffs assert that apart from a duty of care not to act negligently, Manulife had a fiduciary duty to protect their interests.

267Certain categories of relationships are considered to give rise to fiduciary obligations because of their inherent purpose or their presumed factual or legal incidents. These categories are sometimes called per se fiduciary relationships. See Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247 at para. 36 per Cromwell J.

268The plaintiffs submit that although it is well settled by case law that the relationship between an insurer and an insured is not a per se fiduciary relationship, this case law turns on the general contractual relationship between an insurer and an insured, and does not consider the unique proprietary relationship between a mutual insurance company and its policyholders.

269 Alberta v. Elder Advocates of Alberta Society, 2011 SCC 26, [2011] 2 S.C.R. 360 is the latest S.C.C. case dealing with the tests for recognition of a fiduciary duty. In Frame v. Smith, 1987 CanLII 74 (SCC), [1987] 2 S.C.R. 99 Wilson J. stated her view of when a fiduciary duty has been recognized. Her words have been adopted by the S.C.C. and other courts for many years. She stated:

Relationships in which a fiduciary obligation has been imposed seem to possess three general characteristics:

(1) The fiduciary has scope for the exercise of some discretion or power.

(2) The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests.

(3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

270In Elder, however, McLachlin C.J. stated that as useful as the three “hallmarks” referred to in Frame are in explaining the source fiduciary duties, they are not a complete code for identifying fiduciary duties. She laid down three tests to be applied.

271First, the evidence must show that the alleged fiduciary gave an undertaking of responsibility to act in the best interests of a beneficiary. What is required in all cases is an undertaking by the fiduciary, express or implied, to act in accordance with the duty of loyalty reposed on him or her. The existence and character of the undertaking is informed by the norms relating to the particular relationship. The party asserting the duty must be able to point to a forsaking by the alleged fiduciary of the interests of all others in favour of those of the beneficiary, in relation to the specific legal interest at stake. The undertaking may be found in the relationship between the parties, in an imposition of responsibility by statute, or under an express agreement to act as trustee of the beneficiary’s interests.

272Second, the duty must be owed to a defined person or class of persons who must be vulnerable to the fiduciary in the sense that the fiduciary has a discretionary power over them. Fiduciary duties do not exist at large. They are confined to specific relationships between particular parties. Historically recognized per se fiduciary relationships exist as a matter of course within the traditional categories of trustee-cestui que trust, executor-beneficiary, solicitor-client, agent-principal, director-corporation, and guardian-ward or parent-child. By contrast, ad hoc fiduciary relationships must be established on a case-by-case basis.

273Finally, to establish a fiduciary duty, the claimant must show that the alleged fiduciary’s power may affect the legal or substantial practical interests of the beneficiary. In the traditional categories of fiduciary relationship, the nature of the relationship itself defines the interest at stake. However, a party seeking to establish an ad hoc duty must be able to point to an identifiable legal or vital practical interest that is at stake. The most obvious example is an interest in property, although other interests recognized by law may also be protected.

274In my view, the plaintiffs cannot establish on the facts of this case that a fiduciary duty was owed to them.

275While Mr. Guy, the chief actuary of Manulife, stated at the hearing in Barbados that his role was to ensure that the interests of the policyholders were protected, I do not think it can be said that Manulife made any undertaking under which it forsook the interests of all others in favour of the Barbados policyholders. To have done so would have been to forsake the interests of other persons, included the other participating policyholders of Manulife, and Manulife itself in the running of its business. Under section 166(1)(a) of the ICA, the officers of Manulife were bound to act with a view to the best interests of Manulife. That included all of the stakeholders of Manulife, not just the Barbados policyholders. Thus I do not see the first test of Elder being met.

276With respect to the second test in Elder of vulnerability, Manulife asserts that in both Barbados and Canada, Manulife did not have discretion to transfer the Barbados policyholders or to extinguish their contractual rights. The Transfer was authorized under statute and had to meet statutory requirements. It was for the regulators in the two countries to evaluate the merits of the proposed Transfer, and to permit the Transfer to proceed if the interests of all affected policyholders were found to be adequately addressed. Without regulatory approval, Manulife had no power to affect the interests of the Barbados policyholders.

277I do not accept this argument of Manulife. While it is true that regulatory approval was required, the regulators had to deal with what was put before them, which in this case was a Transfer Agreement that extinguished the rights of the Barbados policyholders. Manulife could have provided different terms in the Transfer Agreement that protected the Barbados policyholders, as acknowledged by Mr. Guy, but chose not to do so. The Barbados policyholders were vulnerable to the discretion exercised by Manulife in putting before the regulators terms that extinguished their rights.

278With respect for the third test is Elder, McLachlin C.J. stated:

51…..It is not enough that the alleged fiduciary’s acts impact generally on a person’s well-being, property or security. The interest affected must be a specific private law interest to which the person has a pre-existing distinct and complete legal entitlement. Examples of sufficient interests include property rights, interests akin to property rights, and the type of fundamental human or personal interest that is implicated when the state assumes guardianship of a child or incompetent person. The entitlement must not be contingent on future government action.

279I do not think it can be said that the plaintiffs can meet this third test. Their interest in continuing as a policyholders or somehow having their policyholders rights protected is not a pre-existing distinct and complete legal entitlement. I have held that Manulife did not owe them a duty of care. Even had I held otherwise, their rights would have been contingent on future actions of Manulife in deciding to demutualize.

280In the circumstances I am not prepared to find that Manulife owed the plaintiffs a fiduciary duty to protect their right to participate in a future demutualization.

281Had I held that Manulife owed a fiduciary duty to the plaintiffs, I would have held that the duty was breached, essentially for the same reasons that I have held that had a duty in tort been established, that duty would have been breached. I would have also held that the plaintiffs had established causation of loss for the same reasons as discussed under the duty of care analysis.

Alternative theories of liability

(a) No extinguishment of ownership rights

282For their main argument, the plaintiffs accept that the effect of the approval of the Transfer Agreement was that their rights under their policies were extinguished and they were no longer policyholders of Manulife. They contend, in the alternative, that properly interpreted, the Transfer Agreement did not sever the contractual relationship between Manulife and the Barbados policyholders. They also contend that when the Barbados policyholders purchased participating policies in Manulife, they obtained certain ownership rights in Manulife under the provisions of the ICA 1991. The ICA 1991 contained no mechanism whereby those rights could be involuntarily extinguished. Neither the Transfer Agreement, nor the sanction of the Supervisor in Barbados, nor the Canadian Minister’s approval of the transaction could or did extinguish these property rights.

283If the plaintiffs are right in this submission, they would have remained policyholders of Manulife at the eligible date of January 20, 1998 under Manulife’s plan of demutualization.

284The argument of the plaintiffs goes as follows. Manulife relies upon the combined effect of the provisions of the Transfer Agreement between it and LOB, together with the Sanction of the Barbados Supervisor of Insurance to create a “novation” exchanging LOB for Manulife and the severance of the contractual relationship between Manulife and the Barbados policyholders. Under Barbados common law, like English and Canadian common law, one party to a contract cannot unilaterally create a contractual novation by transferring its obligations to a third party and ceasing to be a party to the contract himself. However, the plaintiffs agree that both the Transfer Agreement and their insurance policies were governed by Barbados law, including the provisions of the Barbados Insurance Act and that by virtue of the provisions of s. 35B of the Insurance Act, the terms of the Transfer Agreement were binding on them, once the sanction of the Supervisor had been obtained.

285The plaintiffs contend that the fact that the Transfer Agreement was binding on the policyholders does not mean that there was a novation of the contractual relationship between Manulife and the Barbados policyholders. Whether that occurred depends upon the interpretation, as a matter of proper contractual construction, of the language of the Transfer Agreement. The English principles of the interpretation of contracts govern this issue, which based on the evidence of Mr. Motley called by Manulife, are essentially the same as our principles of contract interpretation.

286The provisions of the Transfer Agreement relied on by the plaintiffs are as follows:

Recitals

WHEREAS Manulife wishes to transfer to LOB, provided the legal sanctions and approvals can be obtained, (a) the benefit and the burden of (i) those life insurance policies and annuity contracts issued or assumed by Manulife out of its Barbados branch and (ii) certain obligations undertaken by Manulife in Barbados incidental to the conduct of Manulife’s insurance business in Barbados, as hereinafter specified, and (b) certain investments securities and assets; and

WHEREAS LOB wishes to assume Manulife’s obligations under the forgoing policies, contracts and obligations and to indemnify Manulife in respect thereof provided the required legal sanctions and approvals can be obtained; and to accept the said investments, securities and assets.

3.1 On the Effective Date, the following provisions shall be deemed to take effect as at 12:00:01 a.m. Barbados time on January 1, 1995:

3.1.1 LOB shall assume all of the obligations and liabilities of Manulife under the Barbados Policies and shall acquire the benefit of all of the rights of Manulife in respect of such policies. Reserves and Liabilities in respect of the Barbados Policies as at December 31, 1994, (the “Valuation Date”) are specified in Schedule A hereto.

3.1.2 Manulife as beneficial owner shall transfer assets to, and those assets shall vest beneficially to LOB. [Cash and other assets totalling BDS $174 million to meet all future obligations under the Barbados Policies]

3.1.3.7 Manulife shall be released and discharged from all further obligations under the Barbados Policies.

3.1.3.9 Manulife hereby authorizes LOB to exercise all rights and powers in connection with the Barbados Policies which Manulife possesses and which it could exercise if this Agreement were not made, and Manulife hereby transfers and assigns to LOB all of its said rights and powers under or pursuant to the Barbados Policies.

4.5 Manulife undertakes to deliver to LOB such assignments, conveyances and other documents as may be required to vest in LOB the entire beneficial ownership of all of the assets to be transferred pursuant to this Agreement and to enable LOB to procure registration thereof in its name. (bold emphasis added)

287The plaintiffs submit that in accordance with the plain words of the Transfer Agreement, Manulife did not transfer its right, title or interest in the Barbados Policies to LOB. The policies themselves are not transferred. Rather, what is transferred was:

a. Manulife’s obligation and liabilities under the policies;

b. Manulife’s benefits in respect of the policies;

c. Manulife’s rights and powers under or pursuant to the policies.

288The plaintiffs point to other agreements made by Manulife, such as its agreement with Aetna and for the U.S. subsidiarization in which Manulife assigned all of its right, title, benefit and interest in policies, different language from the Transfer Agreement.

289The plaintiffs refer to the contra proferentum rule and submit that if there is any ambiguity, the Transfer Agreement ought to be construed against Manulife as the Barbados policyholders had no role whatsoever to play in its drafting. Whether the contra proferentum could have any application in this case when the plaintiffs were not party to the contract in question need not be dealt with as in my view the Transfer Agreement, properly interpreted, extinguished the Barbados policyholders rights under their policies with Manulife. It cannot be said that their status as policyholders remained.

290The Transfer Agreement transferred to LOB all of the benefits of all rights under the policies and all obligations and liabilities of Manulife under the policies. It released Manulife from all further obligations under the policies. It authorized LOB to exercise all rights and powers that Manulife possessed in connection with the policies. There was nothing more for Manulife to retain and while the language of the Transfer Agreement did not expressly state that Manulife was transferring all of its right, title, benefit and interest in the policies, it effectively did so by the language used.

291There are other indications in the Transfer Agreement that this was so. Article 5.1 contained a covenant that LOB could not for 10 years sell the obligations arising under the policies to any other insurer without the consent of Manulife and article 5.1.1.2 provided that Manulife could withhold its consent to any transaction that proposed to “transfer the Barbados Policies” to an insurer which could not maintain the required MCCSR ratio. This provision is a clear indication that the policies were transferred to LOB.

292The plaintiffs contend that while the certificate given to the Barbados policyholders stated that LOB was substituted for Manulife as a party to the policies, the Transfer Agreement did not state that or state that Manulife was no longer a party to those policies. However, article 11.1 provided that following the effective date of the Transfer Agreement, being December 31, 1996, the Barbados policyholders would be provided with a certificate that stated that LOB had “assumed the liabilities and obligations of Manulife and shall stand in the place and stead of Manulife” under the policies. This article was a clear indication of a contractual intent that the contractual relationship between Manulife and the Barbados policyholders be severed.

293With respect to the contention that the ICA could not extinguish the ownership right of policyholders, I think it plain from the language of the ICA that it could. The plaintiffs assert that the ownership rights are derived not from the policies held by them, but from the ICA. They assert that nothing in section 254 of the ICA which provided that policies could be transferred with the approval of the Minister expressly or by implication extinguished their ownership rights.

294A “participating policyholder” is defined in the ICA as “the holder of a participating policy” and a “participating policy” is defined as a policy that entitles its holder to participate in the profits of the company”. Once the transfer from Manulife to LOB was sanctioned and carried out, the Barbados policyholders were no longer entitled to participate in the profits of Manulife and thus were no longer participating policyholders under the ICA. Whatever one might call their status as participating policyholders, whether owner or otherwise, those rights ceased under the ICA when the policies were transferred to LOB.

295I conclude that the Barbados policyholders’ rights were extinguished by the Transfer Agreement and the sanction by the Barbados Supervisor of Insurance and they did not survive under the ICA.

296Had I concluded otherwise, the Barbados policyholders would have been eligible policyholders under the 1999 regulations as they would have held their policies and the right to vote on January 20, 1998. However, they would not have been eligible under Manulife’s plan of demutualization as the plan deemed ineligible a policy transferred to another insurer by way of assumption reinsurance prior to January 20, 1998, other than the U.S. policyholders, which included the Barbados policies. Whether Manulife in those circumstances owed a duty of care to the Barbados policyholders to include them in the plan of demutualization rather than deem them ineligible was not argued to any extent and I hesitate to delve into that. The plaintiffs asserted in their factum that there could be no serious issue that by excluding the Barbados policyholders from the plan of demutualization by making their policies ineligible, Manulife failed to meet the standard of care of a reasonable insurance company. They may be right, but it I decline in the circumstances to get into that.

(b) Failure to compensate for lost ownership rights

297For the purposes of this alternative argument, the plaintiffs make the following assumptions:

a. In 1996, Manulife’s participating policyholders were the legal owners of the company, and had a beneficial interest in the surplus of the company;

b. The court concludes that Manulife did not breach a duty of care and/or fiduciary duty to the plaintiffs when it failed to protect their ownership interests as a part of the LOB transaction; and

c. The LOB transaction had the effect of:

i. extinguishing any right the plaintiffs had to participate in a future demutualization of Manulife; and

ii. extinguishing all other ownership interests of the plaintiffs in Manulife.

298In these circumstances the plaintiffs submit, in the alternative, that Manulife nevertheless breached a duty of care and/or fiduciary duty to them when it failed to compensate the plaintiffs for the loss of the proprietary rights that it extinguished, including a pro-rata share of Manulife’s surplus as it stood at that time. In effect, the plaintiffs argue that even if Manulife breached no legal duty in extinguishing the plaintiffs’ ownership interests, it had an obligation to compensate the Barbados policyholders for those lost ownership interests as it owed a duty of care and/or a fiduciary duty to its participating policyholders when it took actions which had the potential to adversely affect their fundamental ownership interests.

299I have difficulty with the assumption for this alternative argument that Manulife’s participating policyholders as legal owners of the company had a beneficial interest in the surplus of the company. They had a right to the surplus on the winding-up of the company. Whether or not the participating policyholders were legal owners, while they were policyholders and before any winding-up or demutualization, they had no right to be paid any of the surplus of the company except by way of dividends. That right ceased to exist on death or termination of the policy. If they had no other right to be paid out the value of the surplus while policyholders of Manulife, I see no right they had once their policies were sold to LOB.

300The argument that they would have had ownership of the surplus that would be distributed on a future demutualization depends on the same argument that they had a right to remain as policyholders, which I have held was not the case. Once they were not policyholders of Manulife after the sale to LOB, I see no basis for holding that Manulife was obliged to pay them for lost rights to the surplus that would result from a later demutualization.

301The plaintiffs rely on submissions in 1994 by the Osler Hoskin firm on behalf of Manulife in furtherance of an advance tax ruling request that Manulife had made with respect to its proposed subsidiarization of its Hong Kong business. In the course of those submissions Osler Hoskin stated that:

Participating Policyholder Proprietary Rights

The proposed transaction will effect the transaction of the insurance element of the participating Hong Kong policies from Manulife to MIL. We confirm your understanding that the Hong Kong participating policyholders will retain their ownership or proprietary rights vis-a-vis Manulife, including voting rights and rights to participate in the event of a future dissolution or demutualization of Manulife. We concur with your understanding that a mutual company has no power to terminate the rights of participating policyholders without compensation. As the participating policyholders will retain their proprietary rights vis-à-vis Manulife, including entitlement to ultimate distribution of surplus, they are not receiving a current distribution or compensation in respect of such continuing rights. (emphasis added)

302I do not see the situation involving the Hong Kong subsidiarization as being comparable. The transaction involved reinsurance by Manulife in which the underlying policies remained in force and the policyholders retained all rights under them. The statement that a mutual company has no power to terminate the rights of participating policyholders without compensation was made in the context of a policyholder who was to retain ownership of his or her policy. In that circumstance a mutual company would have no power to terminate the rights of the policyholder, whether or not there was compensation paid to the policyholder. If the statement by Osler Hoskin were taken to be applicable to a transfer of policies authorized by regulators as occurred in this case, I would not agree with the statement that it could not occur without compensation to policyholders.

303The plaintiffs refer to views expressed by certain Manulife executives in a document considering different actuarial viewpoints on the issue of who owned a mutual insurance company and what par policyholders were entitled to on a demutualization. While these actuarial viewpoints are obviously entitled to weight, there were also opposite arguments expressed in the document in question. The issue however is not simply actuarial but rather legal, on which the actuaries are not qualified to express a view. The plaintiffs also refer to the views of Mr. Dowsett and Mr. Prince, two actuaries. Mr. Dowsett opined on the value of the various rights of the policyholders, but whether these rights were owned by the policyholders requiring payment was a legal issue he did and could not have dealt with. Mr. Prince made the statement in his report that an ownership right is valuable and must either be preserved or some compensation paid for its loss. The support for this statement was not explained but in any case it is a legal question and not simply an actuarial opinion.

304I do not accept the argument of the plaintiffs on this alternative theory of liability.

Damages

305The principle of tort law is that a plaintiff must be placed in the position he or she would have been in absent the defendant's negligence. See Athey v. Leonati, 1996 CanLII 183 (SCC), [1996] 3 S.C.R. 458, at para. 32 per Major J. The parties agree that the same consideration applies in this case to the claim for damages for breach of fiduciary duty. See Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377 at para. 73 per La Forest J.

306The plaintiffs assert that the tortious conduct in this case was a failure to protect the Barbados policyholders from being rendered ineligible to participate in a potential future demutualization, and/or a failure to put in place a legally enforceable protection in favour of the Barbados policyholders to provide them with equivalent benefits in lieu of demutualization benefits in the event the policyholders were not actually eligible for benefits in a future demutualization of Manulife.

307They assert that the proper measure of damages is the value of the demutualization benefits that the members of the Class would have received, in the event they had remained eligible to receive benefits under Manulife plan’s of demutualization in 1999. Manulife asserts that no causation has been proven, and thus that the plaintiffs damages are zero. I have held that if there was a duty of care, Manulife breached the standard of duty required and that the injury that resulted was caused by Manulife.

308I agree with the plaintiffs that the measure of damages would be the value of the demutualization benefits that the members of the Class would have received, in the event they had remained eligible to receive benefits under Manulife’s plan of demutualization in 1999. Each member of the class would be entitled to be paid damages in an amount equal to the amount that would have been paid if the member had been an eligible policyholder and participated in the Manulife plan of demutualization in 1999.

309Depending on their geographic region, eligible policyholders received either shares or the cash equivalent of $18.00 per share, the initial public offering price of the shares. If the Barbados policyholders received demutualization benefits based on the formula used in Manulife’s 1999 demutualization they would have received cash, instead of shares.

310The plaintiffs retained Dr. J. E. Boritz, a professor at the University of Waterloo who holds a Ph.D. in accounting and information systems. Dr. Boritz calculated the demutualization benefits for each policyholder using Manulife’s demutualization formula and the Manulife and Sagicor data. The parties have agreed on a statement of facts relating to the plaintiffs’ demutualization benefits damages theory. The position of Manulife is that while it disputes the plaintiffs’ damages claim and disputes this damages theory, for the purpose of efficiency the parties agreed that certain evidence regarding the plaintiffs’ damage theory could be adduced at trial without the need for filing oral evidence.

311The parties have agreed on the calculations required under Manulife’s demutualization plan in order to calculate the demutualization benefits for each policyholder and policy. The agreement relates to the evidence of Dr. Boritz who was not called as a witness but whose reports, along with the agreed statement of facts, were filed on consent as exhibits.

312Under Manulife’s plan of demutualization, eligible policyholders received demutualization benefits based upon the sum of two components: (i) a variable share allocation component, which is calculated on a policy basis; and (ii) a fixed share allocation component, which is calculated on an individual policyholder basis.

(a) Variable Share Allocation Component

313The eligibility date under Manulife’s plan of demutualization was January 20, 1998, and the demutualization benefits formula required policy and policyholder data as of that date. However, precise data for the Barbados policies is not available as of that date. The Barbados transfer closed as of December 31, 1996, and was valued as of December 31, 1994. LOB had no reason to preserve the relevant data as of the specific date of January 20, 1998. LOB, now called Sagicor, provided data from August 2006 in response to a request in this litigation, and Manulife provided its data for the participating life insurance policies as of December 31, 1994 and its data for the participating immediate annuity policies as of December 31, 1992.

314The parties have agreed on the number of Barbados policies that were in-force as of January 20, 1998. Based upon the available data, as of January 20, 1998, there were 10,719 in-force, participating life insurance policies that were issued or assumed by Manulife’s Barbados branch which belonged to the Barbados policyholders and there were no more than 137 in-force, participating immediate annuity policies that were issued or assumed by Manulife’s Barbados branch which belonged to the Barbados policyholders.

315The data did not contain the cash value as at January 20, 1998 for all policies. So Dr. Boritz utilized two different methods to estimate the amount which resulted in a range for the cash value component and a range for the total value of the variable share allocation component for the Barbados policyholders at $55,410,053 to $55,712,618, with an average of $55,566,453. I would take Dr. Boritz’ average of $55,566,453.

(b) Fixed Allocation Share Component

316The fixed share allocation component is 186 shares for each individual policyholder, and thus for the Barbados policyholders would be 186 x $18, or $3,348.

317The parties have been unable to determine the number of unique individual policyholders who owned the Barbados policies described above. The reason is that the data provided by Manulife and Sagicor did not contain a code linking policies to a particular person. Some entries on that list are for people with similar names, or for people identified only by their last name and the initial of their first name (e.g., the list may identify three policies owned respectively by “D. Jones”, “Don Jones” and “Donald Jones”).

318Dr. Boritz therefore used a variety of algorithms and provided the following estimates:

a. The 10,719 participating life insurance policies were owned by approximately 6,932 to 7,702 individuals and the range of fixed allocation value was $23,208,336 to $25,786,296;

b. The 137 participating immediate annuity policies were owned by approximately 119 to 129 individuals and the range of fixed allocation value was $398,412 to $431,892.

319Based on Dr. Boritz’ work, the value of the fixed allocation share component in total is therefore in a range of $23,606,748 to $26,218,188.

320Manulife takes the position that it is impossible to calculate the fixed share allocation component and that the parties have not agreed to this amount. It says that there is no way to achieve a minimum level of certainty regarding the resulting number, which gives rise to a concern regarding proper compensation.

321I note that the difference in the range is a little less than $3 million, not a large amount when the overall amount of Dr. Boritz’ calculation is considered. In light of the way in which I intend to deal with damages, I do not see this as posing any real problem.

322The plaintiffs contended in written argument that the damages payable to the class can be assessed and should be awarded on an aggregate basis without the need for individual proof from individual class members, pursuant to ss. 23 and 24 of the Class Proceeding Act.

323Section 23(1) of the CPA permits the admission of statistical information that would not otherwise be admissible as evidence for the purpose of determining issues relating to the amount or distribution of a monetary reward.

324Section 24 of the CPA permits an aggregate assessment of damages which can be carried out for the Class members without specific proof of loss by them as individuals but rather by having regard to records, materials and processes which are solely in the possession of the defendant or which are otherwise evident from the record before the court. Specifically, s. 24(1) of the CPA states:

24(1) The court may determine the aggregate or a part of a defendant’s liability to Class members and give judgment accordingly where:

(a) monetary relief is claimed on behalf of some or all Class members;

(b) no questions of fact or law other than those relating to the assessment of monetary relief remain to be determined in order to establish the amount of the defendant’s monetary liability; and

(c) the aggregate or a part of the defendant’s liability to some or all Class members can reasonably be determined without proof by individual Class members.

325Section 26 of the CPA provides discretion as to how an aggregate award is to be dealt with. It provides in part:

(1) The court may direct any means of distribution of amounts awarded under section 24 or 25 that it considers appropriate.

(2) In giving directions under subsection (1), the court may order that,

(a) the defendant distribute directly to class members the amount of monetary relief to which each class member is entitled by any means authorized by the court, including abatement and credit;

(b) the defendant pay into court or some other appropriate depository the total amount of the defendant’s liability to the class until further order of the court; and

(c) any person other than the defendant distribute directly to class members the amount of monetary relief to which each member is entitled by any means authorized by the court.

(3) In deciding whether to make an order under clause (2) (a), the court shall consider whether distribution by the defendant is the most practical way of distributing the award for any reason, including the fact that the amount of monetary relief to which each class member is entitled can be determined from the records of the defendant.

326Manulife contends that no aggregate award should be made because it is not possible to reasonably determine the aggregate liability in this case without proof by individual class members. That is because it is not possible to determine, based on the available data, the total size of the class. Thus an aggregate award could over or under compensate the members of the class, and the dollar amount at issue as a result of the uncertainty of the class is significant, i.e. C$ 2.6 million.

327The plaintiffs in oral argument conceded that there should be a claims process which would result in the eligible members of the class being identified. As discussed in argument with Mr. Outerbridge, the real issue is who should hold the money while the claims process is underway.

(d) Conclusion on damages

328Had I found liability, I would have ordered that Manulife pay into a fund the sum of $81,784,641 plus interest. I would order that there would be a claims process to be agreed by the parties, or failing agreement to be determined by me. Any disagreement over any particular claim would have to be determined either by me or a Master. If after a reasonable period of time money was unclaimed, it would be returned to Manulife with any interest earned on it.

329I would remain seized of the matter and able to deal with any other questions that would arise.

Damages on alternative liability theory

330The plaintiffs asserted as their second alternative theory of liability that Manulife improperly failed to compensate the Barbados policyholders for their lost ownership rights. I have held against the plaintiffs. Had I held otherwise, damages would have been in issue. There was a great deal of argument and contested evidence between experts as to what the value of that ownership was.

331Manulife asserts that these values were calculated by Mr. McGuiness, the independent actuary retained by Manulife, and by Mr. Arnold of Hymans Robertson retained by the Supervisor in Barbados, and that these values should not be questioned. I disagree. The views of these actuaries are not binding on me. As well, Mr. Mr. McGuinness’ report suffers from frailties that I have previously discussed.

332Mr. Arnold was led by Manulife and Mr. Mr. McGuinness to believe that demutualization was a non-issue and he did not take any steps to value the loss of rights to the surplus in the event of a demutualization of Manulife. Mr. Arnold did not make any calculation in his report of the value of the ownership rights of the Barbados policyholders. He stated that it would be difficult and impractical to quantify the loss of security, the value of mutuality rights and the embedded value. He stated that thought something should be paid representing the embedded value of the transferred policies being retained by Manulife as the purchase price, and suggested in his draft report an amount equal to one year’s dividend, and re-iterated this amount to the Supervisor after his final report. He testified that this had nothing to do with payments for lost demutualization rights.

333All experts agreed that there was no settled way to value a participating policyholders’ ownership interest in a mutual insurance company.

334Mr. Dowsett provided his estimate of the ownership rights of the Barbados policyholders, including the right to vote and to share in the residual value of Manulife if it were to be wound up. He said there was no fixed way to value this. His view is that a reasonable measure of the value was the sum of the policyholders’ equity and the embedded value for Manulife. This latter concept is that insurers use conservative assumptions as to what interest will be earned on premium receipts and later recognize in profits the gain from the actual earned interest being higher than assumed.

335Mr. Dowsett calculated the Barbados policyholders’ share of equity at $9.548 million and their share of embedded value being $5.714 million, for a total basic value of their ownership rights of $15.262 million.

336Mr. Dowsett made a further calculation on the basis that a future demutualization be taken into account. He used an allocation of 25% for the fixed amount and 75% for the variable amount. His fixed amount was $1,526 for each of 8,844 eligible policyholders for a total of $13.496 million. His variable amount was $7.161 million.

337Mr. Dowsett’s total estimate of the ownership rights of the plaintiffs if demutualization was taken into account was therefore $26.371 million. His view was that this was a conservative figure as it did not take into account the value of the potential profits to be earned by a demutualized Manulife in all of its operations after January 1, 1995, being the period after the valuation date, which he thought should be taken into account. His view was that it was not possible to do this as experts, including investment advisors and business analysts and actuaries would need to be retained. This is understandable. When the demutualization proceeded, the surplus of Manulife was $6 billion but the value paid out was $9 billion, based on the pricing of the IPO. In Mr. Dowsett’s view, the possible benefits from a future demutualization would have been considerably higher than $26 million if some reasonable value for a share of the future new business profits from Manulife’s worldwide operations was included.

338Mr. Prince opined that the ownership rights on demutualization should have been preserved by Manulife. He calculated the value of the accumulated surplus by two methods. The first was to apply the MCCSR ratio (the Minimum Continuing Capital and Surplus Requirement ratio) of 222.69% (meaning that Manulife worldwide had 2.2269 times the surplus required by its regulator) to the Base MCCSR for the Barbados business, derived from Mr. McGuinness’ report, to get a value of $23.543 million. The second was to apply the Barbados percentage of the Manulife total liabilities, being .312%, to the Manulife total surplus of $3.052 billion to get a value of $9.523 million. He considered this second valuation was an inappropriate method as it ignored all of the other values measured by the MCCSR calculations.

339Mr. Fishbaum in his report did not agree that anything should have been paid to the Barbados policyholders. He expressed the view that they had received appropriate benefits under the LOB transaction. However, in response to instructions from Manulife’s solicitors, he provided two calculations of amounts that would have been appropriate to pay the Barbados policyholders on the assumption that Manulife had decided to demutualize in 1996.

340His first calculation was a sharing of existing surplus that all of the Barbados policyholders, past and current, had created. His view was that they were entitled to only a portion of that surplus because Manulife had originally seeded the Barbados branch with capital and should be entitled to a return of that capital with some investment return. Because the financial records did not contain information of the original seed amount, he assumed a 50% sharing under which the Barbados participating policyholders would share equally with Manulife’s other participating policyholders. He used the value of funds eligible for remittances at year end 1994 of B$29.1 million. He said this value was overstated because it did not contain a liability for head office expenses, which for years 1992 to 1994 were B$12 million, but did not include head office expenses for prior years. He therefore took half of B$17.1 million to get a value for the Barbados policyholders of B$8.6 million or C$5.7 million.

341He also calculated a contingent value approach in which he calculated a figure that the Barbados policyholders would obtain on the closing of the LOB transaction based on what they would receive on a future Manulife demutualization. For this he assumed different chances of a future demutualization because whether a demutualization occurred was uncertain. He assumed a 0% chance of demutualization in 1997 given that it was not legal to demutualize at the time of the LOB transaction and a 20% chance for 1998 through to 2006. He assumed 15% for the fixed component and 85% for the variable component. His value of a potential demutualization for the Barbados policyholders was C$6.9 million.

342Mr. Fishbaum said he would have chosen his first approach because it was the more objective of the two. He said the second required too many assumptions that were speculative

343I have difficulty with Mr. Fishbaum’s view that the Barbados policyholders were provided sufficiently in the LOB transaction, and in particular his view that the transfer provided benefits that included (i) maintaining the current dividend scale; (ii) maintaining policyholder service levels; and (iii) ensuring LOB maintained appropriate solvency security. I have already discussed the issue of the prospect of dividends being cut and the fact that service levels were already being maintained under the prior administration agreement with LOB. So far as the solvency security is concerned, the evidence is that this was far stronger with Manulife than LOB and the transfer required undertakings by LOB in that regard.

344I also have some difficulty with Mr. Fishbaum’s values. He acknowledged on cross-examination that his surplus division opinion was based only on the value of the surplus rather than the whole value of the company. He did not have the information to determine the value of the company, which is understandable, yet it meant that any value in excess of the surplus was not included. The other experts’ views were that the total value should be included.

345The rationale of Mr. Fishbaum to cut the surplus in half was done because of seed capital that he said should be repaid to Manulife with some return on investment. He acknowledged in cross-examination however that that there was no evidentiary or documentary basis to support his assumption that there was seed capital in the Barbados surplus requiring repayment and that the seed capital may have been repaid long ago. Manulife had began selling policies in Barbados in 1894, and so the assumption that its seed capital had not been repaid was indeed a long bow. He sought to say that he was being conservative because based on a 1987 report, not dealing with Manulife, the vast majority of a mutual’s surplus was developed from previous policyholders. This argument of some actuaries, including some in Manulife, that the participating policyholders were not entitled to the surplus as it was built up by previous policyholders was rejected in the regulations that required the entire value to be paid out to them, as foreshadowed by the White Report.

346Regarding his alternative valuation taking into account the chances of a future demutualization, I do not accept his premise that in 1997 the chances were zero because it was not legal to demutualize at the time of the LOB transaction. That was the same situation in January 1998 when Manulife announced its intention to demutualize, and it can hardly be said that the chances remained zero at that time. Also, I do not accept his other figures as to the chances. They do not reflect the reality of the likelihood of a demutualization of Manulife at the time of the LOB transaction. Regarding his assumption that the fixed allocation component of the distribution would be 15% of the company-wide surplus, I prefer the opinion of Mr. Dowsett that 25% is appropriate for the reasons given by Mr. Dowsett. He was entitled to rely on the transactions that he did. His figure of 25% compares favourable to the later demutualization involving Manulife and Canada Life that also used the same 25% for the fixed allocation. Those later demutualizations are no basis for any initial opinion regarding 25%, but may be used to test the assumptions and reasoning used to arrive at the opinion.

347Manulife asserts that the most significant flaw in Mr. Prince’s approach is that is that it suffers from blatant double counting. The only justification for providing the Barbados policyholders with a share of the accumulated surplus would be the termination of their rights in Manulife, which Prince opined ought to have been preserved. This was Mr. Fishbaum’s opinion. Mr. Prince however disagreed with Mr. Fishbaum that there was a double counting and explained that by reference to the various components of value to which he referred in para 6.1 of his report. His figure of $23.543 million did not include any value for lost ownership rights on a demutualization, and he did not attempt to put a value on it. I accept Mr. Prince’s opinion on this point.

348With regards to Mr. Dowsett, Manulife contends that he used the purchase price of B$9M (C$5.714) under the Transfer Agreement as a proxy for the embedded value in the Barbados business, on the assumption that the purchase price paid to Manulife represented the present value of the future profits in the Barbados business. It asserts that Mr. Dowsett concluded that the Barbados policyholders were entitled to an immediate fixed amount on account of the embedded value in the Barbados branch business, even though Manulife had already ensured that the Barbados policyholders would receive the benefits of the embedded value following the transfer through the dividend guarantees in the Transfer Agreement. As such, this figure is not necessary and constitutes double-counting.

349This point of double-counting was not put to Mr. Dowsett on cross-examination, and it is unfair to now argue the point. When he was asked on cross-examination about the embedded value of C$5.714 paid to Manulife by LOB, Mr. Dowsett said that his point was that if anyone was entitled to that value, it was the Barbados policyholders rather than the other policyholders of Manulife who effectively got the benefit of it when it was taken by Manulife and put into its profit.

350Manulife is critical of the way that Mr. Dowsett arrived at his figure of 25% for the fixed amount allocation and 75% for the variable amount allocation used to arrive at his estimate of $26.371 million if the ownership rights of the plaintiffs in a demutualization were taken into account. It asserts that he relied upon hindsight, that he took into account what actually happened in Manulife’s 1999 demutualization, which could not have been known in 1996, in formulating his opinion. I do not think this a fair characterization of his evidence. Mr. Dowsett said in chief that he compared some of the thinking that he did, that he would have done as the 1996 actuary, with what happened when Manulife demutualized in 1999. It is quite open to a valuer to look at after acquired events, not as a basis for forming an opinion, but to test some of the assumptions that the valuer used. See New Quebec Raglan Mines Limited, v. Anderson (1991), 4 B.L.R. (2d) 71 per Farley J. and Levy-Russell Ltd. v. Tecmotiv Inc. (1994), 13 B.L.R. (2d) 1 per D. Lane J. at paras 683 to 787. That is essentially what Mr. Dowsett did.

351Moreover, it has been held that a court should be allowed to admit evidence of transactions after the date of valuation if it finds, in place, time and circumstances, to be logically probative of the fact to be found. See Canada v. Tabco Timber Ltd., 1970 CanLII 147 (SCC), [1971] S.C.R. 361 and Domglas Inc. v. Jarislowsky & Co., [1980] Que. S.C. 925, 13 B.L.R. 135, aff'd (1982), 1982 CanLII 2950 (QC CA), 138 D.L.R. (3d) 521.

352Regarding Mr. Dowsett’s estimate of the ownership rights of the plaintiffs if demutualization was taken into account of $26.371 million, he proceeded on the assumption that the chance of demutualization was 100%. Manulife asserts that his calculations do not account for the probability or possibility that in 1996 Manulife would never demutualize, or that Manulife would demutualize at an uncertain and unknown time in the future or that Manulife would demutualize in a form that did not provide benefits to participating policyholders (i.e., a mutual holding company conversion). This argument, of course, overlooks the finding I have made that at the time of the LOB transaction, it was foreseeable that Manulife would demutualize on the basis that it did. However, the point remains that Mr. Dowsett did not consider any discount for risk. A court in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards. See Athey v. Leonati, 1996 CanLII 183 (SCC), [1996] 3 S.C.R. 458 at para 29, per Major J. A valuer is in no different position.

353Manulife also asserts that Mr. Dowsett calculated the values as of January 1, 1995 and that the number of Barbados policyholders and their associated liabilities would have decreased over the period January 1, 1995 to December 31, 1996. Also the Barbados policyholders whose policies had lapsed or terminated in the period January 1, 1995 to December 31, 1996 would not be voting policyholders in Manulife as of the effective date of the transfer and, therefore, they would not have lost any rights as a result of the transfer or been entitled to any compensation for the loss of their rights. All of these changes would have led to lower amounts resulting from Dowsett’s approximation technique. No evidence of what that would have been was offered by Manulife.

354There is something in these last points made by Manulife. However, it must be remembered that Mr. Dowsett considered his value of $26.371 million was a conservative figure as it did not take into account the value of the potential profits to be earned by a demutualized Manulife in all of its operations after January 1, 1995 which he thought should be taken into account and which would have made the figure considerably higher if included.

355Taking into account all of the evidence, I hold that if Manulife owed a duty to pay the Barbados policyholders at the time of the LOB transfer for their ownership or proprietary interests in Manulife, the damages to be paid by Manulife would be $24.5 million, essentially taking the average of the values of Mr. Dowsett and Mr. Prince, plus interest.

Answers to common issues

356I will answer these questions briefly, but the answers are not meant to supplant any of these reasons and the decisions which I have reached in them.

Did Manulife have the power to extinguish any rights of the members of the Class, including membership, ownership, voting, property or other rights, including those rights arising out of the Insurance Companies Act as a result of being the holder of a participating policy in Manulife? Did it do so?

Answer: Both parties agree that this issue need not be decided. Neither party alleges that Manulife had the unilateral power to extinguish the rights of the Barbados policyholders.

Does either the Certificate of Sanction dated November 26, 1996 issued by the Supervisor of Insurance in Barbados and/or the approval of the Minister of Finance, Canada dated December 20, 1996 extinguish the rights of the members of the Class to make any claim against Manulife, including the causes of action asserted in this action?

Answer: The rights of the members of the Class as policyholders of Manulife were extinguished by the decision of the Supervisor of Insurance in Barbados, but did not extinguish the right of the members of the Class to make the claims asserted in this action. The causes of action asserted in this action by the Class fail. The action is dismissed.

Were the members of the Class eligible policyholders and entitled to participate in Manulife’s Plan of Demutualization?

Answer: No.

Was Manulife negligent? If so, when, how and why?

Answer: Manulife owed no duty of care to the Barbados policyholders.

Did Manulife owe a fiduciary duty to the members of the Class? If so, did it breach this fiduciary duty? If yes, when and how?

Answer: Manulife did not owe a fiduciary duty to the members of the Class.

Is each member of the Class entitled to be paid damages? If so, should damages be in an amount equal to the amount that he, she or it would have been paid if he, she or it was considered by Manulife to be an eligible policyholder and participated in the Plan of Demutualization? If no, what is the measure of damages?

Answer: No member of the Class is entitled to be paid damages.

Is an award of punitive damages appropriate? If so, in what amount and why?

Answer: This claim has been abandoned.

Is Manulife obligated to pay prejudgment interest? If so, at what annual rate? Is the rate to be compounded?

Answer: This issue by agreement has been deferred.

Should Manulife pay the costs of administering and distributing any monetary judgment? If so, what amount should Manulife pay?

Answer: This issue by agreement has been deferred.

Costs

357The parties may make written submissions regarding costs.

Newbould J.

Released: August 1, 2012

COURT FILE NO.: 01-CV-221418CP

DATE: 20120801

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

RICHARD MANDEVILLE, WISMAR GREAVES, MARCUS JORDAN and ANTHONY BOWEN

Plaintiffs

and

THE MANUFACTURERS LIFE INSURANCE COMPANY

Defendant

Proceedings under the Class Proceedings Act, 1992

REASONS FOR JUDGMENT

Newbould J.

Released: August 1, 2012

Footnotes

For the most part, shares were issued except to policyholders who resided in jurisdictions in which there was not an active stock market on which Manulife shares could be traded. In that case, cash was paid.
A reference to Barbados policyholders in these reasons is a reference to Barbados participating policyholders.
Mr. McGuinness for health reasons was unable to give evidence.
Professor Weinrib is critical of the development of tort law on the Anns two-stage process. He views it as a jurisprudential decline and refers to the process as a “ramshackle enquiry”!
During his cross-examination Mr. Thompson said that they were satisfied in this case, by virtue of receipt of the sanction document of the Supervisor in Barbados, that the Supervisor in Barbados had taken into account as a matter of law what reasonable or prudent steps Manulife was required to take in order to protect the rights of the transferred Barbados policyholders. However, it was agreed at the outset that because of deliberative secrecy principles applicable to OSFI, Mr. Thompson could not give evidence of OSFI’s deliberations in this particular case, and all that was introduced so far as OSFI and the LOB transfer was involved was the documentation obtained under freedom of information legislation. Thus what Mr. Thompson said about being satisfied by the actions of the Supervisor in Barbados should not have been said and cannot be considered by me.
Mr. Bell appears to have changed his views since an earlier letter of his of June 28, 1990 to Mr. Greaves, the then Supervisor of Insurance in Barbados, in which he said that Manulife reduced dividend scales throughout the region in 1989 and in the absence of any change in the basis of operation, will reduce dividends further to meet the cost of doing business. In fact, dividends were not cut any further.

Footnotes

For the most part, shares were issued except to policyholders who resided in jurisdictions in which there was not an active stock market on which Manulife shares could be traded. In that case, cash was paid.
A reference to Barbados policyholders in these reasons is a reference to Barbados participating policyholders.
Mr. McGuinness for health reasons was unable to give evidence.
Professor Weinrib is critical of the development of tort law on the Anns two-stage process. He views it as a jurisprudential decline and refers to the process as a “ramshackle enquiry”!
During his cross-examination Mr. Thompson said that they were satisfied in this case, by virtue of receipt of the sanction document of the Supervisor in Barbados, that the Supervisor in Barbados had taken into account as a matter of law what reasonable or prudent steps Manulife was required to take in order to protect the rights of the transferred Barbados policyholders. However, it was agreed at the outset that because of deliberative secrecy principles applicable to OSFI, Mr. Thompson could not give evidence of OSFI’s deliberations in this particular case, and all that was introduced so far as OSFI and the LOB transfer was involved was the documentation obtained under freedom of information legislation. Thus what Mr. Thompson said about being satisfied by the actions of the Supervisor in Barbados should not have been said and cannot be considered by me.
Mr. Bell appears to have changed his views since an earlier letter of his of June 28, 1990 to Mr. Greaves, the then Supervisor of Insurance in Barbados, in which he said that Manulife reduced dividend scales throughout the region in 1989 and in the absence of any change in the basis of operation, will reduce dividends further to meet the cost of doing business. In fact, dividends were not cut any further.

Mandeville v. Manufacturers Life Insurance Company, 2012 ONSC 4316

Case Summary

ONTARIO

SUPERIOR COURT OF JUSTICE

Footnotes

Mandeville v. Manufacturers Life Insurance Company, 2012 ONSC 4316

Case Summary

ONTARIO

SUPERIOR COURT OF JUSTICE

Footnotes

Cited By (4 cases)

Brunt v. Economical Mutual Insurance Company et al., 2021 ONSC 4026

Scotia Capital Inc. v. Aphria Inc., 2021 ONSC 1469

Mandeville et al. v. The Manufacturers Life Insurance Company, 2014 ONCA 417

Robert Penteliuk v. CIBC World Markets, Inc., 2014 ONSC 2105

Cited By (4 cases)

Brunt v. Economical Mutual Insurance Company et al., 2021 ONSC 4026

Scotia Capital Inc. v. Aphria Inc., 2021 ONSC 1469

Mandeville et al. v. The Manufacturers Life Insurance Company, 2014 ONCA 417

Robert Penteliuk v. CIBC World Markets, Inc., 2014 ONSC 2105