COURT FILE NO.: CV-12-9813-00CL
DATE: 20121205
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
WILLIAM SANDIFORD, MELISSA SANDIFORD and DURHAM.NET INC.
Applicants
– and –
2104587 ONTARIO INC. and GRANT ALEXANDER HOOD
Respondents
Gavin Tighe and Anna Husa, for the Applicants
C. C. Lax, Q.C., Andrew Winton and Arden Beddoes, for the Respondents
HEARD: October 11 and November 6, 2012
L. A. pattillo J.:
Introduction
[1] This is an Application by the Applicants William Sandiford (“Bill”) and Melissa Sandiford (“Melissa”) (collectively the “Sandifords”) for, among other things, a declaration that the buy/sell notice delivered by them and the subsequent notice of election delivered by the Respondent 2104587 Ontario Inc. (“210”) pursuant to a shotgun provision in a shareholders agreement between them are enforceable and binding on 210 and an order requiring 210 to transfer all of its shares in the Applicant Durham.Net Inc. to the Sandifords.
[2] The Respondents submit the Application should be dismissed on the ground that the Sandifords’ offer did not comply strictly with the provisions of the buy/sell clause in the Shareholders Agreement or, in the alternative, was repudiated by the Sandifords. In the further alternative, the Respondents submit that the Application should be converted to a trial of an issue and consolidated with an action which was commenced by 210 in the Superior Court, Commercial List on September 17, 2012 (the “Action”).
[3] During the argument on the Application on October 11, 2012, it became apparent to me in light of a direct conflict in the affidavit evidence of the Applicants and the Respondents concerning what occurred at the closing of the share transaction on August 7, 2012, that I could not resolve all of the issues in the Application on the record before the Court. Accordingly, on October 12, 2012, I released a brief endorsement dismissing with reasons the Respondents’ request for consolidation of the Application and the Action and directing a brief one-day trial of an issue concerning what occurred on August 7, 2012. The trial took place on November 6, 2012.
Background Facts
[4] Durham.Net Inc., which operates as Telnet Communications (“Telnet”), carries on the business as a provider of telecommunications services in Ontario and elsewhere in Canada.
[5] In 2005, Bill and Melissa each purchased 25 common shares or 50% of the issued shares of Telnet. Jorge and Gail Ramos owned the remaining 50%.
[6] 210 is owned directly or indirectly by the Respondent Grant Alexander Hood (“Hood”). Hood owns numerous internet and telecommunications companies. In August 2009, Hood, through his company Hood Brothers Inc. (“Hood Brothers”) loaned Telnet $1.26 million for the purchase of certain telecommunication assets on the condition, among others, that he would become a 50% shareholder of Telnet (the “Asset Loan”). In early 2010, 210 purchased the Ramos’ 50% interest in Telnet for $1,250,000.
[7] As part of 210’s share purchase transaction, the Sandifords, 210 and Telnet entered into a unanimous shareholders agreement made as of the 1st of February 2010 (the “Shareholders Agreement”). The Shareholders Agreement dealt with the conduct and affairs of Telnet, including the board of directors and officers, financial matters and restrictions on the transfers of Telnet shares.
[8] In particular, the Shareholder Agreement provided in Article 4.2 that the number of directors would be fixed at two and that 210 was entitled to appoint one director and Bill and Melissa collectively were entitled to appoint the other. Article 4.3 provided that Telnet would have four officers and that Bill would be president and chief technical officer and Tony Severin (“Severin”), the chief financial officer of Hood’s companies and an officer of 210, would be secretary and treasurer.
[9] Article 7.4 of the Shareholders Agreement, which is part of the section dealing with restrictions on the transfer of shares, provides for a buy/sell provision amongst the shareholders, which is referred to as a shotgun. Because of the issues raised by the parties, Article 7.4 is reproduced in its entirety.
7.4 Shot Gun. In the event that after the debt owed to Hood Brothers Holdings Inc. has been repaid, any of the Shareholders wishes to sell to the other Shareholders all of his Shares, the transaction shall be completed and initiated and completed as set out in this Section 7.4.
(1) Any Shareholder, may initiate a sale of the shares to the other Shareholders by giving written notice of sale to all, of the other Shareholders in which notice such Shareholder irrevocably offers to sell all of the Shares held by him and, at the election of the other Shareholders, to purchase all of the Shares held by such other Shareholders, such purchase or sale, as the case may be, to take place at a price per share of the Corporation payable in cash as provided herein, which shall have been stipulated in the notice of sale. Contemporaneously with the sending of the notice of sale, the initiating shareholder shall deliver to the accountants of the Corporation share certificates representing all of the Shares of the Corporation owned by the initiating Shareholder duly endorsed in blank for transfer to be held in escrow until completion of the transactions contemplated herein. The other Shareholders are then obliged either to purchase all the Shares of the Shareholder giving such notice at the same price and on the same terms and conditions, or to sell all of the Shares to such Shareholder as they may collectively elect or be deemed to have elected collectively all on the basis hereinafter set out. At the time the other Shareholders notify the initiating shareholder as to whether they intend to purchase all of the Shares of the initiating shareholder or sell all of their shares to the initiating shareholder, the other Shareholders shall contemporaneously deliver share certificates representing all of the Shares owned by the other Shareholders duly endorsed in blank for transfer to the accountants of the Corporation who shall hold such Shares and evidence in escrow until completion of the transactions contemplated herein. In the event that at the time of any closing under this Article 7 the selling Shareholder shall refuse to complete the sale of his Shares, other than by reason of any condition for his benefit such selling Shareholder hereby irrevocably appoints the secretary of the Corporation as the attorney of such selling Shareholder with full power to fill in all the blanks on the share certificates and evidences representing its Shares, which have been lodged with the Corporation’s accountants and to deliver such share certificates to the purchasing Shareholders upon receipt of payment therefore.
(2) In the event that any Shareholder (the “Offeror”) delivers a notice of sale pursuant to Section 7.4(1) in respect of its Shares to the other Shareholders (the “Other Shareholders”), then within sixty (60) days after receipt of the notice of sale, the Other Shareholders shall jointly give notice of election to the Offeror in which they specify either that they accept the Offer of the Offeror to sell all of his Shares to them or that they require the Offeror to purchase all of their Shares. The closing date specified by the Offeror in his notice shall not be earlier than 60 days and not later than 90 days after the expiry of the aforesaid sixty (60) day period.
(3) If a joint notice of election is not given by the Other Shareholders within the prescribed 60 day period, then they shall be conclusively deemed to have required the Offeror to purchase all of their shares.
(4) In the event that the Other Shareholders disagree in writing as to the course of action to take in respect of the notice of sale from the Offeror then, the party wishing to accept the Offeror’s offer to sell his Shares (the “Accepting Party”) shall be required to purchase, in addition to all of the Offeror’s shares, all of the Shares of the party not wishing to accept the Offeror’s offer to sell (the “Declining Party”), on identical terms and conditions, and the Declining Party shall be required to sell all of his shares on such terms and conditions to the Accepting Party.
(5) In the event that the Other Shareholders elect to accept the offer by the Offeror to sell all of his shares to them, then the Other Shareholders shall, unless otherwise agreed between the Other Shareholders, acquire that proportionate number of shares which the number of shares then held by such shareholder bears to the aggregate of all outstanding shares then owned by the Other Shareholders.
[10] Article 7.6(2), which incorporates the provisions of Article 7.4, provides that the shareholder selling its shares shall cause its “nominees” on the board of directors to resign and release Telnet “from all claims with respect thereto except for rights of indemnity as provided by the Act.”
[11] Pursuant to Article 4.2 of the Shareholders Agreement, the Sandifords appointed Bill as a director of Telnet and 210 appointed Hood.
[12] During the two years following 210’s purchase of the Telnet shares, the relationship between Bill and Hood deteriorated. Bill was not happy with Hood’s interference and control over Telnet’s business. Hood, on the other hand, was not happy with the direction of Bill’s management of Telnet.
[13] In early January 2012, the issues between Bill and Hood came to a head. Hood indicated to Bill that he wanted to work towards separating from Telnet but keep it as an investment. Discussions between the parties did not result in a resolution of their issues.
[14] On March 9, 2012, Bill and Melissa sent a Notice of Sale or Purchase pursuant to Article 7.4 of the Shareholders Agreement to 210 offering to sell their shares in Telnet to 210 at a price of $12,500 per share for a total cost of $1,250,000 (the “Shotgun Notice”). The Shotgun Notice further provided pursuant to Article 7.4(2), 210 must give notice of election to Bill and Melissa within 60 days that it either accepts their offer to sell their shares in Telnet or it requires them to purchase all of its shares for the same price of $12,500 per share. The Shotgun Notice provided that the closing date was to be August 6, 2012 or earlier as the parties may agree.
[15] At the time of the Shotgun Notice, Telnet had paid off the Asset Loan from Hood Brothers which was the “debt owed” to Hood Brothers referred to in the introduction to Article 7.4.
[16] On May 3, 2012, just prior to the expiry of the 60 day period following the Shotgun Notice, the parties agreed to extent the time for expiry a further 14 days.
[17] On May 17, 2012, 210 delivered a letter addressed to the Sandifords dated May 16, 2012 and signed by Severin, which stated, in part:
Furthermore be advised regarding your shotgun option dated March 8, 2012 that as an officer of and on behalf of 2104587 Ontario Limited we require you as the Offeror to purchase all of the shares that 2104587 Ontario Limited holds in Durham.Net Inc. by payment in the amount of $1,250,000 on or before August 6, 2012.
[18] On May 17, 2012, Hood Brothers demanded repayment of a $250,000 loan it had made to Telnet, apart from the Asset Loan. The loan was governed by an agreement dated April 6, 2011, and could be called at any time at the election of Hood Brothers.
[19] The parties subsequently agreed, as August 6, 2012 was the civic holiday, that the closing of the purchase of 210’s shares in Telnet by the Sandifords would take place on August 7, 2012.
[20] On August 2, 2012, Allan Furlong (“Furlong”), the Sandifords’ lawyer sent a letter by email to R.D. Morningstar (“Morningstar”), the Hood Companies in house lawyer who was acting for 210, enclosing a draft share purchase agreement and a copy of a release he indicated was to be executed “by your client”. Furlong asked Morningstar to provide him with a proposed closing agenda and stated that if he had any questions, to contact him.
[21] The release enclosed with Furlong’s letter was addressed to Telnet, its directors and officers and the Sandifords and was a general release of all claims “by reason or as a consequence of the Releasee having been an officer, director and employee of the Corporation…” It also contained a confidentiality provision concerning its terms. It was to be signed both on behalf of 210 and by Hood personally.
[22] On August 3, 2012, 210 commenced an action in the Superior Court against the Sandifords, the Ramoses, Norman Tomlins, “Mrs. Norman Tomlins”, Voice Network Inc. and Michael Bain (the “First Action”). The claim alleged was a conspiracy to defraud 210 of profits, capital gains and the true value of its equity in Telnet. It also alleged that Bill breached his fiduciary duty to both the shareholders and Telnet, essentially from the time 210 became a shareholder. It claimed both general and punitive damages.
[23] After the Action was commenced by 210 on September 17, 2012, it discontinued the First Action on September 18, 2012.
[24] Later on August 3, 2012, after a copy of the claim in the First Action had been sent to the Sandifords’ litigation counsel, Morningstar sent the following email to Furlong:
Thank you for your suggestions as to what you want the “seller” to now do less than 2 full business days before our agreed meeting on Tuesday (with an intervening long holiday weekend) re a purported bona fide shotgun exercise by your clients the Sandifords 150 days ago.
The seller has done everything required by contract and law herein and will be present Tuesday as agreed.
I respectfully suggest that you look after doing whatever else you believe is necessary to facilitate your client’s obligations herein as well.
[25] After receiving the claim in the First Action, the Sandifords’ litigation counsel wrote a letter dated August 3, 2012 to Morningstar stating, among other things, that the claim failed to plead a valid cause of action and the Sandifords were still ready, willing and able to close the shotgun transaction on August 7, 2012.
[26] On Monday August 6, 2012, which was the civic holiday, Furlong sent an email to Morningstar. He expressed disappointment in Morningstar’s response to his letter of August 2 and enclosures. He stated, however, that he intended to meet with him on August 7, 2012 as agreed for the closing. Furlong then listed eight things which he required on closing including: a letter from the Royal Bank of Canada (RBC) advising it had no interest in 210’s shares of Telnet; a release in the form attached “to be signed by 2104587 Ontario Inc. and Grant Alexander Hood as per section 7.6 (i) and (ii) of the Shareholders Agreement”; the resignation of Hood as a director of Telnet; and the resignation of Severin as secretary and treasurer of Telnet. The release enclosed was substantially in the form of the release that had been attached to Furlong’s August 2, 2012 letter.
August 7, 2012
[27] The closing was scheduled to take place at 2pm on August 7, 2012. The Sandifords and Furlong travelled from Oshawa and arrived at Hood’s offices on Kipling Road in Etobicoke prior to 2pm. They were met at the reception by Morningstar who told them Hood was not prepared to conduct any business with the Sandifords in the room. After a brief consultation with Furlong, the Sandifords agreed to wait in another boardroom.
[28] Morningstar then accompanied Furlong to a boardroom in an adjoining building where Hood was present. Also present was Ms. Rofica (Rose) Fera, an employee with one of Hood’s companies. Furlong was advised that Ms. Fera would take notes. When Furlong asked if he could have a copy of the notes, Morningstar said yes but Hood said no. Furlong then said he wished to tape the meeting. At that point, Furlong left the boardroom to get a tape recorder from the Sandifords in the adjacent building. Because entry to the buildings was only by card access, Ms. Fera accompanied him.
[29] When Furlong returned to the boardroom with Hood, Morningstar advised him that they were not prepared to allow him to record the meeting. Morningstar told Furlong he could take notes.
[30] Hood began by asking Furlong if he had a conflict of interest acting for the Sandifords as it was his understanding that he had previously acted for Telnet. Furlong assured him he had not and there was no conflict of interest. Hood continued to pursue the matter but Furlong continued to insist he had no conflict. Hood then launched into various allegations concerning Bill’s alleged improper conduct as an officer and director of Telnet. Furlong advised him that he knew nothing about the allegations.
[31] Furlong then began to ask for the items he had requisitioned in his email of the previous day. He asked if they had a release from RBC in respect of any interest it may have in 210’s shares in Telnet as a result of its floating PPSA registration. Morningstar produced a letter from the RBC stating that it had no interest in 210’s shares in Telnet. Furlong next asked for the release.
[32] What occurred next is the subject of some disagreement between Furlong and Hood. Morningstar did not testify. Although Ms. Fera’s notes were produced and she did testify, her evidence does not really assist in determining what happened.
[33] Furlong’s evidence is that Hood said he would not sign any release. He said after Hood refuse to sign a release, one of either Hood or Morningstar asked if that was a deal breaker. Furlong told them he needed instructions. He proceeded to go through the remaining items in his August 6th email. He then left the boardroom in order to speak with the Sandifords. He was again accompanied by Ms. Fera. He received instructions from them to close without a release. He was gone about 10 - 15 minutes.
[34] When he returned to the boardroom, Furlong advised Hood and Morningstar that the Sandifords were prepared to close without any release. He asked for Hood’s resignation as a director. Hood said he would not provide anything. Furlong tendered a bank draft for the closing funds of $1, 2500,000. He said that Hood and Morningstar look at each other in shock when he tendered the bank draft. At that point, Morningstar said something about conditions precedent and stated that they were not prepared to close under any circumstances and Hood was not prepared to provide a release.
[35] Morningstar then asked Ms. Fera to show Furlong out of the building. They went back to the boardroom where the Sandifords were waiting. He explained to them that Hood had refused to complete the transaction. Shortly thereafter, they left Hood’s offices.
[36] Hood’s evidence confirms Furlong’s evidence of what occurred at the closing up to the point of the discussion about the release. Hood said that he told Furlong he was not prepared to sign the release and that he felt that they were “overreaching”. He said that Furlong pointed to the provision in the Shareholders Agreement providing for the release and said the Sandifords were entitled to a release. He understood that the release Furlong was referring to was the one he had forwarded the previous day. He said that he was prepared to give his release as a director of Telnet.
[37] Hood denies that either he or Morningside asked if no release was a deal breaker. He said that when he refused to provide the release, Furlong continued and requested his resignation as a director of Telnet. He refused to provide it. Furlong then asked for a number of other items including the resignation of Severin, Telnet’s minute book and 210’s share certificates in Telnet. He refused to provide Severin’s resignation and said that the minute book was at the lawyers and the share certificates were at the accountants. He did not understand when Furlong left the boardroom that he would be returning. He thought the meeting was over. He remained in the boardroom because he didn’t want to run into the Sandifords. When Furlong returned to the boardroom, he told them the Sandifords were willing to close without the release “today” so long as Hood undertook to provide them with an indemnity letter. Hood again told Furlong he was not prepared to sign a release or resign as a director, following which, he left the boardroom.
[38] Bill and Melissa also testified concerning the events of August 7. Because they were isolated in a boardroom in a separate building, they were not able to contribute anything to what occurred in the boardroom with Hood. Bill did say that when Morningstar met with them initially to tell them that Hood didn’t want to meet with them, he told them that Hood was “ready and willing to proceed to close the transaction.” Bill was the only person who testified to that statement.
Position of the Parties
[39] The Sandifords submit that they validly triggered the shotgun provision in Section 7.4 of the Shareholders Agreement by delivering the Shotgun Notice and that 210’s subsequent election to sell its shares in Telnet to them dated May 16, 2012 created a binding agreement requiring 210 to transfer its shares in Telnet to the Sandifords for $1,250,000 (the “Share Purchase Agreement”).
[40] The Sandifords further submit that 210 was in breach of the Share Purchase Agreement when it failed to complete the transaction on August 7, 2012, the date of the agreed closing. At all material times, the Sandifords were ready and willing to complete the Share Purchase Agreement.
[41] The Respondents submit that the Application should be dismissed on the grounds there is no agreement for the Court to enforce. They submit the Sandifords’ offer pursuant Section 7.4 of the Shareholders Agreement was void ab initio because it did not strictly comply with the provisions of the Shareholders Agreement. In the alternative, they submit that, if there was an agreement for the sale of 210’s shares, the Sandifords repudiated it prior to closing and 210 accepted such repudiation.
Law and Analysis
(a) Did the Sandifords Validly Exercise the Shotgun?
[42] In order for a shareholder to obtain the benefit of a shotgun provision in a shareholders agreement, the shareholder must strictly comply with its terms: Zeubear Investments Ltd. v. Magi Seal Corp., 2010 ONCA 825 (C.A.), 103 O.R. (3d) 578 at para. 24 citing 942925 Alberta Ltd. v. Thompson, 2008 ABCA 81, [2008] A.J. No. 194, 47 B.L.R. (4th) 1 (A.C.A.)
[43] The Respondents submit that Article 7.4(1) of the Shareholders Agreement requires, by its wording, that only a single shareholder can initiate a sale of shares under the shotgun. Because the Shotgun Notice was from both Bill and Melissa, they submit it did not strictly comply with the provisions of Article 7.4 and was therefore void.
[44] The issue requires the interpretation of the shotgun provision in the Shareholders Agreement. The meaning of a shareholders agreement is determined in accordance with the general rules governing contractual interpretation. See: Canadian Business Corporation Law, Kevin McGuinness, 2nd ed. (LexisNexis: 2007) at p. 1215.
[45] A contract is to be interpreted in accordance with the intention of the parties at the time they entered into the agreement having regard to the words the parties used and the provisions of the contract as a whole: Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888 at pp. 899 - 901; Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129.
[46] Where the words under consideration are clear and unambiguous on their face, it is unnecessary to consider any extrinsic evidence in the interpretive exercise. However, in the event there is ambiguity, it is permissible to consider the circumstances in which the agreement was signed in interpreting the words. This is called the “factual matrix”.
[47] Commercial contracts must be interpreted in accordance with sound commercial principles and good business sense. An interpretation that would result in a commercial absurdity must be avoided. See Consolidated Bathurst at pp. 901 – 902.
[48] In Zeubear Investments, which involved the interpretation of a shotgun provision in a shareholders’ agreement, O’Connor A.C.J.O., on behalf of the Court explained the interpretive exercise as follows:
[23] When interpreting a written contract, a court should focus on the meaning of the words used in the contract. It should consider the meaning of the words in light of the whole of the contract as well as in the context in which the contract was made, sometimes called the factual matrix. The purpose of the interpretative exercise is to determine the meaning of the contract in an objective sense, by asking what the parties using the words in the contract against the relevant background would reasonably have been understood to mean: Dumbrell v. Regional Group of Companies Inc. (2007), 2007 ONCA 59, 85 O.R. (3d) 616, [2007] O.J. No. 298 (C.A.), at para. 51.
[49] In my view, when the words of Article 7.4(1) of the Shareholders Agreement are considered not only within that provision but also in light of the Shareholders Agreement as a whole and in the context in which the Shareholders Agreement was made, it is not clear whether the word “Shareholder” in Article 7.4(1) is meant to be read in the singular or plural. In my view, based on the wording of 7.4(1) and the Shareholders Agreement as a whole, the term “shareholder” is clearly capable of being read in either the singular or the plural.
[50] Article 7.4(1) begins: “Any Shareholder, may initiate a sale of the shares to the other Shareholders by giving a written notice of sale to all, of the other Shareholders in which notice such Shareholder irrevocably offers to sell all of the Shares held by him and, at the election of the other Shareholders, to purchase all of the Shares held by such other Shareholders….” Based on that portion of Article 7.4(1), the offeror is singular and the offerees are plural. Later on in the provision, however, reference is made three different times to the “selling Shareholder” when it is clear from the earlier wording of the provision that the “selling Shareholder” could also be “selling Shareholders”, that is more than one shareholder may be selling. Further, the very last sentence of Article 7.4(1) refers to “purchasing Shareholders”. Again, however, depending on who is buying, there may only be one “purchasing Shareholder”.
[51] This failure to clarify the singular and the plural in not unique to just Article 7.4(1). It also appears elsewhere in Article 7. In Article 7.6(1), the selling shareholder is singular whereas it could easily be the selling shareholders, depending on how the initial offer is resolved. Article 7.6(2) requires the shareholder selling its Shares to require its “nominees” on the Board of Directors to resign and release the Corporation. Once again, there could be more than one shareholder selling. Further, Article 4.2(2) provides that Bill and Melissa have one nominee and 210 has one nominee. No shareholder has more than one nominee.
[52] In my view, when the words in the Shareholders Agreement are considered both as a whole and in the context in which the Shareholders Agreement was made, the ambiguity as to whether the term “shareholder” should be read in the singular or plural is easily resolved. In my view, the term “shareholder” must be read to include either the singular or the plural. In that way, shareholder may be shareholders and vice-versa, depending on the circumstance.
[53] I am also of the view that an interpretation which enables the shareholders of Telnet to initiate the shotgun provision either individually or collectively reflects the intention of the parties at the time they entered into the Shareholders Agreement as indicated from both the provisions of the Shareholders Agreement itself and the factual matrix which existed at the time it was entered into.
[54] The provisions of the Shareholders Agreement recognize that the Sandifords and 210 are two distinct and separate shareholder groups in Telnet. As noted, Article 4.2 provides that a board of two directors shall manage Telnet. The Sandifords are entitled collectively to elect or appoint one director and 210 is entitled to elect or appoint the other. Article 9.2(a) provides that in the event of the death or mental or physical incapacity of Bill or Melissa, their shares may be transferred by one to the other notwithstanding the share transfer restrictions in the Shareholder Agreement. Finally, Article 12.3 dealing with notice to any party under the Shareholders Agreement provides that notice is to be sent to Bill and Melissa collectively.
[55] The fact that the Sandifords and 210 are two separate shareholding groups in 210 is also apparent from the factual matrix that existed at the time the Shareholders Agreement was entered into. Prior to 210 acquiring its shares, there were two groups of shareholders of Telnet. The Sandifords owned 50% of the shares and the Ramoses owned the other 50%. 210 purchased the Ramos’ 50%. The provisions of Shareholder Agreement reflect the continuation of two groups of Telnet shareholders.
[56] Given that the Shareholders Agreement clearly recognizes that the shareholders of Telnet are two groups made up of the Sandifords and 210, notwithstanding the Sandifords separately own shares, an interpretation that permits the Sandifords to exercise the shotgun collectively is also consistent with the intent of the shotgun which is to provide a corporate divorce for the shareholders.
[57] I am also of the view that an interpretation of Article 7.4 that permits the Sandifords to collectively exercise the shotgun against 210 is commercially reasonable. As noted, the Shareholders Agreement clearly reflects that the Sandifords and 210 are two distinct shareholder groups of Telnet. To require one of either Bill or Mellissa to have to offer to sell to or purchase not only 210’s shares but the other’s shares as well makes no sense. Rather than permit a corporate divorce of the two groups, which the shotgun is designed to achieve, it would only serve to further complicate their relationship with 210 to the ultimate detriment of Telnet. Further, it would require the Sandifords to go through an unnecessary and undoubtedly expensive share transaction requiring one of them to purchase the shares of the other.
[58] Kuksis v. Physical Planning Technologies Inc., 2004 CarswellOnt 4627 (S.C.J.), involved a shotgun offer by more than one shareholder where the shareholders agreement provided that the offer must be made by “a shareholder”. Relying on an expanded meanings provision in the shareholders agreement which provided that the singular shall include the plural, the Court held the offer was valid. While the Shareholders Agreement has no expanded meaning provision, given the ambiguity which exists in the use of the singular and the plural in respect of the term “shareholder”, in my view, the reasoning in Kuksis is equally applicable to this case.
[59] The Respondents rely on 942925 Alberta Ltd. v. Thompson, referred to by O’Connor A.C.J.O. in Zeubear Investments. In that case, the Alberta Court of Appeal held that a buy-sell offer made by multiple offerors was invalid in circumstances where the buy-sell provision in the shareholders agreement provided that a single shareholder was to be the “offeror”. In my view, 942925 is distinguishable on its facts from this case. First, there is no mention by the Court of any ambiguity in the buy-sell provision regarding whether “shareholder” is to be read in the singular or plural. Further, and unlike this case where there are two separate and distinct shareholder groups which have been in existence from the outset, there were three separate shareholders, each with an equal number of shares and each without a combined interest.
[60] For the above reasons, therefore, it is my view that the Sandifords properly exercised the shotgun provision in Article 7.4 of the Shareholders Agreement when they delivered the Shotgun Notice. In my view, the Sandifords strictly complied with the provisions of Article 7.4. As a result therefore of 210’s election on May 16, 2012, 210 agreed to sell its shares in Telnet to the Sandifords for $1,250,000 pursuant to the terms of the Shareholders Agreement.
(b) Repudiation
[61] Repudiation of a contract occurs when a party, by words or conduct, evidences an intention not to be bound by the contract. The effect of a repudiation depends on the election made by the innocent party to the contract. That party may treat the contract as still being in full force and effect or it can, by words or conduct, accept the repudiation in which case the contract is terminated. See Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423 (S.C.C.) at para. 40.
[62] In Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc. 2008 ONCA 92 (C.A.), 88 O.R. (3d) 721 at para. 37, Gillese J.A. explained repudiation as follows:
[37] I would add this. When considering Spirent's conduct, it was important to keep in mind that what was involved was an anticipatory breach of contract. An anticipatory breach sufficient to justify the termination of a contract occurs when one party, whether by express language or conduct, repudiates the contract or evinces an intention not to be bound by the contract before performance is due. See Pompeani v. Bonik Inc. (1997), 1997 CanLII 3653 (ON CA), 35 O.R. (3d) 417, [1997] O.J. No. 4174 (C.A.). To assess whether the party in breach has evinced such an intention, the court is to ask whether a reasonable person would conclude that the breaching party no longer intends to be bound by it. See McCallum v. Zivojinovic (1977), 1977 CanLII 1151 (ON CA), 16 O.R. (2d) 721, [1977] O.J. No. 2341 (C.A.). Having said that, when determining whether such an intention has been evinced, the courts rely on much the same analysis as they do in respect of claims of fundamental breach. That is, in determining whether the party in breach had repudiated or shown an intention not to be bound by the contract before performance is due, the court asks whether the breach deprives the innocent party of substantially the whole benefit of the contract
[63] Termination of the contract requires not only repudiation but also acceptance of the repudiation by the innocent party. As Lord Asquith stated in Howard v. Pickford Tool Co. LD., [1951] 1 K.B. 417 (C.A.) at p. 421, “an unaccepted repudiation is a thing writ in water and of no value to anybody: it confers no legal rights of any sort or kind.”
[64] In BP Global Special Products (America) Inc. v. Conros Corporation, 2010 ONSC 1094 (S.C.J.), [2010] O.J. No. 814; affd 2011 ONCA 384 (C.A.), Newbould J. discussed acceptance of a repudiation:
52 Generally, the innocent party must communicate its election to treat the contract at an end within a reasonable period of time. In some cases, the election to treat the contract at an end will be found to have been sufficiently communicated by the innocent party's conduct. See Place Concorde East Limited Partnership v. Shelter Corp. of Canada Ltd. supra at para. 50. Actual notice is not necessary and adoption by the innocent party of the repudiation may be reasonably inferred from all of the circumstances. See American National Red Cross v. Geddes Brothers, (1920) 1920 CanLII 6 (SCC), 61 S.C.R. 143.
[65] The Respondents submit that Furlong’s request at the closing on August 7, 2012 for a release that was not in the form required by Article 7.6(2) of the Shareholders Agreement constituted a repudiation of the Share Purchase Agreement. They further submit that Hood’s words and conduct in response to such request before Furlong left the boardroom to get instructions were sufficient to communicate 210’s acceptance of the Sandifords’ repudiation and terminate the Share Purchase Agreement. In the alternative, they submit that Furlong’s subsequent conditional withdrawal of the release was a repudiation that Hood accepted on behalf of 210 by refusing to close.
(a) Did the Sandifords Repudiate the Share Purchase Agreement?
[66] I do not consider either the delivery of the first release by Furlong on August 2, 2012 or the revised release on August 6, 2012 to be a repudiation by the Sandifords of the Share Purchase Agreement even though neither release complied with the provisions of the Shareholders Agreement.
[67] The draft share purchase agreement, which was enclosed in Furlong’s letter of August 2nd was clearly noted as being a draft. It provided for a release in a form to be drafted by Furlong. In my view, it was clear from reading letter and the enclosed documents that the release was a draft for comment. Furlong’s evidence, which I accept, was that it was submitted at that stage simply as a draft for discussion. Further, and given the issues which existed between Bill and Hood in respect of 210, I do not fault Furlong for attempting to get a broad release of the Sandifords from Hood and 210. All 210 had to say was that the release was not as required by the Shareholders Agreement. It said nothing.
[68] Nor, for the same reasons, do I consider that the release or any of the other requests by Furlong in his email of August 6, 2012 to the extent that they are beyond the requirements in the Shareholders Agreement amount to a repudiation of the Share Purchase Agreement by the Sandifords. Morningstar’s response to Furlong’s August 2nd letter said nothing about the release or its inadequacy from 210’s point of view. Furlong was entitled to assume, notwithstanding the First Action, in the absence of any direct communication from or on behalf of 210, that the release was satisfactory to 210.
[69] Finally, I also do not consider that Furlong’s request for the release at the closing on August 7, 2012 amounted to a repudiation of the Share Purchase Agreement.
[70] Furlong’s evidence was that he considered the items listed in his August 6th email to be requisitions. When he asked for the release at the closing, he was not insisting on his draft or no deal. His actions in response to Hood’s refusal clearly indicate that. In my view, his request for a release never amounted to an intention on the part of the Sandifords not to be bound by the Share Purchase Agreement.
[71] I accept Furlong’s evidence of what transpired on August 7, 2012. Notwithstanding his interest in a successful outcome for the Sandifords given his role in the transaction, I consider that he gave his evidence in a professional, straightforward and truthful manner. I did not consider him to have been evasive in his answers.
[72] The Respondents submit that an adverse inference should be drawn against Furlong given that he did not produce his notes of the closing or the documents he brought with him. There is no evidence that the Respondents ever requested that Furlong produce such documents. There was no request for them during Furlong’s cross-examination on his affidavits. Nor was there any request to produce them when he testified before me. I am hard-pressed to understand why, in such circumstances, I should draw an adverse inference against Furlong.
[73] I accept Furlong’s evidence that the first time he heard that there was any issue with either of the releases he had forwarded to Morningstar prior to August 7th was at the closing from Hood. I do not consider the claim in the First Action to constitute such notice, particularly given Morningstar’s subsequent email that 210 intended to close on August 7th.
[74] I also accept that after Hood told Furlong he was not providing a release, either Hood or Morningside asked him if no release was a deal breaker. The fact that statement was not in Furlongs’ affidavits does not, in my view, diminish its credibility. Not everything makes its way into an affidavit. He was cross-examined on his affidavits and testified to the statement at that time. The fact that more detail concerning the events of August 7 came out later is understandable given that the events of that day took on a greater focus as the Application proceeded.
[75] I also accept Furlong’s evidence that when he returned to the boardroom and advised Hood that the Sandifords would close without a release, that there were no conditions attached. He did not request an indemnity or suggest that 210 or Hood provide further documentation at a later date. In no way did Furlong’s actions, when he returned to the boardroom after getting instructions from the Sandifords, amount to a repudiation of the Share Purchase Agreement.
[76] It follows that I do not accept Hood’s evidence where it conflicts with Furlong’s. His evidence is inconsistent with other evidence that I accept. I didn’t believe him when he said that he thought the meeting was over when Furlong left to get instructions. It makes no sense that he would remain in the boardroom for 15 minutes because he didn’t want to run into the Sandifords. He struck me as a forceful individual who was very much in charge at all times. He had no trouble leaving the boardroom shortly after Furlong returned and the closing ended when the Sandifords were still on the premises. In my view, his explanation for his actions is not credible in the circumstances.
[77] There were also a number of points in Hood’s evidence where, in my view, his actions didn’t match his words. In my view, his evidence was tailored after the fact, to fit 210’s legal argument.
[78] Hood testified that he received a copy of Furlong’s August 6th email and the attached release from Morningstar that evening while at his cottage in Muskoka. He considered the last minute “demands” in the email to be a repudiation of the deal (his words). He decided that evening, subject to speaking with Morningstar the next morning, to reject the “revised offer” as he termed it and refuse to tender his shares. He was scheduled to be at the cottage all week on vacation but drove back to Toronto late Monday night.
[79] I accept Hood’s evidence that he decided on August 6th to not close the Share Purchase Agreement on August 7th. In my view, however, it was not because of Furlong’s release. If that release was so objectionable, Hood could have simply had a release prepared which conformed to the Shareholders Agreement and tendered it at the closing. Article 7.6(2) is clear that it is the selling shareholder (210) who is required to cause its “nominees” on the board to resign and release Telnet.
[80] Further, if the August 6th release was the trigger point, there was no reason for Hood to leave his cottage and return to Toronto for the closing. He could have simply spoken to Morningstar by phone and saved everyone the time and trouble of the events of August 7th.
[81] Hood said the reason that he didn’t tell the Sandifords in advance he was not prepared to close was because he was determined to have them drive from Oshawa because he was angry with them for “wasting his time.” He also said that he felt he should show up because he had previously agreed to attend the closing.
[82] There is no question in my mind that Hood wanted to inconvenience the Sandifords on August 7th. His refusal to meet with them and his actions at the closing confirm that he was trying to send a message to the Sandifords.
[83] His evidence concerning the provision of a release at closing is also inconsistent. On the one hand he says that he told Furlong that he was not prepared to sign Furlong’s release. On the other, he says he was prepared to provide a release in the form required by the Shareholders Agreement. In the end, however, it is clear that he refused to sign any form of release.
[84] In my view Hood attended at the closing on August 7th hoping that the Sandifords would not be prepared to close. I was struck by Furlong’s statement that Hood looked shocked when he tendered the bank draft for the closing funds. Furlong’s take on Hood and Morningstar’s reaction was that they hadn’t expected the Sandifords would be able to come up with the funds to purchase 210’s shares. In all the circumstances, I consider that to be a reasonable inference to draw.
[85] I accept Bill’s evidence that when they arrived at Hood’s offices on the afternoon of August 7th, Morningstar told him Hood was ready and willing to close. In my view, that was 210’s position at that time.
[86] When Furlong indicated that the Sandifords were prepared to close without a release and produced the closing funds, Hood simply said he was not prepared to close under any circumstance.
[87] The Applicants submit that an adverse inference should be drawn against 210 and Hood’s evidence concerning the events of August 7th for the failure of the Respondents to call Morningside as a witness. Morningside’s employment was terminated by Hood on October 26, 2012 for reasons not explained. It is clear it was not a mutual parting. Although the Sandifords’ counsel was told before the trial that Morningstar would not be a witness, he was not advised until the morning of the trial that his employment had been terminated. The Respondents submit no adverse inference should be drawn because Morningstar was available to both sides and the Sandifords could have summonsed him to testify. Given that Morningstar was the lawyer for 210 and Hood throughout, I do not consider that to have been a realistic option.
[88] Having said that, based on my view of the evidence before me, it is not necessary to draw an adverse inference against the Respondents for failing to call Morningstar.
(b) Did 210 Accept the Repudiation?
[89] Having found based on the evidence I accept that there was no repudiation of the Share Purchase Agreement by the Sandifords on August 7th, it is not necessary to deal with the question of whether 210 accepted it. Assuming, however, that Furlong’s actions at the closing on August 7th did amount to a repudiation, in my view there was never any acceptance of it by 210, either through words or conduct.
[90] As noted, when Hood refused to provide a release, either Hood or Morningstar asked Furlong if that was a deal breaker. Furlong then indicated he needed to get instructions. While he continued to ask for the items he had requisitioned in his email the day before, Furlong’s evidence, which I accept is that there was never any refusal to close by Hood or Morningstar. It was clear that he left the boardroom to get instructions concerning 210’s position on the release. It was only after he returned to the boardroom and advised Hood and Morningstar that the Sandifords would close without a release that Hood refused to provide any release, resign as a director or tender his shares.
[91] As a result, it is clear in my view and I so find that the closing terminated, not because of the Sandifords repudiation and 210’s acceptance of it but because Hood refused to close. The Sandifords were ready willing and able to close without a release. Hood, on the other hand, was not prepared to provide any release, even the release required by the Shareholders Agreement. He was also not prepared to provide his resignation as a director of Telnet or tender his shares. By refusing to close, 210 was in breach of the Share Purchase Agreement.
Conclusion
[92] For the above reasons, there will be a declaration that the Shotgun Notice and 210’s election dated May 16, 2012 are enforceable and binding on 210. 210 is ordered to forthwith transfer its shares in Telnet to the Sandifords in accordance with the terms of the Shareholders Agreement in exchange for the payment by the Sandifords of $1,250,000.
[93] The date of the closing and any issues which may arise should be worked out by counsel. In the event the parties cannot agree, I may be spoken to.
[94] The Sandifords are entitled to their costs of the Application. In the event the parties cannot agree, the Sandifords shall submit written cost submissions of no more than 3 pages along with a Costs Outline within 10 days. The Respondents shall respond with submissions of similar length within 7 days thereafter.
L. A. Pattillo J.
Released: December 5, 2012
COURT FILE NO.: CV-12-9813-00CL
DATE: 20121205
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
WILLIAM SANDIFORD, NELISSA SANDIFORD and DURHAM.NET INC.
Applicants
- and -
2104587 ONTARIO INC. and GRANT ALEXANDER HOOD
Respondents
REASONS FOR JUDGMENT
L. A. PATTILLO J.
Released: December 5, 2012