Endorsement
COURT FILE NO.: Kingston CV-10-611-00
and Belleville CV-10-0345-99
DATE: 20120201
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Abdul Rehman, Applicant and Danish Qureshi et al, Respondents
AND:
Danish Qureshi, Applicant and Abdul Rehman et al, Respondents
BEFORE: Hackland R.S.J.
COUNSEL:
Berkley D. Sells for Abdul Rehman
R. Benjamin Mills for Danish Qureshi
ARGUED: January 10, 2012 (Ottawa)
ENDORSEMENT
[ 1 ] In my previous endorsement in this matter, see Rehman v. Qureshi , 2011 ONSC 5703 , I held that neither Mr. Rehman nor Mr. Qureshi had validly invoked the Buy-Sell provision in the shareholders agreement of Holdco when, in the summer of 2010, they attempted to buy out the interests of the other. However, the parties are agreed that they can no longer carry on business together and what is now required (since the parties have been unable to agree) is a buy-out of one shareholder by the other pursuant to a suitable court ordered mechanism.
[ 2 ] As noted in my earlier reasons, Mr. Rehman and Mr. Qureshi are the shareholders of a holding company which in turn owns the operating company for the new Holiday Inn Express in Brockville which opened in July of 2009. In particular, I stated:
R&DQ Enterprises Inc. (the operating company) is a wholly owned subsidiary of 2225021 Ontario Inc. (Holdco), which in turn is owned by the applicant, Danish Qureshi (Mr. Qureshi) and the respondent Abdul Rehman (Mr. Rehman), who are the parties to this proceeding. Mr. Qureshi owns 35% of the shares of Holdco and Mr. Rehman owns 65% of the shares. It is common ground that these two gentlemen have experienced a complete breakdown in the trust they once enjoyed and can no longer operate this business together. Mr. Qureshi has been, in effect, excluded from any operational involvement with the business since March of 2010. They each initiated proceedings against the other in December of 2010, claiming oppression relief under the Business Corporations Act , R.S.O. 1990, c.B. 16. Both applications were heard together before me.
[ 3 ] I previously found that the parties had agreed to a re-organization of their business which had been completed except for the final step of transferring the shareholders loans of Mr. Rehman and Mr. Qureshi into Holdco. The loans remain in the operating company and there is no longer any disagreement that they must be transferred into Holdco. I propose to require completion of this step as part of the court ordered buy out. My previous findings in that regard were:
In November of 2009 Mr. Qureshi and Mr. Rehman reorganized their hotel business by creating Holdco and, in that connection, executed a Shareholders’ Agreement dated November 27, 2009 setting out the terms of their new relationship. As part of that transaction the respective shareholders loans of Mr. Rehman ($2,955,329.) and Mr. Qureshi ($731,156.) to the operating company were to be rolled into Holdco. Unfortunately, this step had not been completed when the parties’ relationship broke down and these loans, as of the date of the hearing, remained in the operating company. The reason the shareholders loans have not been transferred to Holdco is that Mr. Qureshi continues to refuse to execute the required documentation to bring this about.
[ 4 ] In argument before me, counsel for Mr. Rehman submits that the court should order an independent valuation of Holdco and a buy-out by Mr. Rehman of Mr. Qureshi’s minority shareholder interest based on such valuation, without any discount based on his minority shareholder status. Counsel for Mr. Qureshi submits that a court imposed compulsory buy sell based on a “shot gun” arrangement, similar to Article X of the Holdco shareholders agreement, should be imposed.
[ 5 ] I am persuaded that a valuation of Holdco must be ordered and the majority shareholder, Mr. Rehman, will be required to buy out Mr. Qureshi’s 35% minority interest (without a minority discount) at an amount based on the company’s valuation. I reach this conclusion for the following reasons:
• Mr. Rehman has the predominant shareholding interest (65%) and he has invested by far the larger amount into the business by way of his shareholders loans ($2,955,329 versus Mr. Qureshi’s $731,156). The hotel was built largely with Mr. Rehman’s money and bank borrowing.
• Mr. Rehman has had complete operational management and control of the hotel business since March 2010 when Mr. Qureshi withdrew in the context of disputes between the two of them.
• I find on the evidence that Mr. Rehman’s acquisition of Mr. Qureshi’s interest in this business would be in accordance with the reasonable expectations of the parties. In particular, as part of the re-organization, a resolution was signed by both parties specifically contemplating that Mr. Rehman would acquire all of Mr. Qureshi’s interest in the hotel. When Mr. Qureshi withdrew from the business he indicated his position that he was “out of the hotel” in terms of future operations.
• Mr. Rehman’s counsel submits that a “corporate divorce” such as is sought here must be full and final. The purchaser of the shares must provide a full release of the vendor including a release of the guarantees of the bank borrowing (or, at minimum, meaningful indemnities) and it is far more likely that Mr. Rehman is in a position to do this. I agree with this submission.
• The previous attempt by these parties to affect a short gun buy out was extremely problematic.
[ 6 ] It will be a requirement of this buy out that Mr. Rehman repay to Mr. Qureshi the full amount of Mr. Qureshi’s shareholders loan ($731,156.) plus accrued interest, as discussed below. As a condition of this transaction, Mr. Rehman will supply Mr. Qureshi with a release of any claims that he or Holdco or the operating company may have against him or his companies arising out of the business and a release of any guarantees provided by Mr. Qureshi or his companies in respect of loans made to the hotel business. This of course would include a release of any Qureshi guarantees of the indebtedness to the Business Development Bank, which is in the approximate sum of $5.5 million dollars.
[ 7 ] Mr. Qureshi will co-operate in the transfer of his shareholders loan to Holdco as a component of this transaction. The independent valuation will be carried out by a qualified business valuator of the parties’ choice and the transaction will be conducted by solicitors of the parties’ choice. The valuation will be paid for by Holdco. This transaction will be carried out under the supervision of the Master at Ottawa and he shall be authorized to adjudicate on any dispute or to provide any further directions for the implementation of this order.
[ 8 ] The parties agree that the shareholders loans should be deemed to have accrued interest although they have been accounted for as interest free to date. They disagree on the rate and duration of such accrued interest.
[ 9 ] I find that for the purpose of determining how much interest should now be paid to the departing shareholder on his loan, the date when the loan ought properly to have begun to earn interest should be used which is November 27, 2009. This is the date when the re-organization ought to have been completed and it is the date the shareholders’ agreement (with its interest provision) was executed.
[ 10 ] The Shareholders’ Agreement contains this provision dealing with interest on shareholder’s loans:
Any and all monies advanced from time to time to the Corporation [i.e., Holdco] by its Shareholder(s), unless waived by the Shareholders, shall bear interest at a rate per annum equal to the prime lending rate charged by the principal bankers of the Corporation existing from time to time to its most favoured commercial borrowers, plus two (2%) percentage points, to be calculated and adjusted annually, which advances may be secured by the Corporation granting a security interest and/or mortgage on its undertaking and assets.
[ 11 ] Who then are Holdco’s “principal bankers”? I find that this is clearly the Business Development Bank by virtue of its $5.5 million dollar loan, its mortgage and general security agreement. The bank’s base interest rate is 6.45%. It charges the operating company 7.45% interest on the $5.5 million dollar loan. It is submitted that, in accordance with the “plus 2%” language of the Shareholders’ Agreement, Mr. Rehman and Mr. Qureshi’s shareholders’ loans should therefore bear interest (from the date of that Shareholders’ Agreement) at the rate of 9.45%. I accept this submission and order accordingly.
[ 12 ] Lastly, I deal with costs. Mr. Rehman has been substantially successful in this proceeding. The parties have each expended very similar amounts of time in this important and complex piece of commercial litigation, which involves substantial sums of money. The scale of costs will be partial indemnity. Mr. Rehman’s counsel, a 1998 call, charges a partial indemnity rate of $300 which is not unreasonable for this type of case. I disallow the 19 hours referable to a mediation which occurred on July 26, 2010 which, although commendable, was not a compulsory part of this litigation. I award Mr. Rehman his costs which I fix in the sum of $65,640 (fees) and $10,443.11 (disbursements) plus applicable HST. These sums may be deducted from the amounts owed to Mr. Qureshi for the purchase of his shares in the holding company.
[ 13 ] Order to issue in accordance with the above.
Mr. Justice Charles T. Hackland
Released: February 1, 2012
COURT FILE NO.: Kingston CV-10-611-00
and Belleville CV-10-0345-99
DATE: 20120201
BETWEEN: Abdul Rehman, Applicant and Danish Qureshi et al, AND Danish Qureshi, Applicant and Abdul Rehman et al ENDORSEMENT
HACKLAND R.S.J.
Released: February 1, 2012