ONTARIO

SUPERIOR COURT OF JUSTICE

BARRIE COURT FILE NO.: CV-11-0050
DATE: 20130215

BETWEEN:

WILLIAM JOHN ADAMS

Plaintiff

– and –

McLEAN & DICKEY LTD. and 2192464 ONTARIO LIMITED

Defendants

AND BETWEEN:

McLEAN & DICKEY LTD.

Plaintiff by Counterclaim

-and-

WILLIAM JOHN ADAMS

Defendant by Counterclaim

M.M. Miller, for the Plaintiff/Defendant by Counterclaim
P. Lassaline, for the Defendants/Plaintiff by Counterclaim

HEARD: December 4, 5, 6 & 7, 2012

REASONS FOR JUDGMENT

DiTOMASO J.

INTRODUCTION

[1] This dispute is about the value of one Common Share in McLean & Dickey Ltd. (“McLean & Dickey”) owned by William John Adams (“Adams”) as at December 31, 2008. Mr. Adams claims that his one Common Share is valued in the amount of $385,552. McLean & Dickey and 2192464 Ontario Limited counter that the value of the share is zero. In addition, McLean & Dickey asserts that it is entitled to the remedy of rectification which would alter the formula for valuing Mr. Adams’ Common Share. In the end, if rectification were granted, the value of Mr. Adams’ share would still be zero and his action ought to be dismissed.

[2] Mr. Adams denies that the remedy of rectification ought to be granted in this case. Rather, he seeks judgment in the amount of $385,552 together with interest.

OVERVIEW

[3] The Plaintiff/Defendant by Counterclaim Adams is a retired insurance broker residing in the Township of Severn, in the County of Simcoe. The Defendant/Plaintiff by Counterclaim McLean & Dickey is an Ontario corporation which carries on a property, casualty, commercial and life insurance brokerage, with its head office in Orillia, Ontario.

[4] The Defendant 2192464 Ontario Limited was amalgamated into McLean & Dickey in or about February 2009 and no longer exists as an individual legal entity.

[5] In or about 2005, Adams was one of three principals in McLean & Dickey along with Wayne MacIntosh (“MacIntosh”) and William Hamilton (“Hamilton”). At that time, MacIntosh and Hamilton were attempting to sell their respective one-third interests in McLean & Dickey, while Adams wanted to stay on and sell his one-third interest at a later date.

[6] A potential sale of McLean & Dickey came to the attention of the Tisi family, and, in particular, Francois Tisi.

[7] During the course of negotiating a potential sale and purchase, Adams confirmed to the Tisi family that he preferred to continue working for at least another three years and sell his full one-third interest in McLean & Dickey upon retiring. However, Adams wanted his one-third interest to be guaranteed at the same price payable to MacIntosh and Hamilton.

[8] In exchange for the guarantee that the value of his share would be at least the same as the Tisi family had paid to his other partners, Adams continued his employment with McLean & Dickey at a salary which was $225,000 per year – less than the $300,000 salary that he had earned during his last year of the original partnership.

[9] It was the expectation of the Tisi family and Adams that Adams would share in the increase of the business over time. If the value of the business increased, then Adams would have an opportunity to be paid more money.

[10] The Tisi family entered into a Share Purchase Agreement dated December 15, 2005 between 2090719 Ontario Limited as Purchaser and Wayne Duncan MacIntosh, William Frazer-Logan Hamilton and William John Adams as Vendors to purchase their shares in McLean & Dickey. The purchase price was in the amount of $3,607,499.80 based upon a formula set out in said Agreement.

[11] As part of the same transaction, Adams, the Tisi Family Trust (“TFT”) and McLean & Dickey entered into a Shareholders Agreement dated January 11, 2006. Adams was the owner of 1,169,166.6 Special Shares and one Common Share of three issued and outstanding Common Shares in the capital of McLean & Dickey. The other two Common Shares were held by the TFT. Schedule B of the Shareholders Agreement set out a formula for the determination of the Common Share purchase price. Under the Shareholders Agreement, the total price of Adams’ Special Shares in McLean & Dickey was fixed at a value of approximately $1.2 million adjusted. The Shareholders Agreement also dealt with other matters such as the operation of the McLean & Dickey, Adams rights and responsibilities within the company and terms regarding Adams employment with McLean & Dickey for three years at $225,000 per year.

[12] In the Summer or Fall of 2008, Adams confirmed to McLean & Dickey that, as previously discussed in 2005, he wished to retire at the end of 2008. Adams retired from McLean & Dickey as of December 31, 2008.

[13] As a result of Adams confirming his planned retirement, McLean & Dickey and Adams completed a Share Purchase Agreement dated February 12, 2009 between Adams, McLean & Dickey and 2192464 Ontario Limited. This numbered company became the purchaser of Adams’ Common Share and Special Shares in McLean & Dickey for tax efficiencies.

[14] In accordance with the Share Purchase Agreement, on February 12, 2009 the transaction closed whereby Adams sold all of his Special Shares and his one Common Share in the capital of McLean & Dickey to 2192464 Ontario Limited. The purchase price for the special shares was the sum of $1,247,529.93 (rounded to $1,247,530) and the price for the common share was to be determined in accordance with a formula set out in paragraph 2 of the said Share Purchase Agreement dated February 12, 2009.

[15] On or about February 12, 2009, Adams received payment in full for his Special Shares and a Promissory Note given by 2192464 Ontario Limited pursuant to which that company promised to pay Adams the Common Share price as defined in paragraph 2 of the Share Purchase Agreement on the 30th day following completion of the Closing Date Financial Statements or the 60th day following closing whichever was sooner (“the Due Date”). The said Promissory Note also provided that after the Due Date it would bear interest at the “overnight” rate of interest charged by the Bank of Montreal to its best commercial customers in Orillia, Ontario plus five percent per annum.

[16] On February 13, 2009, 2192464 Ontario Limited amalgamated with McLean & Dickey.

[17] The Closing Date Financial Statements for the period ending February 12, 2009 were not prepared until March 15, 2010. Adams states that the Due Date of the Promissory Note was April 14, 2009.

[18] It is common ground that the Closing Date Financial Statements do not differ much from the year end statements for McLean & Dickey dated December 31, 2008 and for all practical purposes, the valuation date of Adams’ common share is December 31, 2008.

[19] Adams states that the Common Share price and the amount due to him by McLean & Dickey and 2192464 Ontario Limited is calculated in accordance with the formula set out in the Share Purchase Agreement at paragraph 2 together with interest on the Promissory Note. Although the parties could not locate the Promissory Note, there was no dispute as to whether or not such Note existed or as to its terms. To the contrary, there is evidence that it was indeed prepared by the Purchasers’ solicitor although it could not be subsequently located.

POSITION OF THE PARTIES

[20] While Adams has been paid for his Special Shares, he has not been paid for his one Common Share in McLean & Dickey. At the heart of this dispute is the formula for the valuation of Adams’ Common Share and, more specifically, whether fees and sub-brokerage commission income are included or excluded within the calculation of the annual commission income on McLean & Dickey’s book of business on property, casualty and commercial insurance business for the 12 months immediately preceding the closing date in accordance with the formula. Adams takes the position that fees and sub-brokerage commission income are included in the formula. McLean & Dickey and 2192464 Ontario Limited claim that fees and sub-brokerage commission income are excluded.

[21] Further, there is an additional issue. By way of counterclaim, McLean & Dickey pleads that a mutual mistake occurred in the drafting of the Share Purchase Agreement dated February 12, 2009. McLean & Dickey seeks rectification of this Agreement on the grounds that when the formula was drafted for determining the price of Adams’ one Common Share in McLean & Dickey, it was intended to be valued to take into account that Adams held a one-third interest in McLean & Dickey at the time the TFT was purchasing Adams’ interest.

[22] Through mutual mistake, it is alleged that the parties failed to stipulate that as a one-third owner of MacLean & Dickey, the fair market value should be determined on the basis of a one-third value of the company.

[23] It is further alleged that this erroneous formula for determining the fair market value of the Common Shares outlined in the Share Purchase Agreement, first deducts Adams’ Special Share value from the fair market value of MacLean & Dickey to determine the net market value. The effect of this alleged erroneous formula leaves Adams with more than a one-third value in the company which was never the intent of the parties who negotiated an agreement in good faith. Rather, McLean & Dickey claims it is entitled to rectify the formula. The rectified formula would produce a valuation of Adams’ Common Share at zero.

[24] It is the position of Adams that there was no mutual mistake. The Agreements clearly reflect the intention of the parties. The purchase price of his Special Shares was guaranteed. If there was any growth in the business over the time that Adams stayed on as an employee, he would benefit from any financial increase. He alleges that the approach asserted by McLean & Dickey for the calculation of his one common share does not reflect the intention of the parties but rather is a deliberate attempt to reduce the value of his Common Share to zero. In the end, McLean and Dickey would pay him nothing for his one Common Share over and above what he had already been paid for his Special Shares.

[25] McLean & Dickey as Plaintiff by Counterclaim seeks the remedy of rectification. Adams asserts that there is nothing to rectify as the Share Purchase Agreement is clear and unambiguous. He submits the Counterclaim ought to be dismissed.

ISSUES

[26] There are two primary issues to be determined:

(1) What is the valuation of Adams’ one Common Share as at December 31, 2008?

(2) Is McLean & Dickey entitled to the remedy of rectification?

ANALYSIS

[27] This was a relatively short trial with four witnesses testifying. Mr. Adams and chartered accountant, Gregory Ferguson testified on behalf of the Plaintiff. For the defence, chartered accountant and chartered business valuator Eric Walker and Danielle Tisi testified. The issues are fairly discrete and the factual context regarding this commercial transaction is, for the most part, not overly complex. Nevertheless, this dispute takes us to the evidence of the parties, their accounting experts and, ultimately, a review and analysis of the commercial agreements in play to understand the factual context of this case. Specifically, the parties disagree on the applicable formula to calculate the value of Adams’ one Common Share as at December 31, 2008. In addition, the parties disagree not only as to whether fees and sub-brokerage commissions ought to be included or excluded in the formula but also on the methodology of arriving at the valuation of the one Common Share. In particular, the parties disagree at what stage in that calculation Adams’ Special Share value ought to be deducted. This is material to the defence’s argument in respect of rectification and, ultimately, the defence assertion that Adams’ one common share is worth zero. Adams disputes the defence assertion that the value of three equal common shares be calculated first and then divided by three and thereafter the value of Adams’ Special Shares ought to be deducted from the value of his one Common Share. This approach would leave the amount payable by McLean & Dickey to Adams at zero. He asserts that this was not intended by the parties and certainly not contemplated by a plain reading of the formula.

[28] In determining whether fees and sub-brokerage commissions are either included or excluded in the formula contained in the Share Purchase Agreement dated February 12, 2009, and interpretation of that Agreement is required. A succinct statement of the basic principles of commercial contractual interpretation is summarized by Winkler C.J.O. in Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 at para. 16:

… When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of it s terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity. Where a transaction involves the execution of several documents that form parts of a larger composite whole – like a complex commercial transaction – and each agreement is entered into on the faith of the others being executed, then assistance in the interpretation of one agreement may be drawn from the related agreements. See 3869130 Canada Inc. v. I.C.B. Distributing Inc. (2008), 2008 ONCA 396, 66 C.C.E.L. (3d) 89 (Ont.C.A.), at paras. 30-34; Drumbrell v. The Regional Group of Companies Inc. (2007), 2007 ONCA 59, 85 O.R. (3d) 616 (C.A.), at paras. 47-56; SimEx Inc. v. IMAX Corp. (2005), 2005 46629 (ON CA), 11 B.L.R. (4th) 214 (Ont.C.A.), at paras. 19-23; Kentucky Fried Chicken Canada v. Scott’s Food Service Inc. (1998), 1998 4427 (ON CA), 41 B.L.R. (2d) 42 (Ont.C.A.), at paras. 24-27; and Professor John D. McCamus, The Law of Contracts (Toronto: Irwin Law Inc., 2005), at pp. 705-722.

[29] In respect of the question of contra proferentem Estey J., speaking for the majority of the Supreme Court of Canada in Consolidated-Bathurst Export Limited v. Mutual Boiler and Machinery Insurance Company made it clear that contra proferentem applies only once a finding of ambiguity is made. 1979 10 (SCC), [1980] 1 S.C.R. 888.

(Decision continues exactly as in the original text…)

CONCLUSION

[149] For the reasons given, judgment is hereby granted to the Plaintiff William John Adams against McLean & Dickey Ltd. in the amount of $254,430 with interest at the rate of 7.50 percent from April 12, 2009 to the date of judgment. Post-judgment interest is fixed on the judgment amount at the same rate of 7.5 percent per annum. The counterclaim is dismissed.

[150] As for costs, the parties agree to have costs determined by way of written submissions. Those written submissions shall consist of a concise written summary not exceeding two pages in length, Bill of Costs, Costs Outline any Rule 49 offers and any authorities in support. Within 14 days, those written submissions are to be exchanged and then delivered to my Judicial Assistant at Barrie.

DiTOMASO J.

Released: February 15, 2013