COURT FILE NO.: 08-CL-7482

DATE: 20130312

ONTARIO

SUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

BETWEEN:

Adam Leikin Harris, Naomi Sara (Harris) Stanton, Sheira Rachel Harris, Zena Leah Harris, Hilliard Brian (Rick) Kesler and David Joseph Spieler

Plaintiffs

– and –

Leikin Group Inc., Barbara Linda Farber, David Lawrence Katz, Andrew Mark Katz, Grant Jameson, Geoffrey Gilbert, Ogilvy Renault LLP, Ingrid Levitz, in her capacity as estate trustee with a will of the Estate of Gerald Levitz, Patricia Day, Ginsburg Gluzman Fage & Levitz LLP and First Capital Realty Inc.

Defendants

Counsel: R. Bennett, S. Erskine and D. Barbaree, for the Plaintiffs S. Victor, Q.C. and D. Cutler, for the Defendants, Barbara Linda Farber, David Lawrence Katz and Andrew Mark Katz D. Scott, Q.C. and I. Mentina, for the Defendant, Leikin Group Inc. B. Zarnett, J. Kimmel and S. Gotlieb, for the Defendants, Ogilvy Renault LLP, Grant Jameson and Geoffrey Gilbert Alan D’Silva, L. Mercer and S. Clarke, for the Defendants, Ingrid Levitz, in her capacity as estate trustee with a will of the Estae of Gerald Levitz, Patricia Day and Ginsburg Gluzman Fage & Levitz LLP

HEARD: May 28, 29, 30, 31, June 1, 5, August 9 and 10, 2012

REASONS FOR JUDGMENT

D. M. Brown J.

I. Overview

[1] In 2005 eight of eleven cousins, who together constituted the owners of the common shares of a group of closely-held family companies, the Leikin Group, decided to monetize the value of their interests in the two core assets of those companies – shopping centres in the Ottawa area. They entered into a share redemption transaction with the family companies. In order to fund the share redemptions the non-selling cousins brought in an equity investor who purchased a 50% stake in the key asset – the College Square shopping centre. The equity investor was a public company which immediately made known the fact and the price of its acquisition. The selling cousins found out that the price paid by the equity investor reflected a much higher value attributed to College Square than the price on which the share redemption transaction had been negotiated.

[2] Some of the selling cousins – six of the eight to be precise - thought they had been hard done by their non-selling cousins. (Two of the eight did not, and they did not join in this lawsuit.) Nevertheless, the six cousins waited almost two years before commencing this action. They sued their non-selling cousins, the family companies’ lawyers and accountants, as well as the public company which paid hard cash for its share of College Square. The selling cousins seek damages of $11 million for what they view as their share of the difference in value between the amount attributed to College Square in the share redemption transaction and that in the arm’s-length sale to the public equity investor.

[3] For the reasons set out below, I dismiss the action.

II. Procedural history

[4] In January, 2011, all defendants moved for summary judgment. I granted summary judgment in favour of the public equity investor, First Capital Realty Inc., and dismissed the action against it, while directing a trial of the claims against the other defendants.[^1] The Court of Appeal dismissed the plaintiffs’ appeal from my order dismissing their action against First Capital Realty Inc.[^2]

[5] Pursuant to directions which I gave in my Summary Judgment Reasons, the trial of this action adopted a hybrid form: (i) affidavits filed by witnesses on the motions served as part of their examination-in-chief at trial; (ii) transcripts of the examinations conducted for the motions – cross-examinations and Rule 39.03 examinations – served as part of the cross-examination of a witness at trial; and, (iii) the viva voce evidence led at trial, both during examinations-in-chief and cross-examinations, focused on the key issues in dispute.[^3] I wish to compliment counsel on conducting an efficient, focused trial.

III. The parties

A. Harry and Zena Leikin

[6] The late Harry Leikin was a dairy farmer in the Ottawa area who, during the latter part of his life, assembled, developed and managed properties through a number of companies: Harry Leikin Holdings Limited (“HLH”), Harzena Holdings Limited (“Harzena”), Zena-Kinder Holdings Limited (“ZKH”) and Zena’s Fisher Heights Plaza Limited (“ZFHP”). The parties have referred to these corporations collectively as the Leikin Group of Companies. The Group’s major asset was College Square, a “big box” retail shopping centre located in the west end of Ottawa. HLH and Harzena together owned College Square.

B. Their offspring

[7] Harry and his wife, Zena Harris, had four daughters: Josephine Harris, Ethel Kesler, Goldie Spieler, and Libby Katz. Harry ultimately put in place a governance structure for the Leikin Group which saw each of his four daughters hold seats on the companies’ boards of directors. In 1982 Harry enacted an estate freeze which set up trusts for each of his grandchildren who were issued the common shares in the Leikin Group of companies. In 1996 the trustees distributed those shares directly to each grandchild.

C. Their grandchildren

[8] The pedigree of those grandchildren is as follows. Josephine Harris is the mother of the plaintiffs Adam Harris, Naomi Stanton, Sheira Harris and Zena Harris (the “Harris Plaintiffs”). All four grandchildren were Selling Shareholders. Sheira Harris and Zena Harris gave evidence in this proceeding.

[9] Ethel Kesler has three sons: the plaintiff Rick Kesler, and Steven and Ivan Kesler. All sold their shares under the transaction in question in this action. However, neither Steven nor Ivan joined their brother, Rick, as plaintiffs. Rick Kesler gave evidence in the proceeding.

[10] The third daughter, Goldie, had one child, the plaintiff, David Spieler, who started off as a Non-Selling Shareholder, but ultimately participated in the transaction as a Selling Shareholder. He testified throughout the proceeding.

[11] The other daughter, Libby Katz, had three children: the defendants Barbara Farber, Andrew Katz and David Katz (the “Katz Defendants”, the “Katz Siblings”, or the “Non-Selling Shareholders”). All three gave evidence in this proceeding.

[12] In these Reasons I shall follow the lead of the parties and refer to the plaintiffs as the “Selling Shareholders”, and to the Katz Defendants as the “Non-Selling Shareholders”.

[13] Only partial information about the background of Harry Leikin’s grand-children was put before me. Initially, Josephine Harris filed the evidence on behalf of her four children but, by the time of the trial, Sheira and Zena had filed affidavits. Zena is a medical doctor. At the time of the transaction the plaintiff, Rick Kesler, was a lawyer practising customs and excise tax law as a partner in the Toronto office of Fraser Milner Casgrain LLP; he retired from the practice of law a few months after the share redemption transaction closed. David Spieler lived in Barbados where he owned and operated a pottery factory.

[14] David Katz lived in Montreal. His business background was in commercial real estate and shopping centre development. He was the President of the Leikin Group from 2003 until May, 2004. Andrew Katz was the President of Skypoint Capital, an Ottawa-based venture capital company. Prior to that he had been a senior executive with a public technology company and a partner of Deloitte & Touche. Barbara Farber was the CEO of the Leikin Group and had been involved with the companies for all her career.

D. The Leikin companies

D.1 Common shares and Barbara Farber’s special voting shares

[15] Harry Leikin created an ownership structure for his companies which contained three key elements: (i) his grand-daughter, Barbara Farber, was issued a special class of preferred shares in the companies which carried voting rights which, in effect, gave Barbara control over the Leikin Group of companies; (ii) each of his four daughters owned an equal number of preferred shares in ZKH; and, (iii) each of his 11 grand-children owned an equal number of common shares in the various companies comprising the Leikin Group. After Harry’s death in 1998, Barbara became the Chief Executive Officer of the Leikin Group.

D.2 Restrictions on the transfer of the shares

[16] Harry Leikin incorporated into his business structure the principle that the shareholders of HLH and Harzena could not sell or transfer their shares to anyone other than the issue of Harry Leikin. This restriction was designed to keep the shareholdings and management of the business within the family, and it also drove the form of corporate re-organization through which the Non-Selling Shareholders effectively purchased the shares of the Selling Shareholders.

D.3 Directorships

[17] Each of the four daughters enjoyed a seat on the board of directors of the Leikin Group, as did Barbara Farber. Ethel, Libby and Goldie stepped down as directors around 2000, and their places were taken by their children, Rick Kesler, Andrew Katz and David Spieler. By 2004, when the events surrounding this lawsuit unfolded, the board of directors of the Leikin Group of Companies consisted of Josephine Harris, Rick Kesler, Andrew Katz, David Spieler and Barbara Farber. The CEO for the Leikin Group was Barbara and, for a period of time in early 2004, David Katz was the President.

E. The non-family defendants

[18] The defendant, Grant Jameson, was a partner at the defendant, Ogilvy Renault LLP (now Norton Rose LLP), who practiced corporate law at its Ottawa office. Jameson had started acting as corporate counsel for the Leikin Group of Companies in early 2003. Geoffrey Gilbert was an associate at Ogilvy Renault who assisted Jameson on the share redemption transaction.

[19] The defendant, Ginsburg Gluzman Fage & Levitz LLP, had acted for many years as the corporate accountants for the Leikin Group, including performing the annual audits of their financial statements. Gerald Levitz was the partner who had a long-term association with the Leikin Group of companies. On the share redemption transaction he was assisted by Patricia Day, another partner who was a chartered accountant. Mr. Levitz passed away in October, 2009; his estate was the defendant at trial.

IV. A summary timeline and the key elements of the dispute in this action

A. Who has sued and who has not

[20] This action involves a dispute amongst some, but not all, of the grandchildren concerning the share redemption transaction in 2005 which saw a majority of the grandchildren (8 of the 11) have their shares redeemed in companies which owned two significant, or core, shopping centre assets – College Square and Zena’s Fisher Heights Plaza. Six of those eight selling grandchildren have brought this action seeking damages in respect of that share redemption transaction. Two of the selling shareholders – Ivan Kesler and Steven Kesler, the brothers of Rick Kesler – have not joined this action as plaintiffs. Evidently they were content with the share redemption transaction.

B. An overview of the chronology

[21] The share redemption transaction between the Selling and Non-Selling Shareholders used a negotiated price which reflected an attributed value for College Square of $60 million. The later sale of a 50% interest in College Square to First Capital Realty (“FCR”) to finance the share redemption transaction was at a price which reflected an attributed value of $78.8 million. The plaintiffs/Selling Shareholders alleged, in essence, that they should be entitled to share in some of the enhanced value attributed to College Square on the sale to FCR as a result of various alleged breaches of fiduciary duties by the defendants.

[22] In February, 2004, Josephine Harris, on behalf of the Harris Family plaintiffs, informed the Company that they wanted to cash-out their interests. This then prompted several other shareholders to offer to sell their shares. At an April 15 meeting of the Board, David Katz raised the possibility of a strategic alliance with FCR; the Board did not pursue the matter.

[23] Pressure mounted from some family members to monetize their interests in the Company, especially that related to College Square. In June then counsel for the plaintiffs wrote indicating that a majority of the shareholders wanted to redeem their shares or wind up the Company. The possible sale of College Square was also mentioned.

[24] In July, 2004, Barbara Farber approached the CIBC to act as an advisor, and that month the Board engaged CIBC to prepare a report valuing the Company’s core developed assets – College Square and Fisher Heights – and developing a structure under which the plaintiffs could sell their shares.

[25] The CIBC secured an appraisal report from the Altus Group which valued College Square at $55 million as of August 1, 2004. The CIBC then submitted its own report on September 23 describing a possible share redemption transaction structure by which the Selling Shareholders could monetize their interests in the core assets. Later that month the Board reviewed the report, as well as a draft letter of intent (“LOI”) amongst the shareholders prepared by Ogilvy Renault.

[26] On October 1, 2004, information was circulated to the holders of common shares, including a term sheet for a proposed share redemption transaction, as well as the draft letter of intent. The LOI proposed a reorganization of the Leikin Group and a share redemption transaction, rather than a share purchase transaction. Grandfather’s restriction on the transfer of Leikin Group shares drove the choice of that deal structure.

[27] Rick Kesler thought that a further appraisal of College Square should be obtained, so the Board retained Grant Edwardh, who submitted a review report dated October 20, 2004 suggesting revisions to the Altus Report. That then led to Altus sending the Company a revised valuation report dated November 5 increasing the appraised value of College Square.

[28] Extensive negotiations then ensued amongst the shareholders. For a period of time the parties broke off negotiations. Rick Kesler, and his legal partner, Jules Lewy, acted as the principal negotiators for the Selling Shareholders. Ultimately on April 18, 2005 the shareholders executed a Letter of Intent for a share redemption transaction in which the negotiated transaction price used a value of $60 million for College Square. The LOI provided the Non-Selling Shareholders with a window of 120 days in which to secure financing for the share redemption and the method of financing was in their “sole discretion”.

[29] Shortly after executing the LOI the Non-Selling Shareholders retained RBC Capital to run a marketing process for the sale of an interest in College Square to a third party equity investor. RBC circulated a Confidential Information Memorandum to interested parties and secured several letters expressing interest. After evaluating the expressions of interest RBC recommended the proposal by First Capital Realty as the superior one. On July 8 FCR formally offered to acquire a 50% interest in College Square for $39.4 million.

[30] On August 4, 2005 the share redemption transaction closed in escrow. On August 11 the Non-Selling Shareholders entered into an agreement of purchase and sale with FCR for a 50% interest in College Square. On September 29, the FCR transaction closed, and a few days later, on October 4, the Selling Shareholders received their proceeds from the share redemption transaction. Very shortly thereafter the Selling Shareholders learned of the FCR transaction when that company announced the completion of the deal in a press release. Almost two years passed before the plaintiffs/Selling Shareholders issued the Notice of Action for this proceeding on October 2, 2007, just a few days before the expiration of the limitation period.

C. An overview of the claims advanced by the plaintiffs

[31] Before proceeding to review the key portions of the evidence and to make findings of fact, let me sketch the nature of the claims advanced by the plaintiffs so that a framework exists in which to understand the evidence.

[32] In this action the plaintiffs seek damages of $11 million from the defendants, which they contend was the “profit” earned by the Non-Selling Shareholders on their sale of an interest in College Square to FCR. In general terms the plaintiffs alleged against the defendants breaches of fiduciary duty or knowing assistance in breaching fiduciary duties owed to the plaintiffs, and against the Non-Selling Shareholders and the Leikin Group they also alleged oppression, breach of confidence, misuse of confidential information, and unjust enrichment.

[33] The essence of the plaintiffs’ breach of fiduciary claims is that the defendants knew, before concluding the redemption of the Selling Shareholders’ shares, that the true fair market value of College Square was significantly in excess of the value attributed by CIBC and its advisors which, the Selling Shareholders contend, formed the basis of the redemption transaction. Armed with that knowledge, it is alleged, the Non-Selling Shareholders were able to buy out the other family members at an unreasonably low price and then, immediately upon locking up the redemption of those shares, sell part of College Square to FCR based on a much higher value. The resulting “profit” earned by the Non-Selling Shareholders is what the plaintiffs seek to recover in this lawsuit.

C.1 As against the Non-Selling Shareholders and the Leikin Group

[34] The plaintiffs claim against the Non-Selling Shareholders and the Leikin Group for damages for breach of fiduciary duty, oppression, breach of confidence, misuse of confidential information and unjust enrichment. The plaintiffs pleaded that the Non-Selling Shareholders owed duties to all shareholders. Specifically, they asserted that the individual Non-Selling Shareholders, in their capacities as directors, officers or, in the case of David Katz, a former officer of the Leikin Group, owed a fiduciary duty “to all of the shareholders, including the Selling Shareholders” (i) to act in their best interests, (ii) to refrain from utilizing confidential information for their personal gain to the detriment of the Selling Shareholders, and (iii) to refrain from diverting a corporate opportunity for their personal benefit.

[35] The plaintiffs’ opening and closing statements identified the following key elements of their claims against the Non-Selling Shareholders:

(i) The Non-Selling Shareholders possessed material information about the potential value of College Square which they failed to disclose to the plaintiffs, specifically the existence and nature of discussions regarding the sale of College Square held with FCR;

(ii) By July 14, 2004, the Non-Selling Shareholders were aware that (a) FCR had expressed a strong desire to purchase an interest in College Square, (b) FCR had the wherewithal to purchase such an interest, and (c) FCR had been involved in negotiations with David Katz which had assigned a value to College Square in excess of $70 million;

(iii) The information about the dealings with FCR was material from the start of 2004 or, as put by the plaintiffs in their opening statement:

It was material when David Katz was President of the companies; it was material when he was employed as a consultant; it was material when he communicated this information to the other Defendants to this action; and it was material when these Defendants pressed the Plaintiffs in negotiations to accept a significantly lower value for College Square in the share redemption transaction.

(iv) The Non-Selling Defendants were under a duty to disclose that information to the plaintiffs. The Non-Selling Shareholders owed the plaintiffs an ad hoc fiduciary duty because:

(a) they had undertaken to act in the plaintiffs’ best interests by representing that the share redemption would be based on fair market value, the process would be open and transparent, and the process would be in the interests of all shareholders;

(b) they possessed information which by its very nature caused the plaintiffs to be vulnerable;

(c) this vulnerability could only be addressed properly through the disclosure of the FCR negotiations;

(v) This fiduciary duty could not be discharged by suggesting that the plaintiffs obtain independent legal advice or by the give-and-take of a process of negotiation. The duty could only be discharged by the disclosure of the material information; and,

(vi) By failing to disclose that material information and by concealing the FCR negotiations, the Non-Selling Defendants were able to manufacture a significant benefit – effectively they increased their interest in College Square from 27% to 50% without any financial contribution from them, all at the expense of the Selling Shareholders. The Non-Selling Shareholders intended to use the spread between the values assigned to College Square in the share redemption transaction and the price fetched on the subsequent sale of an interest in that property to a third party to increase their equity share in College Square.

[36] In their factum on the Summary Judgment motion, on which they relied at trial, the plaintiffs identified two ways in which the Non-Selling Shareholders stood as fiduciaries in relationship to the Selling Shareholders: (i) as directors and officers of the Company with duties “to the board of directors that flowed to all the shareholders”, and (ii) as agents to their principal by virtue of “their undertaking to devise a strategy and process for the Selling Shareholders to liquidate their interests in College Square.”[^4]

[37] The plaintiffs also pleaded that the Non-Selling Shareholders, as directors and officers (or former officer), owed a duty to the corporation not to divert a corporate opportunity for their personal benefit. Although the Ontario Business Corporations Act provides for shareholders to seek leave of the court to commence a proceeding against directors and officers for breach of a duty to the corporation, no such leave has been sought or received in respect of this element of the plaintiffs’ claim, so I give no effect to it.[^5]

[38] The Non-Selling Shareholders argued that they owed no fiduciary duty to the plaintiffs, largely for two reasons: (i) the level of mistrust between the two sides of the family militated against the creation of a fiduciary relationship; and, (ii) the share redemption transaction essentially placed one group of shareholders in a position opposite to the interests of the other – the transaction involved classic self-interested negotiations. Further, the Non-Selling Shareholders contended that they did not fail disclose any material facts.

C.2 As against the lawyers, Grant Jameson, Geoffrey Gilbert and Ogilvy Renault LLP (the “Lawyer Defendants”)

[39] In their opening and closing statements at trial the plaintiffs submitted that an ad hoc fiduciary relationship existed between the Lawyer Defendants and the plaintiffs, that the Lawyer Defendants owed them a duty to disclose material information, and that by failing to disclose the FCR negotiations, or assisting in its non-disclosure, they breached that duty. Specifically, the plaintiffs argued that by July 14, 2004, the Lawyer Defendants possessed information concerning the value of College Square, FCR’s willingness to purchase an interest in the asset, and the goal of the Non-Selling Shareholders in the share redemption transaction to gain an equity control over College Square which they did not have at the expense of the plaintiffs.

[40] In their Statement of Claim the plaintiffs alleged that because the Leikin Group was a closely-held family corporation and Jameson had acted as corporate secretary at board meetings, the Lawyer Defendants owed a fiduciary duty to both the corporation and its shareholders. The plaintiffs also pleaded that the Lawyer Defendants knowingly assisted the Non-Selling Shareholders in breaching their fiduciary duties to the plaintiffs and the corporation.

[41] In response, the Lawyer Defendants argued that they were the solicitors for the companies and owed no fiduciary obligation to the shareholders to look out for and protect their personal self-interests. Those personal interests, these defendants argued, were protected by the independent legal and financial advice the plaintiffs received concerning the reorganization and the share redemption transaction. The Lawyer Defendants also contended that they did not possess any material information about the dealings with FCR which they failed to disclose to the plaintiffs.

[42] At trial the plaintiffs disputed the suggestion made by the Lawyer Defendants that they were acting as mere conduits of information between the Selling and Non-Selling Shareholders. It was the plaintiffs’ position that the Lawyer Defendants were acting on the instructions of the Non-Selling Shareholders, even when those instructions were to the detriment of the plaintiffs or the company itself.

C.3 As against the accountants, Patricia Day, the estate of Gerald Levitz and Ginsburg Gluzman Fage & Levitz LLP (the “Accountant Defendants”)

[43] In their opening and closing statements at trial the plaintiffs submitted that an ad hoc fiduciary relationship existed between the Accountant Defendants and the plaintiffs, that the Accountant Defendants owed them a duty to disclose material information, and that by failing to disclose the FCR negotiations, or assisting in its non-disclosure, they breached that duty. Specifically, the plaintiffs argued that by July 14, 2004, the Accountant Defendants possessed information concerning the value of College Square, FCR’s willingness to purchase an interest in the asset, and the goal of the Non-Selling Shareholders in the share redemption transaction to gain an equity control over College Square which they did not have at the expense of the plaintiffs.

[44] The plaintiffs alleged that the Accountant Defendants “acted as the corporate accountants” for the Leikin Group and “in respect of the share redemption transaction, were providing professional accounting advice to the corporation, its Board of Directors and all of the shareholders.” At the same time, the plaintiffs claimed that the Accountant Defendants “took direction from some or all of the Non-Selling Shareholders exclusively in respect of the financial affairs of the company”. The plaintiffs also pleaded that the Accountant Defendants knowingly assisted the Non-Selling Shareholders in breaching their fiduciary duties to the plaintiffs and the corporation. Further, the plaintiffs alleged that at certain points in the transaction Gerald Levitz provided them with advice concerning the transaction, on which they relied.

[45] The Accountant Defendants took the position that they owed no fiduciary duty to the individual shareholders, knew nothing of any deal with FCR until after the August, 2005 agreement was executed, prepared various calculations using numbers provided by the management of the Leikin Group and, as accountants for the corporation, appropriately released to the plaintiffs only those calculations which management had directed them to provide.

V. How I intend to deal with the evidence

[46] As a result of the directions I gave when disposing of the summary judgment motions, the evidence at trial consisted of that adduced on the summary judgment motions, together with additional evidence tendered at the trial. My Summary Judgment Reasons contained a detailed review of the evidence led on those motions. In these Reasons I will recite most, but not all, of that evidence, but I do wish to emphasize that in preparing these trial Reasons I have reviewed and taken into account all of the evidence set out in my Summary Judgment Reasons, in particular the evidence found in paragraphs 42 to 273, 306 to 308, 346 to 364, and 384 to 390 of those Summary Judgment Reasons. As I proceed through the chronology of events in these trial Reasons, I will identify those portions of the Summary Judgment Reasons which contained evidence relating to the particular events which I have reviewed and considered.

[47] What I propose to do in these Reasons is to draw on all of that evidence in order to make the necessary findings of fact to determine the issues at trial. I will take into account the following findings of fact which I made at paragraph 274 of my Summary Judgment Reasons largely concerning the dealings between the Non-Selling Shareholders and FCR. Specifically, I made the following findings of fact:

(i) Prior to the commencement of negotiations amongst the shareholders in November, 2004, First Capital had not entered into any binding agreement to acquire an interest in College Square. First Capital had not even made an offer to the Leikin Group for such an interest. What First Capital did, as early as January, 2004, was to express an interest in acquiring part of College Square and it engaged in some discussions with David Katz to that end in January and February, 2004, as well as in the August to October, 2004 time period;

(ii) At the time the shareholders executed the LOI on April 18, 2005, First Capital had not made any offer to acquire an interest in College Square, let alone enter into any binding agreement to do so. To the contrary, First Capital was told by the Leikin Group in October, 2004 that no further discussions could be held until the company had resolved its internal affairs;

(iii) First Capital made its first, and only, offer to purchase an interest in College Square by its LOI dated July 8, 2005;

(iv) A binding agreement of purchase and sale for an interest in College Square was entered into between First Capital and the designated Leikin Group entity on August 11, 2005. No prior binding agreement had been entered into;

(v) David Katz commenced discussions with First Capital about the possibility of that company acquiring an interest in College Square in January, 2004. He continued those discussions in February, 2004, and from July until October, 2004. As was described in the engagement letter for RBC Capital, by October, 2004 those discussions had reached an “advanced” stage before they were terminated by the Leikin Group;

(vi) During their discussions in January and February, 2004, David Katz and Sylvie Lachance had talked about a possible acquisition price using a 100% value for College Square in the low 70 millions;

(vii) From the beginning of the discussions about the possible sale of shares by certain shareholders in early 2004, the relationship between the plaintiffs (except for David Spieler) and the Katz Siblings was marked by significant mistrust. By April or May, 2005, a similar lack of trust had emerged between David Spieler and the Katz Siblings;

(viii) Throughout their dealings with the Leikin Group and the Non-Selling Shareholders, the plaintiffs had access to, and availed themselves of, independent legal and accounting advice; and,

(ix) As a result of market commentary contained in the Edwardh Report and the updated Altus Group Report in September and October, 2004, the Selling Shareholders knew, or reasonably ought to have known, that the CIBC valuation of College Square had been undertaken in a hot, rising market where investors were aggressively pursuing opportunities to purchase assets such as College Square.[^6]

In my Summary Judgment Reasons I concluded:

The plaintiffs alleged and argued that some sort of deal existed with First Capital before negotiations on the LOI started in the fall of 2004 and before the LOI was executed. No evidence supported that allegation. Certainly First Capital expressed an interest in College Square to David Katz in early 2004, and the parties pursued their discussions in the late summer of 2004. But that is all they were – discussions. No agreement was reached; no commitment was made by First Capital.[^7]

[48] With that by way of background, let me turn to a consideration of the evidence.

VI. The state of family affairs at the beginning of 2004[^8]

[49] Prior to the events of 2004 strained relationships had existed amongst the children of Harry Leikin and their children. Josephine Harris described the relationships amongst the Leikin sisters and the grandchildren in early 2004 as ones characterized by conflict and lack of trust. She recalled the relationships as “fractious” going back to at least 2002, and that as of 2004 the relationships amongst the grandchildren featured mistrust and disagreement. Rick Kesler deposed that Barbara Farber’s style of management was causing tension within the family and he agreed that the board was emotional and polarized. David Spieler deposed that by 2002 tensions in the family business were very high, and he described his four Harris cousins and Stephen Kesler as “bugbears”. Business relations amongst family members were so strained that in 2002 Barbara Farber had retained the KPMG Centre for Family Business in an effort to resolve family business issues.

[50] Jameson deposed that when he started providing legal services to the Leikin Group in 2003, the common shareholders were a fractious group and little trust or cooperation existed amongst them. He knew there was acrimony between the directors, as well as issues of trust.

[51] David Katz was involved formally in the affairs of the Leikin Group for some time before the transaction. From 2001 until 2003 he acted as a consultant to the Leikin Group. He then served as the President of the Leikin Group from June, 2003 until May, 2004, when some of the directors required him to resign.

[52] At the material times in 2004 and 2005 the boards of directors of the Leikin Group of companies consisted of Barbara Farber, Andrew Katz, Rick Kesler, David Spieler and Josephine Harris – i.e. the boards consisted of three Selling Shareholders (Kesler, Spieler and Harris) and two Non-Selling Shareholders (Farber and Andrew Katz).

VII. January – April 15, 2004: The initiation of the share sale process[^9]

[53] At a board meeting on February 6, 2004, Josephine Harris informed the other directors that the Harris Plaintiffs wanted to sell their shares in the Leikin Group and had retained a Chicago lawyer and accountant, James Mainzer, to advise them on the sale. Mainzer specialized in federal income tax and estate planning. The Harris Family did not like the management style of Barbara Farber or the involvement of David Katz in the business, and they wanted to liquidate the value of their interests in the business. As Harris testified: “My children needed to redeem or rescue their shareholdings which we felt were not in safe hands.” Mainzer sought and obtained information from the Accountant Defendants so the Harris Plaintiffs could assess the value of the shares.

[54] David Spieler’s initial reaction to the proposal of the Harris Family was not positive. He emailed Ms. Farber on February 10 querying why “our company should pay full value for redeemed shares to quitters and make it easy to go while we hold the bag”.

[55] Farber circulated a letter to all shareholders on February 12, 2004 telling them of the decision of the Harris Plaintiffs and stating that because the companies lacked sufficient cash to fund the share purchase without incurring debt, undoubtedly the cost of servicing any debt required to buy-out the shares would have a material impact on the companies’ ability to pay dividends. Farber also wrote that neither she, David Katz nor Andy Katz were interested in selling their shares and she requested any other shareholder interested in selling their shares to let her know by February 20, 2004 so that the companies could have a clear idea of the amount needed to buy the shares.

[56] Around this time the Katz Family shareholders discussed the possible retainer of CIBC Mid-Market Investment Banking to provide advice regarding the Harris Family’s interest in selling their shares. No retainer with CIBC was entered into at that time.

[57] On February 24 Barbara Farber emailed all shareholders and directors a one-page memo setting out how a common shareholder could submit an offer to sell all of his or her shares. That elicited a February 25 memo from Rick Kesler to all shareholders, on the letterhead of Fraser Milner Casgrain, in which he observed that if a sufficient number of shareholders wanted to sell their shares, the corporation might have to purchase them and that, in turn, would require the consideration of various financing options. Mr. Kesler called for a directors’ meeting to consider those issues. On February 27 Rick Kesler told Mainzer that at the next Board meeting he planned to propose the liquidation of all the entities rather than using a process under which shareholders could sell their shares.

[58] Mainzer asked Gerald Levitz, the accountant for the Leikin Group, to provide financial information about the company to assist his clients in selling their shares in the Leikin Group. Levitz did so on February 26, 2004. Harris deposed that the information was used by Mr. Mainzer, their advisor, to “attempt to figure out what a potential value of the shares would be.” Based on information he had obtained from GGFL, Mainzer prepared a spreadsheet around March 29 on which he listed the gross value of College Square at $60 million. He passed that information along to Kesler, who in turn sent it to one of his FMC partners, Mr. Jules Lewy.

[59] On March 12 Steven Kesler sent Farber a letter offering to sell his shares in the Leikin Group for $5.3 million.

[60] On April 14 Mainzer sent Farber a letter containing an offer by the Harris Plaintiffs to sell their shares for $6.2 million for each interest (or $24.8 million in total). According to Mainzer had “put a value” on the shares based, he said, on the information which had been provided by GGFL. Harris testified that although the letter talked of a sale of the shares to the remaining shareholders, she always understood that the transaction would require a redemption of their shares by the corporation. At trial Mainzer described the expectations of his clients at the time of their offer as follows:

Q. And it would be fair to say that with your experience and what you knew on April 14, 2004 that after your clients had sold their shares, the remaining shareholders, and the remaining corporate entities would’ve been free to do whatever they wanted with the properties?

A. Yes.

Q. And was there any consideration with the Harris family children that if they sold their shares, pursuant to the terms of the April 14th letter, and they found out later on that the properties had increased in value that they would – they would consider coming back and suing the selling shareholders?

A. I have no idea.

Q. That wasn’t discussed?

A. No.

[61] On May 12 Kesler offered to sell his shares for $6 million which reflected his best guess at the value of his shares. Combined, these offers would require the Leikin Group to fund buy-outs totaling $36 million.

[62] Although each offer to sell contained an expiration date, Farber did not respond to the offers by those dates because, she deposed, to purchase or redeem the proffered shareholdings would require over $36 million and “it was unclear as to whether such transactions would even be possible.”

VIII. The dealings between Katz and First Capital Realty prior to the April 15, 2004 Board meeting[^10]

A. The initial contact

[63] The Leikin Group held a Board meeting on April 15, 2004. Prior to that meeting David Katz had engaged in some discussions with FCR about entering into a development and acquisition arrangement for non-enclosed retail developments within the greater Ottawa area. Katz described this as discussing a possible “strategic alliance”. Katz regarded the College Square development as an integral part of the strategic alliance he wished to discuss with FCR, including the sale of a partial interest to FCR.

[64] The contact between Katz and FCR came about in the following way. At the time Sylvie Lachance was the Executive Vice-President and Chief Operating Officer of First Capital. FCR focused on owning, developing and operating supermarket and drugstore-anchored shopping centres. Lachance’s job was to search for new properties.

[65] In December, 2003, as a result of a discussion at a trade conference, David Katz had sent FCR a list of some properties which might be of interest to it; College Square was not on the list. Lachance could not recall who next called whom, but in early 2004 she began to deal with Katz about a strategic alliance, including a co-tenancy arrangement for College Square. She dealt with David Katz because she understood that he was a representative for the shopping centre’s owners which she knew were a group of family members. Lachance described Katz as a very reputable business person.

[66] Lachance testified that FCR generally used a multi-stage approach to acquiring properties: first pursuing exploratory discussions, followed by signing a non-binding letter of intent or expression of interest, then conducting due diligence, seeking senior management approval, and then executing a binding agreement of purchase and sale.

[67] FCR signed a confidential disclosure agreement dated February 9, 2004 which had been requested by David Katz in anticipation of the discussions in order to protect financial information regarding College Square which David Katz planned to disclose to FCR. Lachance regarded the request as “customary”. The disclosure agreement described the confidential information to be disclosed as “general business opportunities” and stated that any information would be used only for the purpose of “evaluating for possible investment in the retail development known as College Square…” Lachance testified that FCR normally was interested in purchasing 100% of a shopping centre, but it was open to acquiring a partial interest in College Square. Katz confirmed at that trial that by that point in time FCR had indicated to him that it was interested in College Square.

[68] Katz sent FCR an analysis of the College Square 10-year projected rental income stream which led him to estimate the market value of College Square as of February 10, 2004 at $72 million calculated on a discounted cash flow basis. He also sent to FCR a site plan, lease summary, and rent roll for College Square. Katz acknowledged that he obtained that information about College Square at a time when he was the President of the Leikin Group. At trial Katz was asked how he had arrived at the $72 million number. He replied:

Well the main purpose of sending this report was really to give Ms. LaChance an understanding of the tenant mix and the cash flow, and the net operating income that was generated by the tenant mix. The valuation number of $72 million is not a market supported valuation, it wasn’t tied to an appraisal or any relevant market activity. For me it represented an inflated value of College Square which was intentional on my part to commence discussions with Sylvie LaChance.

[69] Katz did not receive any response from FCR to this $72 million DCF analysis. He did not disclose that communication with Lachance to Farber or any other director on the Board. When asked why he had not, Katz stated that he did not think that it was relevant for them to see that information.

[70] Using that information FCR prepared an internal Pro Forma Analysis – what Lachance called a “blue package” - in February, 2004, disclosing that the vendor, the Leikin Group, would be looking for $72 million to sell College Square, whereas FCR had run numbers suggesting a $66 million price. FCR used its “blue package” to start “conversations with the vendor.” The cap rate used in the analysis was selected by a FCR analyst who was not preparing a valuation, but a range of indicative numbers. Lachance described the “blue package” as “a working document that we use internally so that we can discuss the asset internally.” David Katz did not see a copy of the pro forma at the time.

[71] Lachance recalled that at the time “cap rates and value of properties were climbing…the market was changing constantly and it had reached its peak around 2006.” Lachance remembered that in 2004 she discussed numbers with David Katz “in the neighbourhood of low 70 million”, but “the real discussion took place in 2005”. Katz testified that during the first two months of 2004 he did not talk with Lachance about a possible acquisition price using a 100% value for College Square in the low $70 million. He said he had transmitted the $72 million number to Lachance, but she had not responded at that time.

[72] In my Summary Judgment Reasons I made the following findings of fact:

(i) What First Capital did, as early as January, 2004, was to express an interest in acquiring part of College Square and it engaged in some discussions with David Katz to that end in January and February, 2004, as well as in the August to October, 2004 time period;

(ii) During their discussions in January and February, 2004, David Katz and Sylvie Lachance had talked about a possible acquisition price using a 100% value for College Square in the low 70 millions.

As referenced in the Summary Judgment Reasons, the latter finding was based on the evidence given by Lachance on her pre-trial cross-examination, specifically the following passage:

Q. 130. Okay, but this was the numbers that you were using to frame your discussion with Mr. Katz.

A. The numbers that I recall we were discussing with Mr. Katz were in the neighbourhood of low 70 million.

Q. 131. Okay. Thank you. And that’s the number you were discussing in February of 2004?

A. That’s the number that I – in that period of time with Mr. Katz you mean?

Q. 132. Yes.

A. Yes. Now, “discussing” is a big word. We never had a firm discussion about price with Mr. Katz because we didn’t have at that time an agreement. We never concluded anything in 2004, as you know. The real discussion took place in 2005.

[73] Lachance’s qualification that “discussing” was “a big word” was an apt one. When taken in context, Katz’s early February transmittal to FCR of a $72 million DCF-derived value for College Square was in the nature of a trial balloon floated by him to gauge FCR’s interest in College Square. While FCR was interested in continuing discussions with Katz about co-tenancy principles, both generally and as they could apply to College Square, Katz had not received any sort of response from FCR to the $72 million number prior to the April 15, 2004 Leikin Group Board meeting. By the time of that meeting the $72 million remained simply a trial balloon floated by Katz.

B. The March discussions on co-tenancy principles

[74] Katz met with Lachance in Montreal on March 4, 2004. He testified that it was at that time the “our discussions really commenced in earnest”. He mooted the idea of the Leikin Group and FCR working together in furthering their interests within the Ottawa market through a strategic alliance by identifying and pursuing opportunities for the betterment of both companies. College Square was mentioned in the course of that discussion. Katz testified:

I was well aware of the fact that First Capital would covet the College Square property, the College Square property represented a best of class property that their portfolio consisted of. First Capital was a company that acquired properties such as College Square which were not enclosed Shopping Centres, that were food anchored, and College Square represented the very best of that class of asset, so that I knew that it would have First Capital’s interest and I intentionally discussed it with them as an integral part of the strategic alliance discussion.

Well College Square was discussed within the context of a strategic alliance and it involved First Capital participating in the ownership of College Square, which would’ve involved Leikin Group selling a partial interest of College Square to First Capital as part of the strategic alliance.

[75] On March 5, following their meeting, Katz sent Lachance a memorandum describing a possible strategic relationship between the Leikin Group and FCR in the Ottawa market. In the memo Katz described the purpose of a strategic alliance in the following terms:

For First Capital Realty and the Leikin Group to work in a collaborative manner in acquiring retail/commercial redevelopment opportunities and/or acquiring property for retail/commercial development within the Greater Ottawa Market, with the intention of becoming the dominant non-enclosed retail centre developer/asset manager within the market.

Katz proposed that the parties would hold their respective interests in properties as undivided co-ownership interests in proportions to be determined, and he contemplated that the co-ownership venture by the two companies could include College Square. Katz wrote that if the co-ownership arrangement did not reach a stipulated level of net income by the end of its first 10 year term:

[T]he Leikin Group shall have the right to repurchase the minority interest in the asset known as College Square that it is intending to sell to First Capital Realty Inc., at a price that is equal to the price paid by First Capital Realty in acquiring such minority interest.

[76] From this memo it is clear that Katz was contemplating that as part of a larger strategic alliance between the two companies in the Ottawa area, FCR would acquire a minority interest in College Square. On cross at trial Katz stated: “I was in effect using College Square as a bit of a carrot I would say to attract First Capital and attract their interest and hopefully maintain their interest in discussing a strategic alliance…”

[77] Lachance secured a memorandum dated March 9, 2004 from Ms. Rita de Santis, a lawyer at Davies Ward Phillips & Vineberg, FCR’s counsel, addressing a number of issues surrounding a co-ownership arrangement with the Leikin Group for College Square – the “re” line on the memo referenced “College Square” - and she sent the memo to David Katz. He, in turn, sent Lachance a memo dated March 12, 2004 giving his views on FCR’s lawyer’s memo. In that memo Katz wrote about “the fundamental principles which must govern the co-ownership arrangement pertaining to College Square…” Katz’s thinking at that time about the reason for talking with FCR about College Square was captured in the following portion of his memo to Lachance:

[The Lekin Group’s] interest in selling a minority interest in [College Square] to [FCR] would be strictly and solely for the purposes of encouraging and facilitating the parties in entering into a co-ownership based development and acquisition arrangement, for non-enclosed retail developments within the Greater Ottawa Market (“Ottawa Co-ownership Agreement”), which would be substantially based on the draft outline transmitted on March 5th.

There was no suggestion by Katz in that memo that his interest in discussing a co-ownership arrangement with FCR for College Square had anything to do with the need to find financing for a potential purchase of the shares of some of the Leikin Group’s shareholders.

[78] On his cross-examination on the summary judgment motion Katz had disagreed with the suggestion that by that point of time he was negotiating with Lachance: “We were discussing a co-ownership outline...It’s not a product of negotiating.” He described his discussions with Lachance as “exploratory”. As he put it during that cross-examination:

Q.: And if you reached a consensus of opinion, as you have stated it, would that not be then reflected in a co-ownership agreement that both of you could accept?

A. If it was the intention of the parties to ultimately create a definitive co-ownership agreement, I would agree with you but that wasn’t the intention here. The intention here, as I’ve mentioned, was to determine if we could reach consensus of opinion on co-ownership issues, nothing more.

It’s not a negotiation. First Capital transmitted basic terms of a co-ownership outline for my review and I commented on that co-ownership outline through my memo of March the 12th. That’s what was taking place.

[79] At this point a long lull occurred in the discussions between David Katz and Lachance. Katz testified that Lachance did not respond to his memo of March 12, 2004, and he had no further contact with Lachance prior to the April 15, 2005 Leikin Group Board meeting about College Square. (Some contact took place between them about a potential offer by FCR for another property, Perth Mews.) They only resumed their discussions in earnest in August, 2004, and I will return to those events later in these reasons. I should note that Ms. Lachance testified that she was not aware that Mr. Katz had resigned as the President of the Leikin Group in May, 2004, but, as she stated: “why should I have been concerned at this early stage?”

[80] Barbara Farber testified at trial that prior to the April 15 Board meeting she had not been aware of any discussions between her brother and FCR, save for one occasion when her brother had brought Lachance through their offices.

[81] Harris and Kesler had not been aware of the contact between Katz and Lachance prior to the April 15 Board meeting. Harris deposed that from her perspective, the March memoranda passing between Katz and FCR showed that “David Katz had engaged in negotiations with First Capital Realty regarding its acquisition of an interest in College Square”, and that neither she nor her children had been aware of those negotiations at the time of the April, 2004 Board meeting. Rick Kesler stated that he, too, had not been aware of those discussions with FCR.

C. Findings of fact

[82] I make the following findings of fact regarding the nature of the discussions which took place between Katz and FCR in 2004 prior to the April 15, 2004 Leikin Group Board meeting:

(i) As the President of the Leikin Group, David Katz was interested in positioning the company as a significant player in the Ottawa region shopping centre development business. Given the modest size of the Leikin Group, he decided that the company had to link up with a larger, established player through some form of strategic alliance;

(ii) Katz viewed FCR as a company which fit the bill for a possible strategic alliance;

(iii) In his initial overture to Lachance in early February, 2004, Katz tried to whet FCR’s appetite for an alliance by indicating it would include an interest in College Square;

(iv) The $72 million estimate of value generated by Katz and sent to FCR was not based on any appraised value for College Square. Using his own assumptions about internal rates of return and capitalization rates, Katz ventured a $72 million value for the property. That number was in the nature of a trial balloon designed to gauge FCR’s willingness to pursue discussions about a strategic alliance;

(v) Prior to the April 15 Board meeting FCR did not respond to Katz’s trial balloon of $72 million. That said, FCR did express its willingness to talk about the general principles which would surround a co-tenancy strategic alliance between the two companies for various properties, including College Square, and it engaged with Katz in discussing some co-tenancy principles in the first part of March. But, by the time of the April 15 Board meeting over a month had elapsed since Katz had sent FCR his March 12 memo, and Katz had heard nothing further from FCR about College Square; and,

(vi) I accept, as an accurate description of the nature of these initial discussions between Katz and Lachance, Katz’s description of them as “exploratory”.

IX. The April 15, 2004 Board meeting[^11]

[83] A meeting of the Board of the Leikin Group was held on April 15, 2004. Harris participated in the April 15 Leikin Group Board meeting by way of telephone. The directors received an agenda in advance of the meeting. Item 4 on the agenda was a “review and approval of short and medium term strategic objectives”; Item 5 was a “report on Leimerk”.

[84] For the meeting Katz had prepared a PowerPoint presentation entitled, “Short & Medium Term Strategic Objectives”. The presentation contained a number of slides dealing with a possible “Leikin Group-First Capital Realty Strategic Alliance”. The slides described the purpose of the proposed alliance as working “in a collaborative manner in acquiring retail/commercial redevelopment opportunities and/or acquiring property for retail/commercial development within the Greater Ottawa Market…” A copy of Mr. Katz’s PowerPoint presentation had been circulated to most directors prior to the meeting, although Harris did not recall receiving a copy before the Board meeting.

[85] A dispute existed between the Leikin family parties as to what David Katz told the Board at that meeting about his discussions with FCR, specifically as those discussions had related to College Square. I will first set out the evidence of each witness, and then make findings of fact.

A. The evidence

Josephine Harris

[86] In her pre-trial affidavit Ms. Harris had given the following evidence about her recollection of what transpired at the April 15 Board meeting:

David Katz began to make a presentation to the Board with respect to his position that the Leikin Group of Companies should enter into a strategic alliance with an arm’s length third-party, First Capital Realty. During the presentation and the discussions, it was disclosed that David Katz had brought First Capital Realty through the Leikin Group of Companies corporate office located at College Square and to the Perth Mews shopping centre.

In his pre-trial affidavit Rick Kesler had deposed in respect of that recounting by his aunt of the events at the Board meeting:

My recollection of those events accords with Jo’s recollection; however, I also recall that at the meeting Grant Jameson advised the Board that David Katz’ actions were highly inappropriate and that he had breached his fiduciary duty to the companies.

[87] At trial, in chief, Ms. Harris recalled that David Katz had started to talk about Leimerk (Agenda Item 5) when the meeting came to a screeching halt and Katz did not get to finish his presentation because of an issue respecting the interest of Loblaws in Leimerk’s Perth Mews shopping mall. On cross she stated that she did not know how far David Katz got in the agenda, but he did talk separately about Perth Mews and a strategic alliance with FCR. Harris recalled that Katz informed the Board that he had taken business people from Montreal to look at the Perth Mews shopping centre, and, as well, he had brought them to College Park and the company’s business office. Harris found that “shocking”. At the meeting Katz had identified the business people as from FCR.

[88] As to whether there was any mention at the Board meeting of an interest by FCR in acquiring an interest in College Square, at trial, in chief, Harris testified:

Q. Ms. Harris at the April 15th board meeting was there any discussion with respect to College Square?

A. No.

Q. At any time during the board meeting do you recall whether there was a mention of anyone buying College Square or College Square being sold?

A. Oh, no, no, on my first answer did we talk about College Square, I think it was such a source of pride that we rarely gathered that we didn’t say this is good, and that the - our offices were good, and so on. So in that very – in that very familial way we may have talked about College Square, but certainly the issue of it being sold to anyone was unthinkable.

Q. There was no discussion at that meeting regarding selling College Square?

A. No, no, no.

[89] By contrast, on cross-examination at trial, Harris testified:

Q. Well we’ve already gone over it First Cap – David Katz had presented a strategic alliance with First Capital and it was a relation to the Leikin Group. We’ve established that already Ms. Harris, and I’m indicating to you within that discussion of a strategic alliance between the Leikin Group, and First Capital Realty he indicated that First Capital had an interest in College Square as part of that strategic alliance?

A. I’m not – I’m not disagreeing with you, the answer would be yes, he indicated that.

[90] At trial on cross-examination Harris also testified:

Q. And I suggest to you that when dealing with this strategic alliance Mr. Katz informed the board that he had significant discussions with First Capital?

A. As a matter of fact I don’t recall that, I do recall saying at that meeting how long have you been dealing with these people, and I said it sounds to me as though you’ve been – you’ve known about them for quite a long time.

Q. Right.

A. When did all this start, that was the line of questioning from me. It just it sounded as though it had gone back further than I was aware.

Q. My question is did Mr. Katz inform the board that there were ongoing discussions with First Capital, you would agree with that?

A. Yes.

Q. And he proposed to the board that the Leikin Group and First Capital would work together to grow the assets of the Leikin Group and First Capital in the Ottawa market?

A. Yes.

Q. And he advised the board, did he not, that no commitment was made with First Capital, did he not?

A. No commitment was made with First Capital at the time?

Q. With respect to the strategic alliance?

A. Umm-hmm. No, I don’t recall – I don’t recall that there was anything definite about a strategic alliance and the Leikin Group. I think he wanted that, that - that was what he hoped to do.

Q. And did Mr. Katz not say that it was his duty to bring these opportunities forward to receive the directions from the board to pursue with First Capital or not pursue with First Capital?

A. I think he said that, something like that, yes.

Q. And that all management was putting forward a framework which would be financially lucrative to both the Leikin Group and to First Capital?

A. Well we would need to see more, know more, uh-huh -

Q. But he indicated that he would -

THE COURT: Let the witness finish please.

MR. VICTOR: Sorry.

THE COURT: You would need to see more?

MS. J. HARRIS: A. Yes, and know more about what had been the relationship between David Katz and First Capital, and how he wanted to involve the Leikin Group.

[91] Ms. Harris testified that she was satisfied that David Katz had not made any commitment to FCR. She also acknowledged that based upon what she had heard at the Board meeting, her family did not withdraw its April 14 offer to sell their shares.

Rick Kesler

[92] Kesler recalled that the meeting lasted no more than 30 minutes because it came to a conclusion when David Katz began to talk about a business opportunity that more properly belonged to Leimerk. In chief at trial Mr. Kesler stated that there was no disclosure of any expression of interest by FCR in College Square. On that point he disagreed with the evidence of his aunt, Ms. Harris, saying that she was mistaken in her recollection. He testified that what Katz had disclosed at the meeting was that he had met with Ms. Lachance of FCR.

[93] At trial, in chief, Mr. Kesler disagreed with his aunt that at the meeting they learned that David Katz had taken FCR people through the Leikin Group properties and office. That evidence directly contradicted the evidence he had given in his pre-trial affidavit which had adopted his aunt’s evidence on that point. On cross, at trial, Kesler contended that he did not learn that information until after this action had commenced, and he refused to acknowledge that the evidence he had given in his pre-trial affidavit was mistaken, although he conceded the inconsistency between his two statements. When asked why he had not disclosed before trial his view that his aunt was mistaken in her recollection on this point, Kesler responded that “it was not a significant matter that was raised”. That his recollection did not accord with hers was something that “didn’t jump off the page at me”.

[94] Kesler did admit on cross-examination that at the meeting David Katz made an overhead presentation about a possible strategic alliance between FCR and the Leikin Group, but he contended that it was in connection with the Perth Mews property. Kesler agreed that that David Katz used a PowerPoint, or overhead, presentation, entitled, “Short & Medium Term Strategic Objectives”, but disagreed that Katz presented to the Board a presentation which he had made in February to the Leimerk Executive Committee. (Katz testified that he had planned to hand out the Leimerk document at the Board meeting, but he did not have an opportunity to present it.)

[95] Kesler agreed that the matters recorded by Mr. Jameson in the notes of that meeting about David Katz’s presentation were discussed.

David Spieler

[96] At trial Mr. Spieler testified that the Board meeting came to an end when David Katz raised the possibility of the Leikin Group acquiring a property at Perth Mews together with FCR. Mr. Spieler agreed that at the meeting Katz handed out a Leikin Group/FCR strategic alliance document, but one different from that identified by other participants. He did not recall Katz going through the ins and outs of the document because the meeting came to an end over the Leimerk issue. Spieler recalled no discussion about FCR having an interest in College Square.

David Katz

[97] Katz testified that the meeting went from about 9:30 a.m. until 3:00 p.m. Although at the April 15 Board meeting Katz informed the Board about discussions he was having with FCR concerning the Perth Mews property, he acknowledged that he had not included in his PowerPoint presentation to the Board any reference to College Square. On his pre-trial cross-examination Katz testified that he believed College Square was discussed at the meeting as part of the possible strategic alliance with FCR. Elsewhere in that cross-examination, however, when asked why he did not inform the Board of the Leikin Group at that time about his discussions with FCR, David Katz replied: “It would have been premature to review anything at this stage. It’s very preliminary.”

[98] Yet, at trial Katz testified as follows in chief:

A. As I started to present the material … what I found was that I was being rushed through the presentation.

Q. What do you mean being rushed through the presentation?

A. Well this presentation was prepared to promote a lot of discussion, I expected to spend a couple of hours on the matters that were included in the presentation, I considered them to be important matters. I was excited about the idea of presenting these opportunities because in my view as president of the corporations they were truly opportunities that I felt were in the best interest of the corporations and it would enhance the value for shareholders, and I was expecting to present material, I was expecting to have a lot of questions, provide a lot of answers, and I recognized having been in the real estate development business for 25 years that a strategic alliance opportunity is – can be, and in fact what I was attempting to present was a very sophisticated and complex opportunity, and my primary reason in presenting it at the April 15th meeting was to try to ensure that the board had a very good understanding as to what I was trying achieve with First Capital.

Q. Now when you were – did you inform the board about your discussions with First Capital Realty?

A. I informed them - as I was making the presentation I informed the board that I had discussions with First Capital, that I had exchanged memos with First Capital and that I had specifically discussed College Square with First Capital within the context of the strategic alliance opportunity.

Q. Now you had indicated before that you felt you were rushed through the – what did you mean by that?

A. It was made very clear to me that the three board members in particular Josephine Harris, who was on the phone, David Spieler, who was attending personally, and Rick Kesler, who was attending personally, were not much interested in what I had to say, they were more interested in getting through the slides and moving on to other things. So what I felt was going to be a opportunity that needed to be fully explored and reviewed and considered by the board, it was quite clear to me that these three directors had absolutely no interest in reviewing, discussing or even considering the opportunity, and the presentation lasted a very short time. Essentially it lasted as long as it took me to flip through the slides and convey the preliminary information about my discussions with First Capital that took place in March, and First Capital’s interest in College Square and in particular the exchange of memos that I had with First Capital in March.

Q. And after – from the comments that were – from the comments that were made by Mrs. Harris, Mr. Spieler, and Mr. Kesler could you determine what their intention was at this meeting?

A. At the point of giving the strategic alliance presentation the only thing that I could determine is that they seemed to be rather anxious to get to the end of it to move on to something else. (emphasis added)

According to Katz, when he then moved to the next item on the agenda, Leimerk, and suggested that the Leikin Group and FCR pursue discussions to purchase Perth Mews, Jameson had cautioned him about the duty concerning corporate opportunities which he owed to Leimerk as a director, and Katz accepted the caution. He said there then was a lengthy discussion in which Josephine Harris, Kesler and Spieler requested his resignation “without specifying a particular reason”.

[99] When asked on cross at trial why he had even raised a possible strategic alliance with the Board in light of FCR’s lack of response to his memo of March 12, Katz testified:

Well the fact that I hadn’t received a response from First Capital didn’t – it didn’t dissuade me from wanting to pursue a strategic alliance with First Capital, but I felt that in order for me to attempt to further the discussion with First Capital it would’ve been an appropriate time for me to at least educate the board as to what a strategic alliance meant, and conceptually what I was trying to achieve with First Capital. So it was an opportune time for me to provide a high level overview to the board, and in the hope that I would get a positive response from the board and an indication from the board that they would like me to pursue those discussions with First Capital.

[100] When asked in chief at trial about why he had not advised the Board at that meeting about the $72 million DCF analysis he had sent to FCR a few weeks before Katz testified:

Principally for two reasons, one, the estimated value was not supported by market data, it wasn’t tied to an appraisal, it represented an inflated price that I intentionally provided First Capital. First Capital never responded to that number, so it was further unqualified, and I think most importantly the board and the three directors in particular Josephine Harris, David Spieler and Rick Kesler showed absolutely no interest in reviewing, considering, or thinking about the strategic alliance, so whatever discussions I was going to – I was intending to have further discussions and further information that I was intending to provide became irrelevant.

[101] Much of the language Katz used in his March 5 memo to Lachance to describe the opportunity of a strategic alliance found its way into his PowerPoint presentation to the Leikin Group Board on April 15, 2004. However, Katz did not include in the Board presentation his reference to FCR acquiring a minority interest in College Square. When asked on cross why he had left that information out of his PowerPoint presentation Katz testified:

Well there was a good reason for leaving it out. The March 5th memo that I sent to Sylvie LaChance was responded to with their March 9th memo, and you’ll note in the March 9th memo they didn’t address the term of agreement provision that I had in my March 5th memo, and I guess in short I can tell you that there was no discussion that I had with First Capital pertaining to the term of the agreement as I’m sure you’ll agree with me Mr. Bennett the term of the agreement provision that I put in there was a one-sided agreement, and it’s not surprising that First Capital chose not to discuss that section with me, and in fact they did not. So it would’ve been inappropriate for me to include that in my presentation, include in my presentation something that I had received no response from First Capital on.

Barbara Farber

[102] Farber recalled that the meeting lasted a long time, from about 9:30 a.m. until mid to late afternoon. She recalled her brother’s presentation about a strategic alliance taking place in a very tense atmosphere. Kesler and Spieler wanted Katz to just move on. As to what Katz said about FCR, Farber testified as follows:

Q. During the course of the meeting did David inform the board about the discussions he had with First Capital Realty in the early part of the – that he had prior to the meeting?

A. He only – no, he spoke about a strategic alliance with First Capital, that was part of the – that was part of what he was talking about, and if that’s what you mean by discussions with it, yes.

Q. And did he mention – was College Square discussed at the meeting?

A. Absolutely, that was our contribution to the strategic alliance.

[103] She recalled that Harris, Kesler and Spieler jumped on Katz’s remarks regarding Leimerk to suggest his resignation and the meeting “was pretty uncomfortable, pretty abusive”. However, she denied evidence by Kesler that she had wanted to fire Katz as CEO of the Leikin Group – “at our lowest points in any of our relationship never did I ever dispute the fact that David’s main interest was in the corporation.”

Andrew Katz

[104] Andrew Katz attended the Board meeting. He knew that people from FCR had visited College Square in February and that David Katz had engaged in some co-ownership discussions with them.

[105] Andrew recalled that the meeting lasted from about 9:30 a.m. until the mid-afternoon. He recalled that David Katz started making a PowerPoint presentation about a possible strategic alliance with FCR, and he referred to FCR as a shopping centre developer who would have an interest in College Square. Andrew deposed that Harris, Kesler and Spieler repeatedly interrupted the presentation and demonstrated no interest in discussing a strategic alliance which might commit the corporation’s financial resources; they wanted to monetize their interests in the Leikin Group.

Grant Jameson

[106] Grant Jameson recalled that the meeting had lasted all day and that David Katz had made a PowerPoint presentation about a strategic alliance with FCR at that meeting.

[107] Jameson made handwritten notes of the meeting which recorded a PowerPoint presentation by David Katz on short and medium-term objectives for the companies. His notes stated that David Katz informed the Board that he had held “significant + ongoing discussions with First Capital” and he proposed that the Leikin Group and First Capital work together “to grow the assets of [Leikin Group] + FCR in the Ott[awa] Mkt”. At trial Jameson testified:

I remember that David Katz was explaining the concept of a strategic alliance with First Capital Realty and he mentioned that he had conducted a – that he had shown First Capital Realty College Square. I believe he’d said that he’d given them a tour of College Square. He also referred to First Capital Realty in the context Leimerk Holdings, which the Leikin Group has an interest in.

Jameson testified that no discussion took place at the meeting about negotiations or discussions of value for College Square with FCR.

[108] The notes recorded a fair amount of discussion about Leimerk’s Perth Mews shopping centre, an asset in which the Leikin Group indirectly held an interest. According to Jameson’s notes, Josephine Harris posed a number of questions to David Katz which prompted this exchange:

Numerous and ongoing discussions with First Capital about what we would do together. David purports to hold on discussions with First Realty. No commitment made with First Realty. Meetings and exchange of memos with First Capital. First Capital is aware that David Katz must refer to the Board. David Katz says it is his duty to bring these opportunities forward, to receive direction from the Board to pursue it with First Capital or not pursue it. Jo Harris got the impression that David Katz has already done business with First Capital. Clarify, most of his career reporting to a Board, won’t happen. As a senior manager, must take discussion and meetings to a position where there is something to report to the Board. All that management has done is put forward a framework which would be financially lucrative for both companies.

[109] Although Jameson deposed that at the meeting David Katz presented the “concept that the Leikin Group and First Capital might enter into a co-ownership agreement in respect of the College Square property”, he acknowledged on cross-examination that there was no specific reference to College Square in his notes of the meeting. He gave the following explanation for that statement he had made in his affidavit:

Well, that was my recollection. That was what I remembered, and this is encompassed in – the notes, now that you have taken me back through them – because these are quick notes, things are happening fast, and I am not a shorthand reporter…

When I think back about that meeting and David’s presentation at the meeting, I recollect some discussion of College Square…No, it didn’t find its way into my notes.

[110] On his cross-examination on the summary judgment motion Jameson testified that he did not remember whether at the Board meeting David Katz reported that he had been exchanging numbers with First Capital with respect to College Square or that he had entered into a non-disclosure agreement with FCR.

B. Findings of fact

[111] I make the following findings of fact regarding the April 15, 2004 Board meeting of the Leikin Group:

(i) The meeting lasted most of the day. Kesler’s recollection on the length of the meeting was faulty: it was at odds with the recollection of the other participants and the length of the meeting as reflected in the contents of the agenda and Jameson’s notes;

(ii) David Katz made a PowerPoint presentation which included slides about a possible strategic alliance between the Leikin Group and FCR. Whether the format was the one bearing a compass (as recalled by Speiler and Jameson)[^12] or the one which did not[^13] does not matter; the contents of both were identical;

(iii) David Katz told the Board that he was proposing a strategic alliance with FCR to acquire commercial redevelopment opportunities and acquire property in the Ottawa area to become the dominant non-enclosed retail centre developer/asset manager within the market;

(iv) In the course of that presentation David Katz told the Board that he had had discussions with FCR, exchanged some memos with them, and had brought FCR personnel through the College Square property. I reject Kesler’s testimony at trial that Katz did not mention the latter point. In his initial affidavit Kesler had adopted his aunt’s testimony on that point;

(v) During the course of that presentation David Katz also suggested that a strategic alliance with FCR would involve FCR acquiring an interest in College Square. Farber, Andrew Katz and Jameson all recalled mention of that topic, as did Harris when cross-examined on the point. I discount Kesler’s recollection of the meeting; it stands at odds with that of the other witnesses. I also do not accept the evidence given by Ms. Harris in chief at trial that the issue of College Square being sold to anyone was “unthinkable”. With respect, that evidence made no sense, and I give it no credence. The Board meeting took place against the backdrop of the majority of the Leikin Group shareholders seeking to sell their shares and Kesler having told Mainzer on February 27 that he was going to propose that all Leikin Group entities should be liquidated. Further, on June 29, 2004, a lawyer, Ken Prehogan, wrote to Farber on behalf of the Kesler Family and the Harris Family to advise that his clients supported the sale of College Square. So much for the “unthinkable”;

(vi) The reality of the matter was that by the time of the April 15 Board meeting the Harris Family and Kesler wanted to monetize their interests in the Leikin Group and were more than willing to see College Square sold if that was what was required for them to get their money out. By contrast, the Katz Family saw the College Square asset as a springboard from which to grow the Leikin Group. Simply put, one group wanted to cash out; the other group wanted to develop a business. Therein lay their differences in views about the future of the Leikin Group’s core assets;

(vii) Therein also lay the reason for the different reactions to Katz’s presentation on a strategic alliance with FCR. Harris and Kesler were indifferent; they simply wanted to get their families’ money out. David Katz was disappointed because he saw an arrangement with FCR as a way to build the Leikin Group. In terms of their business objectives for the Leikin Group, the two family groups were like ships passing in the night; and,

(viii) Finally, at that meeting Katz did not tell the Board that as part of his exploratory discussions with FCR he had floated an estimated value of $72 million for College Square.

X. The fall-out from the Board meeting: David Katz resigns as the President of the Leikin Group[^14]

[112] The April 15 Board meeting ended on a sour note with Harris, Kesler and Spieler wanting to end David Katz’s involvement in the management of the company. Kesler and Spieler proceeded to requisition a meeting of the Boards of the Leikin Group for May 3, 2004 to review the position of President held by David Katz. Although the meeting commenced on May 3, it came to an end when two directors - Andrew Katz and Barbara Farber - left, resulting in a loss of quorum, but the meeting resumed a few days later on May 7. At that time Barbara Farber advised that David Katz was prepared to resign as President provided he received fair and generous compensation for the completion of the services to the Leikin Group he had begun as a consultant. The Board accepted his resignation and authorized Farber to conclude the final arrangements with David Katz.

[113] One of the companies in the Leikin Group, Harzena Holdings Limited, then concluded a consulting agreement with David Katz dated May 11, 2004 under which Katz would provide consulting services, including advice on a leasing strategy for College Square. The agreement was to run until the end of 2004. One provision of the consulting agreement permitted Katz to utilize all information or documentation he had acquired during the course of his employment with the Leikin Group.

XI. May and June, 2004: the relationship between the two family groups[^15]

[114] By May, 2004, a clear division had emerged amongst the owners of the Leikin Group: most of the cousins wished to monetize their interests in the companies’ core assets, while a minority – the Katz siblings and David Spieler – wished to continue their interests in the core assets on a going-concern basis. I think the following evidence given at trial by David Katz accurately captured the divisions within the group of cousins:

My particular interest was in taking a business that my grandfather had created and built and taking it to a more sophisticated and more productive level.

[I]t was difficult for me to reach consensus with my sister on those particular matters. She was accustomed to managing the assets in their existing state, and there was also the reality of knowing that I had several other shareholders, cousins of mine, that seemed to be just interested in money, and weren’t much interested in creating value and in perpetuating the Leikin Group name for next generation, for our children, they were more interested in money that they could put in their pocket on an immediate basis. So there were a lot of conflicting interests, it wasn’t just between myself and my sister, there were conflicting and competing interests.

[115] Those who wished to remain – the group ultimately known as the Non-Selling Shareholders – began to run numbers to ascertain the potential payouts to shareholders under various sale scenarios. For example, on May 28, 2004, Katz emailed his brother and sister inquiring how quickly they could obtain from GGFL payout information assuming a sale value for College Square of $70 million. Barbara Farber passed on the request to Gerry Levitz, and Patricia Day (and others at GGFL) began to run the numbers. Before completing their work they received a further request from Katz on June 3 who “asked that we present a third scenario for June 7 – namely selling a 50% interest in the property to Loblaws for $35,000,000.” Day testified that GGFL completed “a number of calculations on hypothetical transactions”, using various figures of the value of College Square provided by either Farber or Katz. GGFL did not have any discussions about how the numbers were arrived at:

We were told – management of the company asked us to perform these calculations and provided us with figures to utilize.

Day thought that the numbers represented David Katz’s estimate of the value for the property.

[116] GGFL sent the requested calculations to Ms. Farber on June 7. The calculations used an estimated market value of $70 million for College Square, a number provided by management of the Leikin Group. On June 8 and 9 GGFL sent further sets of calculations to Farber, this time using $62 million as the estimated market value of College Square.

[117] On June 9, 2004, Farber circulated an email to all Board members, including Rick Kesler, David Spieler and Josephine Harris, in advance of a June 16, 2004 Board meeting. She proposed reconstituting the Board to bring in independent directors. Farber attached two GGFL-prepared documents to her email: (i) a calculation of possible distributions to the common shareholders, and (ii) an analysis of the estimated proceeds on an assumed sale of College Square and Zena’s Fisher Heights Plaza. That analysis disclosed that management was estimating the fair market value of College Square at $62 million; the other calculations performed by GGFL using higher estimates of College Square’s fair market value were not circulated to the Board. Kesler deposed that he was “shocked” by Farber’s proposal to reconstitute the board with independent directors given the family nature of the Leikin Group.

[118] Andrew Katz had seen the June 7 GGFL calculations which had used the number of $70 million for one scenario, as well as the June 8 GGFL calculations which had used $62 million as the estimated value of College Square. At trial he was asked why he did not inform the other directors, at the June 16 Board, that he had seen GGFL calculations using the $70 million number. He replied:

I can’t see why I would’ve said something like that… I was – did I advise them? I don’t think I did. I think what was presented was management’s best estimate. I thought $62 – when I look back $62 seems to be a much more realistic number in light of the appraisals that were to follow, so I think management probably provided a pretty good estimate.

Ms. Erskine this is a pretty normal process, that’s why they were called scenarios, and at some point management, and particularly I would say David Katz who had a better feel for real estate values than clearly any of us on the board arrived at a number of $62, which I found to be a reasonable presentation. I’ve been involved in a lot of presentations to boards and you go through various scenarios. That’s what these were various scenarios based on management’s judgment.

[119] On June 15 Mr. Kenneth Prehogan, a Toronto litigation lawyer, wrote to Ms. Farber on behalf of Steven Kesler advising that a majority of the common shareholders and directors wished to liquidate their interests in the Leikin Group of Companies, objected to the proposed reorganization of the boards to include non-family members, and stated that “if the majority of the shareholders cannot liquidate their respective interests by a sale to other family members, or to third parties, the only alternative left is to wind up the companies”. Prehogan stated that his client’s preference was to work out a business solution.

[120] Mr. Prehogan wrote again on June 29, this time on behalf of seven of the shareholders who wanted to sell their shares, stating:

Our clients support the sale of College Square and Fisher Heights Plaza, and distribution of the net proceeds to the shareholders. We understand that the concept of partial liquidation was discussed in the recent directors meeting.

Noting that Farber had not responded to his first letter, Prehogan wrote that if she did not reply by July 9, “we will assume that you intend to take the course of action you threatened, and institute legal proceedings against you without further notice or delay”. Prehogan wrote to Farber on July 16 re-iterating his clients’ wishes to sell core assets of the companies, not shares, and opposing any change in the boards of directors.

[121] The College Square property was owned by Harry Leikin Holdings (40%) and Harzena Holdings (60%). Harzena also owned several farm lands. The Selling Shareholders’ initial threat in Prehogan’s June 15 letter that they wished to liquidate their interests in all the companies would have seen them forgo any participation in the future development of the farm lands. By Prehogan’s June 29 letter they had limited their desire to monetize their interests to the two “core assets”, College Square and Fisher Heights Plaza, but given Harzena’s partial ownership interest in College Square, any transaction would have to find some way to separate the farm lands from that interest. In the result, the amalgamation/Newco structure proposed by CIBC enabled that to occur.

[122] At trial David Katz was quite candid about how he reacted to Prehogan’s letters:

A. … I didn’t receive Mr. Prehogan’s letter directly, but I received a copy of that letter dated June 16, 2004, wherein Mr. Prehogan advised that if the shareholders were unable to divest of their interest within the Leikin Group of Companies then the only logical alternative would be for an application to be made by them for the winding up of the corporations. So for me that was a very dramatic moment in the history of the Leikin Group, it was clearly a polarization of the shareholder groups into those that wanted to sell and those not wanting to sell, and the threat of the corporations being wound up was something that I took very seriously, and as a shareholder of the Leikin Group of Companies that was interested in perpetuating the business and perpetuating in particular the business that my grandfather had created, I had decided that I would do everything that I could to ensure that the corporations weren’t wound up and that a methodology and process could be developed that would enable those that wanted to sell their interest to sell their interest while providing the opportunity for those shareholders that were not interested in selling their interests and were interested in continuing with the business to be able to do that.

Q. And to that end what did you do?

A. I made contact with CIBC representatives to commence discussions with them about the possibility of them acting as a financial advisor to the corporations because I felt at that time the corporations needed a financial advisor, and I requested the GGFL, the accountants and auditors of the corporation begin to exam a particular methodology and process that would allow selling shareholders to divest of their interest in the core assets under favourable tax conditions while enabling the non-selling shareholders to achieve their objectives of retaining their interests and not giving up control of assets that the selling shareholders were interested in divesting of their interest in that. (emphasis added)

[123] Farber described the relationship between the selling and non-selling shareholders following the Prehogan letters as “pretty toxic”: “Those letters hit me like a thunderbolt, I mean this was everything I had worked for for years before, threatening to be brought to an end.”

XII. July, 2004: Initiating the formal process of buying-out the selling shareholders[^16]

A. CIBC retained as financial advisor

[124] Farber testified that by June, especially following the receipt of the letters from Prehogan, it had become clear that the Selling Shareholders wanted to effect a fundamental change in the operation and ownership of the Leikin Group and were also seeking a substantial payment for their shares. She concluded that as CEO of the Leikin Group she was obligated to investigate the mechanisms which might satisfy the plaintiffs’ desires to monetize their interests in College Square while, at the same time, protecting the other shareholders’ interests in the corporations. So, in early July, 2004, Farber, with David Katz’s assistance, contacted CIBC Mid-Market Investment Banking for assistance in formulating an approach to the differences then manifest amongst the family shareholders.

[125] David Katz acknowledged that once CIBC had been retained, they would approach him on a day-to-day basis if they had questions, required input, or needed matters reviewed. Jameson regarded David Katz as the main point of contact between the CIBC and the Leikin Group.

[126] Jameson understood that since the reorganization would affect corporate structures, his role would be to document the transactions on behalf of the corporations. Farber instructed him, and she also told him that he could take instructions from David Katz.

[127] On June 30, 2004, prior to the formal retainer of the CIBC, David Katz had sent Eric Desrosiers an email attaching “the internally prepared valuation analysis of College Square as well as Gerry Levitz’s analysis of the net after tax proceeds to the shareholders on the disposition of the two assets (College Square & Zena Plaza).” The GGFL analysis had been circulated at the June 16 Board meeting and showed that the management of the Leikin Group estimated the fair market value of College Square at $62 million and Fisher Heights Plaza at $5 million. Katz’s internally prepared cash flow analysis of the leases at College Square estimated the June, 2004 market value of the pad leases and land leases at $71.4 million. Katz described both analyses as “hypothetical scenarios”. Katz explained how he had come up with the $71.4 million number:

The 71.5 was a fairly crude calculation that was done at the time, but essentially I took 7/11, there were 7 shareholders that had expressed an absolute interest and desire in selling their interest in College Square, 7/11, we were 11 shareholders, so 11 being the denominator of the fraction. I divided that by 50%, which is the fifth – represents the 50% ownership that the non-selling shareholders would have to retain, and I multiplied the product of that by $55 million, which I felt at the time would represent an appraised value of College Square bearing in mind that an appraised value hadn’t been completed at the time, so it was my best guess as to what I felt an appraised value would be. So 7 divided by 11, taking that dividing that by 50 and then multiplying it by $55 million generated the value of $71.5 million. And once I had determined crudely, but nevertheless determined that $71.5 million appeared to be the correct value that would have to be ascribed in a funding transaction I then used valuation parameters to end up generating a value that closely approximated the $71.5 million. So as you will see from the estimate that I sent to CIBC the value is generated with $71,394,000 or approximately $71.5, very difficult to end up with an even number when you do this type of analysis, so that was as close as I felt I needed to bring it.

Josephine Harris and Rick Kesler deposed that they did not see the Katz internal, management valuation of College Square until after the litigation had started.

[128] Katz explained why he had sent CIBC his own internal discounted cash flow analysis:

I sent – first I wanted CIBC to be informed of the information that the board had reviewed in the June meeting and in particular the analysis – the proceeds analysis on an assumed sale of College Square, and at the same time I wanted to present them with my discounted cash flow analysis because by that time, and we’re talking about June 30, 2004, I had determined that in order for the selling shareholders to achieve their objectives, their stated objectives of monetizing their interest in the core assets, including College Square, and in looking at the non-selling shareholders objectives of retaining their interest and retaining controlling interest of College Square there would have to be a value ascribed to a third party funding transaction. It would have to be higher than the value ascribed in a redemption of share transaction in order to generate sufficient proceeds to cover the cost of redeeming the selling shareholders shares while at the same time enabling the non-selling shareholders to retain at least a 50% interest in College Square.

[129] Katz also explained why he did not share his $71.4 million analysis with the selling shareholders:

Because this was a – this estimate of value $71,394,000 was not a market supported value, it wasn’t tied to an appraisal, and it was created for the specific purposes of funding the buyout of the selling shareholders. So the funding side of the transaction and all matters relating to the funding side of the transaction I felt clearly was not information that was relevant or material to the selling shareholders.

Katz testified that he did not discuss this calculation with Farber or his brother, Andy. David Katz testified that he did not inform CIBC about the discussion he had held earlier in the year “with First Capital in reviewing co-ownership principles”.

[130] Eric Desrosiers of CIBC had no specific recollection of those documents which were sent to him by Katz, and he stated that he did not recall discussing Katz’s internal value estimate of $71 million with the Altus Group later that summer when they were preparing their formal appraisal of College Square. When asked why he did not think Katz’s estimate relevant to the appraisal process Desrosiers testified:

David Katz…was certainly not perceived as the third party objective group that was, you know, that was retained by us to provide a truly independent value for the assets…and what I can also tell you is that in my line of business I always deal with shareholders, CEOs, that think their company or their asset is worth whatever, very often much higher than it is actually worth, so I have a tendency to take this information, review it, but then rely on true facts and external sources to conclude on what the asset is actually worth.

So, to me, this is an internally generated source. I’m not sure that David Katz is a real estate professional appraiser, so from that perspective it was not listed as an external document received…

I don’t call it an internal valuation, this is just a piece of paper with some views on value…if there were some third party offers that would have been relevant, but this was not a third party offer, and not evidence of a serious third party discussion, and that part was captured into our representation letter that was signed by the company CEO which, essentially, says that there were not, that there were no third party offers or serious discussions with third parties that they did not provide to us, those are the facts.

[131] Farber sent the directors a July 19, 2004 memorandum advising that she had been discussing the situation with CIBC “with a view to facilitating a mutually beneficial transaction between selling shareholders and the Leikin Group” and had retained them to provide advice, subject to board approval. She noted that CIBC “had been the principal banker to the Leikin Group for the last seven decades and has an intimate knowledge of our company structure and business activities”. Farber asked for dates to hold a board meeting for the purpose of reviewing and approving the CIBC’s mandate. In the memo Ms. Farber also addressed concerns voiced by some shareholders about introducing independent directors on to the Board and the holding of the AGM.

[132] The July 9 retainer letter prepared by the CIBC indicated that the “Leikin Group is interested in exploring liquidity options for the shares of the Leikin Group owned by the Selling Shareholders”, and it specified that CIBC would conduct a valuation estimate of the fair market value of the shares owned by the Selling Shareholders as well as the feasibility of financing the proposed transaction. The CIBC would also provide the companies with advice in negotiating the transaction with the selling shareholders. All Board members received this letter.

[133] Mr. Desrosiers, the lead banker for CIBC, testified that CIBC regarded the Leikin Group of Companies as its client and he took instructions on the matter from its CEO, Barbara Farber, or her consultant, David Katz. However, he did have many discussions with Rick Kesler during the engagement.

[134] The Board met on July 23, 2004. David Katz was not invited to attend this meeting. The Board authorized the Leikin Group to enter into the advisory agreement with the CIBC. The minutes of the meeting made it clear that the CIBC would be providing the corporation with advice about “liquidity options available for the shares of the Leikin Group owned by seven of the holders of common shares”.

[135] Josephine Harris voted to approve the agreement with the CIBC. However, in her June, 2010 affidavit Ms. Harris deposed that at the time she was not aware that the Katz Defendants had approached the CIBC earlier in the year to act as their advisor in respect of the acquisition of shares of the Leikin Group from other family members. Although no agreement was reached between the Katz Defendants and the CIBC at that time, Harris deposed that had she known of those discussions in July, 2004, “I would not have agreed to ratify the CIBC mandate in the July 9, 2004 letter.” Rick Kesler also took the position in his affidavit that by reason of its February discussions with the Katz Family the CIBC was not an independent advisor, and he would not have approved CIBC’s retainer had he known at the time about the February discussions. David Spieler deposed that he, too, was not aware of the prior discussions with CIBC when he voted as a director to approve its appointment.

[136] I put no stock in those complaints by Harris and Kesler about the role of CIBC. I regard them as mere “colouring” by both witnesses: no agreement in fact was entered into with the CIBC back in early 2004; the CIBC had been the long-standing bank for the Leikin Group; and the Selling Shareholders enjoyed access to and used the services of independent legal advisors in respect of the resulting September CIBC Report. I should note that the plaintiffs made no legal complaint about the work performed by the CIBC in respect of its reports; they did not sue the CIBC.

B. GGFL on-going work on a transaction structure

[137] In early July GGFL continued to work on developing an appropriate structure to respond to the wish of a majority of the shareholders to sell their shares. Levitz prepared an internal memo dated July 8, 2004 setting out his thoughts. Day testified that in the end GGFL concluded that in order to ensure selling shareholders received capital dividends, it would be necessary to sell a portion of the properties to another entity – not a necessarily an arm’s length third party – to trigger the income and capital gains. Thus arose the concept of a “Newco”.

XIII. The July 14, 2004 meeting[^17]

A. The purpose of the meeting

[138] A meeting took place on July 14, 2004 amongst Barbara Farber, David Katz and Grant Jameson. Gerry Levitz did not attend the meeting and his colleague, Patricia Day, arrived after the meeting had started.

[139] David Katz deposed that he arranged the meeting in order to meet with Day “to review the big picture and bring her up to speed on the agreement that I am concluding with CIBC to act as financial advisor to the Leikin Group.” Katz also wanted Day to start assessing what proceeds would be available to selling shareholders on a share redemption transaction. Day understood that the purpose of the meeting was to allow GGFL and the company to understand the structure of the transaction.

[140] Grant Jameson attended the meeting. He understood its purpose was to discuss the form the proposed transaction might take. Between the April 15 Board meeting and the July 14 meeting Jameson had not received any updates from management about any discussions with First Capital.

B. The state of dealings between David Katz and FCR prior to the meeting

[141] Katz testified that between March 12 and July 14, 2004, he did not have any discussions with FCR about College Square, and he did not re-connect with FCR on that property until the latter part of August. Lachance’s evidence was to the same effect. I accept Katz’s evidence on the point, and I find that between March 12 and July 14, 2004, Katz did not have any further discussions with FCR concerning College Square.

C. What was discussed at the July 14 meeting

[142] Jameson took notes at the meeting. The plaintiffs relied very heavily on entries in those notes to support their claims against all the defendants. I will turn to those notes in a moment, but first let me set out what Jameson recalled about that meeting. He testified that at the meeting David Katz described a structure which involved obtaining a market valuation for the core assets, which included College Square, and then financing the liquidation of the seven Selling Shareholders’ interest in the subject properties by re-mortgaging the core assets. Katz also stated that another way to finance the transaction over the long term might be for the Non-Selling Shareholders (by then the sole shareholders of the corporation which would own College Square) to look for a third party equity investor to purchase a co-ownership interest in College Square within a short time after the closing of the transaction.

[143] Jameson’s notes included the following entries:

FCR First Capital Realty

71.5 MM College Square all cash

6.5MM FHP

78 MM

[144] As to his recollection of the portion of the discussion on July 14 concerning First Capital, David Katz testified as follows on his cross-examination at the summary judgment motion:

I never ever presented a situation to his meeting, to the attendees of this meeting, that involved or confirmed that I had a transaction arrangement with First Capital pertaining to a partial interest of College Square. Never did I advise any of the attendees at the meeting that I had such an arrangement. There was no arrangement with First Capital and I never suggested it and I never advised any of the attendees that there was such an arrangement.

[I]n order for a share redemption transaction to take place, and in order for the objectives of the selling shareholders to be achieved and the non-selling shareholders to be achieved…it would be important and essential that a funding arrangement with a third party for a partial interest in College Square be transacted at a rate that, in my view, had to be in the vicinity of 71-and-a-half million dollars…to enable the non-selling shareholders to achieve their objectives of retaining at least a 50 percent interest in the property and generating sufficient proceeds to cover the costs of the share redemption transaction.

Mr. Katz testified that he made his reference to First Capital in the following context:

And what I was attempting to convey at the meeting, and I think I conveyed it very clearly to all of the attendees, I used First Capital as an example of the type of corporation that the non-selling shareholders would have to attract in order to generate a transaction that would achieve their objectives…I could have easily said RioCan…I could have said a number of companies. But the type of company that had the most meaning for someone like Grant Jameson within the context of the Leikin Group was First Capital, and I used them as an example. In no way did I suggest to the attendees of this meeting that there was a transaction that was either discussed or agreed to with First Capital.

At trial Katz testified:

Q. And what did you say about First Capital Realty?

A. I used First Capital – I referenced First Capital as an example of a real estate operating company that I felt would be inclined to want to purchase an interest in College Square. I thought that First Capital was a good example, represented a good example of the type of a third party that we would have to transact with and that was for a few reasons, but primarily because First Capital was the type of company that was purchasing assets such in the same class as College Square. As I mentioned quite a while back, First Capital was purchasing in the order of $500 million to $600 million of assets on an annual basis, the assets that they were purchasing primarily consisted of non-enclosed shopping centres that were food anchored, and College Square fit that description. There were several other companies that were also interested in acquiring this class of asset and I could have easily named several others that would have been interested as well, but I felt that First Capital was a good name to use, it was a good example to use because First Capital had been referenced in the April 15th meeting, it was known based on what I advised the board that First Capital had expressed an interest in College Square, and was a – represented a very good example of the type of company that would be – that would be interested in purchasing a partial interest, so they were used as an example.

[145] As to his discussion at the meeting of the $71.4 million calculation he had made Katz testified:

I advised the attendees of the meeting that I had come to the conclusion that a – in terms of our funding objective that a value, a higher value would have to be ascribed in a third party funding transaction to generate sufficient proceeds to satisfy the selling shareholder requirements while at the same time enabling the non-selling shareholders to retain their interest in College Square. And I put forward the same analysis that I began to put forward with CIBC, which was informing the attendees of the meeting that in my view $71.5 million would have to be ascribed in a funding transaction and I indicated that that difference in – the difference in that ascribed funding value of $71.5 million, and what I felt the share redemption value would be that difference would assist and it would be – in fact would be required in order for the non-selling shareholders to retain their 50% interest. So if you recall the formulation that I had given you several minutes ago of 7 divided by 11, divided by 50, multiplied by 55, which generated the $71.5 million is what I presented to the meeting.

[146] David Katz saw nothing in Jameson’s notes inconsistent with his recollection of what he had discussed at the July 14 meeting. Under cross-examination before trial he testified that the exchange of information he had undertaken with First Capital earlier in 2004 “had absolutely nothing to do with the information that I was presenting at this July 14th meeting.”

[147] At his pre-trial cross-examination Jameson testified about his recollection of that portion of the discussion:

What this is in my recollection are notes of a conversation David Katz was having with Barb and I’m sitting in the room and I’m writing things down. This conversation was in my recollection predicated on what might happen if they were to do this deal. In other words, what might the upside be, what’s in it for them to do this deal, why would they do this?

At trial Jameson testified:

Q. All right, what was your understanding of the context of him using the First Capital name and those corporate names?

A. My understanding was that this – these names were used as an example of the type of investor who might come in and be interested in purchasing a co-ownership interest in the shopping plaza.

Q. Okay, were there any references in the discussion as you understood it to any deal with First Capital?

A. No.

Q. To any ongoing discussions with First Capital?

A. No.

Q. To any negotiations about these terms with First Capital that had taken place?

A. No, not at all.

[148] At a later part of his notes Jameson wrote: “Why - FCR paid a precedent setting number of $71.5 million” and “Co-ownership Agt. w FCR – as if it was a 50/50 split”. He testified on pre-trial cross-examination:

I understood this was an example of the type of transaction which the remaining shareholders might be able to do after they acquired the property. You know, in six months or some additional period of time, there might be an upside…[M]y recollection is that this was not a discussion of what was going to happen; this was a discussion of what might happen.

I didn’t really see this as the exploitation of a corporate opportunity, certainly not at that time I didn’t see that, and I viewed the reference to First Capital as an example.

I thought [David Katz] was saying that some time in the future it might be sold at $71.5 million…you know, whether David thought that he could sell the property for $71 million or $80 million or any other number to me was pie in the sky.

You know, I looked at the transaction as being one of having a real live third party proper valuation for the property and that was the number which was going to be used. And that would be the relevant number, what happened in the future is in the future.

[I]t was very much framed as someone like First Capital. It was not framed in my recollection as First Capital. (emphasis added)

[149] At trial Jameson offered the following evidence on that notation:

Q. And on page 520, it’s about half way down the page, there’s a note that says, begins with the word why?

A. Yes.

Q. All right, and tell us as well as you can recollect what that note was about?

A. Well that note was about why would this – why would this take place, why would – why would First Capital pay $71.5 million for the property, and it would only take place if it was a precedent setting number, it was expressed as if it would be something extraordinary in the circumstances of the day.

Q. And if you go further down the page, page 520, there’s a note that says – it’s the second last item, it starts with “Do Mez” and then someone has put in square brackets Mezzanine financing, do you see that?

A. Yes.

Q. All right so what – as well as you can recollect what led you to – what discussion led you to write that note?

A. Well my recollection is that David was explaining how the transaction might unfold with the purchase of 7/11 interest in College Square and the transaction would be one where the selling shareholders were sold out, were paid out, and the source of the funds to pay the selling shareholders would be through the use of a Mezzanine mortgage or interim financing by way of a mortgage, and the transaction would be closed on the basis of mortgage financing. And then at some point in the future the mortgage financing, the Mezzanine financing would have to be taken out by some sort of long term financing, and his expression of his – his expression of this First Capital Realty type transaction was an expression of one which might occur, and might provide the financing to take out the Mezzanine financing, so that was the reference to the Mezzanine mortgage.

[150] In his notes of that meeting Jameson also wrote: “First Capital Properties to have ability to deal with interest and assets so First Capital Properties has no public shareholder issues”. David Katz had mentioned those names. That notation spawned the following exchange on the pre-trial cross-examination of Jameson:

Q. First Capital Properties is a subsidiary of First Capital Realty.

A. That’s what I understood.

Q. That’s a little more detailed than someone writing First Capital Realty, isn’t it?

A. I agree and I was a little surprised with that level of detail at the time.

Q. Yes. That didn’t trigger any alarm bells for you?

A. Well, it didn’t say to me that there was a bought deal or that there a done deal. I mean, it didn’t say that at all because the discussion was very much one of speculation.

You know, the line, “Why First Capital pays a precedent setting number of $71.5”, I mean this to me again was something expressed as something which would be extraordinary and not something which was by any stretch of the imagination certain.

At trial Jameson testified about that portion of his notes:

Q. And did you ask any questions as to how we’re now talking hypothetically, but we’re talking about how we’re going to structure the deal to fit not just with FCR, but how their structure might work for them with one of their subsidiary companies?

A. I did not ask that question, again because it was clear to me that this was discussions of what might be, it was in the nature of a wish list, something which might occur in the future. I attributed this level of detail to the fact that I’d known at that point that David Katz was a very detailed thinker. He was clearly thinking this scenario through to the ultimate end, and I recalled that First Capital Realty had been mentioned previously in April. So that’s how I reconciled this statement in my own mind at that time.

[151] Elsewhere in his notes Jameson wrote: “Be sure the structure fits with and FCR needs”. On his pre-trial cross-examination Jameson was asked:

Q. Again, are you telling me this is just a hypothetical?

A: I can’t explain that.

Q. I mean, this is a specific company being referred to.

A: Correct.

[152] At trial on cross it was suggested to Jameson that he knew about FCR’s interest in acquiring College Square because at the time of the July 14 he had in his possession two of the March memoranda containing the co-ownership discussion between Katz and FCR. Jameson testified:

Q. Are two memoranda from or related to First Capital Realty and College Square?

A. Yes.

Q. One is from Davis Ward Philips and Vineberg.

A. Yes.

Q. Dated March 9, and one is from Mr. Katz to Sylvie LaChance dated March 12, 2004, correct?

A. Correct, yes.

Q. You had these in your possession obviously?

A. I did.

Q. And is it possible that you had these in July 12th when you were being asked to set up the meeting in Montreal on July 20?

A. Yes, it is possible.

Q. All right, so you had these memoranda or it’s possible you had these memoranda, you attend this meeting on July 14th, where there’s a discussion about First Capital buying an interest?

A. Well sir on July 14th going into that meeting I had no knowledge of first - of any interest which could be purchased by First Capital, so I had the memoranda, I think because I think I may have picked them up certainly at or after the April meeting, but I wasn’t aware of them at the July 14th meeting.

Q. I’m sorry you just go back there, did you say you got them at the April 15th board meeting?

A. Well I didn’t – I don’t know where they came from. I don’t think I had them before the April meeting, I certainly had them at the time they were sent to Mr. Cohen in a file, so.

Q. So somewhere between April 15, and July 20 you came into the possession of these memoranda’s?

A. Yes.

[153] Farber recalled Katz mentioning the $71.5 million as a “funding number”:

A. It was a funding number that he had come up with in order to determine what it would take for us to maintain our 50% and enough money left over to be able to buy the remaining – the selling shareholders.

Q. And during the course of the meeting did David refer to First Capital Realty?

A. He did – it – the way David always spoke to me, always still does talk to me, is he makes sure that I understand, that’s the way he spoke to me, and spoke to Grant or Pat. It would’ve been a name that I would’ve heard, obviously Grant would’ve heard, I’m not sure that it would’ve meant anything to Pat, I don’t know whether she’d heard of them before, but it was by way of example, so that we would understand that there was someone actually out there who could in fact fund that kind of deal.

At trial in chief Farber testified:

Q. And did David refer to a figure of $71.5 million?

A. He did, it was –

Q. And did he expect –

A. I’m sorry, it was a funding number.

Q. I beg your pardon?

A. It was a funding number that he had come up with in order to determine what it would take for us to maintain our 50% and enough money left over to be able to buy the remaining – the selling shareholders.

Q. And during the course of the meeting did David refer to First Capital Realty?

A. He did – it – the way David always spoke to me, always still does talk to me, is he makes sure that I understand, that’s the way he spoke to me, and spoke to Grant or Pat. It would’ve been a name that I would’ve heard, obviously Grant would’ve heard, I’m not sure that it would’ve meant anything to Pat, I don’t know whether she’d heard of them before, but it was by way of example, so that we would understand that there was someone actually out there who could in fact fund that kind of deal.

On cross Farber acknowledged that on her examination for discovery she had stated that she did not remember specifically what had happened at that meeting and she could not remember whether information she now had about the July 14 meeting “is what I remember or what I’ve read or what I’ve heard.” She affirmed that evidence at trial.

[154] Patricia Day of GGFL testified that she recalled no discussion regarding First Capital during the portion of the meeting she attended: “I do not believe First Capital was discussed in my presence at that meeting”:

Q. You were present during the discussion regarding the amalgamation and needing the structure to fit with a purchase by a third party?

A. We had a discussion that a third party purchaser would likely need a high adjusted cost base on the property, and that we would try and do a structure that would allow that.

Q. And the structure needed to fit with what First Capital Property needed.

A. No.

I accept Ms. Day’s evidence that FCR was not discussed in her presence at the portion of the meeting she attended.

[155] Andrew Katz, who did not attend the meeting, deposed that in June and July, 2004, he was not aware that David Katz had prepared his own analysis of the net operating income stream of College Square nor that GGFL had prepared a variety of calculations on hypothetical transactions involving the sale of College Square.

D. The evidence from the plaintiffs about that meeting

[156] Josephine Harris deposed as follows about what the plaintiffs took from the notes made by Mr. Jameson:

I believe that at the time that Grant Jameson recommended the transaction, at a value of $55,000,000, to me and the other directors, he was in possession of information from David Katz regarding First Capital Realty’s interest in College Square and the $72,000,000 valuation placed on that interest. Grant Jameson received this information on July 14, 2004…

Later in her affidavit Ms. Harris stated that this information indicated a proposed sale of an interest in College Square to FCR at a price in excess of $72 million. On cross-examination before trial Ms. Harris acknowledged that the assertions she had made in her affidavit were based solely on her reading of Jameson’s notes of that meeting – she was not present at the meeting and had not asked Jameson what had transpired at the meeting.

[157] In his affidavit Mr. Kesler (who also was not present at the meeting) deposed as follows:

At a meeting on July 14, 2004 attended by Barbara Farber, Grant Jameson, Gerry Levitz and Patricia Day, David Katz disclosed that First Capital Realty was interested in purchasing an interest in College Square at a value that exceeded $70 million.

[158] Kesler also agreed that his only source for this information was his interpretation of the notes prepared by Mr. Jameson of that meeting. At the same time, on cross before trial, Kesler stated that he and other directors “always disputed” the accuracy of the summaries Jameson prepared of Leikin Group board meetings.

[159] David Spieler deposed that even though in July, 2004, he had identified himself as a non-selling shareholder, David Katz did not tell him “that he was negotiating a co-ownership agreement with FCR with a potential value for Collge Square of more than $70,000,000”. Had he been aware of that information, Spieler deposed, “I would have disclosed it to the selling shareholders and the Board.” Spieler testified that he regarded Mr. Jameson’s notes as revealing that two values for College Square were in play and that the deal with the Selling Shareholders “was known to be a fraudulent, illegal one”.

E. Findings of fact

[160] At the July 14 meeting David Katz obviously did not pull FCR’s name out of thin air. No doubt Katz mentioned FCR because earlier in the year he had engaged in some exploratory discussions with Lachance about College Square in which Lachance had shown sufficient interest that she was prepared to spend some time in March discussing co-ownership principles with Katz and also to engage her lawyer at the Davies firm in that process. That information had been disclosed by Katz to the Board at the April 15 meeting. That said, by the time of the July 14 meeting Katz had not received any response from FCR to his trial balloon of $72 million in his March memo. In fact, the trail with FCR had gone cold following the exchange of the co-tenancy memoranda in the early part of March. From his own internal DCF calculations Katz thought that $71 million was the amount needed to “break-even” on a buy-out of the Selling Shareholders which would leave the remaining members of the Leikin family in control of the College Square asset. From Katz’s perspective, following the receipt of correspondence from Prehogan in June, his main focus had been on figuring out a way to finance the buy-out of his cousins who wished to sell their shares.

[161] On his cross-examination at trial it was suggested to Katz that by the time of the July 14 meeting, FCR was “the intended purchaser at that point of time”. Katz disagreed with that suggestion. He testified:

Well given the fact that I had had no discussions with First Capital between March the 12th, and this date I don’t know how I could’ve put forward a scenario to the attendees at this meeting that would suggest that First Capital had expressed to me a desire to purchase a partial interest in College Square at $71.5 million. It’s just – it just didn’t happen, and for me to have communicated something that didn’t happen to the attendees at that meeting would’ve been totally inappropriate.

I accept Katz’s evidence on that point. The context in which the July 14 meeting took place was that the trail with FCR had gone cold. That was the backdrop against which Katz went over those numbers with the participants at the July 14 meeting. I find that Katz did not tell those at the July 14 meeting that he thought he could do a deal with FCR at that price. Katz would have had no reasonable basis for making that assertion, and Katz struck me as a sophisticated business person experienced in the real estate field who would not go out on a limb representing what he could achieve without some reasonable basis for so doing.

[162] I also accept the evidence of Jameson that he did not understand Katz’s references to FCR as amounting to assertions that a deal probably could be done with FCR for an interest in College Park. That Jameson did not learn at the July 14 meeting that FCR had, or was willing to, cut a deal for an interest in College Square was apparent from a July 27 email Jameson sent to one of his partners, John Naccarato, which described the developing shareholder buy-out transaction structure as one in which there might be an “as yet unknown equity investor”. Also, the evidence disclosed that Jameson was a corporate counsel who was alive to the issue of the permissible pursuit of possible corporate opportunities. Back at the April 15 Board meeting Jameson had cautioned David Katz against pursuing discussions regarding a Leimerk property which could be perceived as exploiting a conflict of interest. At the July 14 meeting Jameson did not see a similar problem. I accept Jameson’s evidence about this meeting.

XIV. July 15 to September 1, 2004[^18]

A. The continuing work of the Lawyer Defendants

[163] On July 19 David Katz emailed Jameson: “I need to develop a co-ownership framework that would be suitable for me to propose to my ‘white knight’ candidates, with someone within your firm that is skilled in commercial real estate and co-ownership arrangements.” Jameson testified that he did not know to what “white knight” candidates David Katz was referring. Katz testified that he was referring to eventual prospective purchasers who would assist in the financing of the share redemption transaction.

[164] On July 20 Jameson sent an email to one of his colleagues at another Ogilvy Renault office, Arnold Cohen. He attached “some documentation with respect to the Leikin Group of Companies”. The attachments included Rita de Santis’ memo to Sylvie Lachance dated March 9, 2004 discussing issues concerning a co-ownership with the Leikin Group for College Square, as well as David Katz’s responding memo of March 12 dealing with the “fundamental principles” for a co-ownership arrangement with FCR for College Square.

[165] On July 21 Jameson attended part of a meeting amongst Cohen, Katz, Desrosiers and Farber to discuss a corporate transaction structure, but there was no mention at that meeting of any negotiations or agreement with FCR. In his notes of that meeting Cohen wrote:

Potential spread between value for financing purposes which wd. potentially be more than the FMV to be determined

Transaxn will not permit a dragalong if there’s a subsequent sale for a higher or lower value; transaxn will be for a fixed amt.

[166] On July 23 Jameson provided Farber with a memorandum summarizing the law respecting the winding-up of a company. He also sought to involve one of his tax partners, John Naccarato, to help structure the co-tenancy arrangements with an outside equity investor “once the dust settles on a proposed transaction with CIBC”, an apparent reference to the proposed transaction with the Selling Shareholders.

[167] Jameson understood that Pat Day was organizing the transaction structure. On July 26 Pat Day sent Farber and David Katz an email, copied to Gerald Levitz and Jameson, which included an attachment detailing the funds required to do the proposed transaction. At trial Day explained the larger context in which she performed these and some subsequent calculations:

When we had done the calculation at July 26th we had determined there was a net cash flow shortfall when we based the selling to a third party at $71.5 with an ascribed value of $62 million for College Square. So now he’s asking the question what value would we have to ascribe to College Square and to Fisher Heights Plaza in order to get a break even on the cash flow.

Well these were just calculations as I said in order to determine the cash flow that would be needed.

[168] Schedule 1 to Day’s July 26 email noted, “Buy-out of 7/11 Shareholders”, based on a buy-out of the Selling Shareholders at a price of $62 million for College Square. Then, when calculating the tax on a sale to a third party, the schedule used a “total gross sales price” for College Square of $71.5 million. Elsewhere, on Appendix B, Ms. Day used $62 million for the proceeds of the disposition of College Square. Ms. Day testified that GGFL was asked to prepare calculations using those numbers. David Katz testified he provided Ms. Day with that number:

If I believe that 71.5 was, represented probably the maximum that we could expect in a funding transaction.

[169] Jameson did not recall receiving this memorandum. At this point in his pre-trial cross-examination Jameson was asked whether he was really suggesting that a re-sale transaction of an interest in College Square was only speculative in July, 2004, and Mr. Jameson answered:

Yes, that’s what I knew. I didn’t have any other knowledge other than what I said to you about my understanding of the reference to First Capital in that meeting of July the 14th.

I will presume that I received this e-mail, but I can tell you that for all matters relating to the value of the property, the numerical analysis, I was paying no attention to this material.

I would not have reviewed this document. I would not have gone down and looked at this document and said, “There’s something here that says $71.5 million”…I am not involved in financial analysis. I took comfort in the fact and I relied on the fact in this transition that the value of the property for the purpose of the transaction would be determined by a professional appraiser and to me, that was the closing element….

I accept that evidence. It reasonably reflected the role which Jameson was playing as counsel to the corporation, and it is consistent with what I have found to be the nature of the references made to FCR at the April 15 Board meeting and the July 14 advisors’ meeting.

[170] In her July 26 email Day raised an issue about land transfer tax. Jameson sought advice on the point from one of his partners, John Naccarato. In his July 27 email to Naccarato explaining the background to the question, Jameson indicated that the Leikin Group of companies were trying to arrive at a structure which would distribute value to the Selling Shareholders “leaving the 4 remaining shareholders (plus some as yet unknown equity participant) to own the Core Assets after the transaction is complete”.[^19] He noted that the structure under discussion would see “the 4 remaining shareholders take the Core Assets in some form of Newco with an outside equity investor. The co-tenancy agreement would involve the outside equity investor”.

[171] David Katz deposed that in late July, 2004 he began to investigate financing options under which funding could be secured to buy-out the interests of the Selling Shareholders while the Non-Selling Shareholders maintained control and management of College Square. GGFL provided him with analyses of how much money would be required to fund such a transaction.

[172] David Katz also retained Fredric Carsley, a veteran Montreal real estate lawyer, then at the Mendelsohn firm, to provide legal advice on co-ownership issues. A specialist in commercial real estate, Carsley learned that Katz had been engaged in discussions with FCR, and Katz wanted his advice on the business and legal aspects of a co-ownership agreement. From a memo to file which he had prepared based on his discussions with Katz in early August, Carsley understood that Katz had formed the view, based on his discussions with FCR to that point of time, that a possibility existed of purchasing his cousins’ interest in College Square at a cap rate higher than that at which FCR might be prepared to purchase an undivided interest in that property. As Carsley recorded it:

Owing to this spread, the two transactions are to remain independent of one another, but the FCR transaction clearly has to be made conditional upon the Cousins Group transaction being satisfactorily completed in favour of the Katz Group.

Jameson testified that prior to the initiation of this action, he had not heard of Carsley.

[173] On August 18, 2004 David Katz prepared a memo to file in which he wrote:

Rick Kesler had a brief conversation with Gerry Levitz yesterday to obtain Gerry’s opinion as to the benefits of the CIBC process. In addition, Rick asked Gerry what he thought would happen if the proposed transaction was unsuccessful.

That same day Carsley talked with David Katz and, according to the memo of the conversation which Carsley prepared the next day, Katz was of the view that FCR was looking to College Square “as a trophy property” and he thought FCR would be prepared to “aggressively invest” in such a property.

B. The state of dealings between David Katz and FCR: July to October, 2004

B.1 Prior to the August 25 meeting with FCR

[174] David Katz prepared a July 22 memo to Sylvie Lachance outlining his thoughts on key co-ownership issues. It was marked “Draft: not for circulation”. No evidence was put before me that Katz ever sent the memo to Lachance.

B.2 The August 25 meeting

[175] A meeting was held on August 25, 2004 attended by David Katz, his lawyer, Fred Carsley, Sylvie Lachance, from FCR, and FCR’s counsel, Rita de Santos.

[176] By this point of time Lachance had received approval from her superior, Mr. Dori Segal, to proceed with discussions concerning College Square. She called it an “exploratory process”. Neither she nor Mr. Segal were authorized to transact on a specific price without going to senior management, and they did not approach senior management in 2004 about the College Square property. However, Lachance testified that she must have mentioned to Segal “at numerous occasions during the year that I was expecting low 70 million would be approximately the price that the asset would go for”.

[177] Carsley’s notes of the meeting disclosed that the parties discussed numerous issues relating to a co-ownership structure for College Square; according to his testimony, “that was the entire discussion.” Carsley prepared a memo about the meeting the day after it was held. In that memo he wrote:

Prior to the meeting, David and Sylvie had a private discussion which was then relayed privately between Sylvie and Rita with regard to certain matters involving the buy-out of existing shareholders with the ownership group and its effects. In a private discussion with David after the meeting, he expects the CBIC World Markets evaluation of the property to come in at somewhere around 55 million, whereas First Capital has already agreed to a value of $71 million for which they would be purchasing a share.

Carsley testified that he was not party to the conversations engaged in by Lachance, and the information he obtained about a value of $71 million came from a post-meeting discussion by the elevators with David Katz who had told him that Ms. Lachance “was amenable to that type of pricing in the event that a transaction could be structured.” Carsley stated that he was not present for any discussions at which the value of the investment or prices that would be paid were talked about with FCR. Carsley understood from Katz that the non-selling shareholders needed to find a buyer willing to pay about $71 million if the Selling Shareholders were to be paid out with the Non-Selling Shareholders maintaining control.

[178] David Katz testified that the purpose of his private discussion with Ms. Lachance was “to bring her up to speed on the reasons why there might be a potential opportunity for First Capital to purchase a partial interest in College Square which was completely and fully predicated on a re-organization of the company for the purpose of enabling selling shareholders to redeem their interest in the corporations that own College Square.” At trial Katz testified:

A. The purpose of that discussion was for me to make sure that Sylvie LaChance understood why I had requested the meeting. She needed to understand that the conditions surrounding the meeting were very different than when we had first discussed co-ownership principles in March of 2004. March 2004 was a period of time where First Capital was being provided an exclusive opportunity to enter into a strategic alliance with Leikin Group for the purposes of pursuing development opportunities within greater Ottawa – the greater Ottawa area. Sylvie needed to understand that in August at this time we were looking to sell a partial interest in College Square because of our need to fund a share redemption transaction, and she needed to understand that this was no longer an exclusive opportunity that was being provided to First Capital, but conveying to her that we would absolutely have a need to sell a partial interest of College Square to a third party for the purposes of funding that transaction, but that we could not discuss or get involved in the negotiation of a purchase and sale at that time because the internal matters of Leikin Group needed to be regulated first. We needed to resolve and reach consensus amongst shareholders within the Leikin Group in order for us to then proceed to look for funding for the transaction. So at that time Sylvie LaChance understood that notwithstanding the fact that we were discussing co-ownership principles for College Square it was not a discussion that related in any way to a – to actual terms and conditions of a purchase or sale of College Square. It was to get back in to a discussion to understand if we could coexist within a co-ownership framework in the event that First Capital ended up being successful in acquiring an interest in College Square at some future date.

Q. Did you discuss the amount of the funding required?

A. Yes, I advised Sylvie that we would require $71.5 million, and I explained to her because I knew that that would come as a – as quite surprise that because $71.5 million was not representative of the prevailing market conditions and I advised Sylvie that the $71.5 million was not tied to an appraised value, it wasn’t tied or supported by market data. It was nothing more than a value that I had determined we needed in order to assist us in covering the costs of the share redemption transaction while enabling the non-selling shareholders to retain a 50% interest. So it was important that she understood that, had I not told her that she wouldn’t have been able to make any sense at all of $71.5 million.

Q. After you gave that explanation or made that explanation to her did she have any reaction?

A. No reaction at all, she took note of it, and we went back in to the general meeting.

Q. Did she say anything to you?

A. She didn’t respond in any way.

[179] Lachance testified that First Capital had not agreed to buy College Square at this juncture, but was having discussions with David Katz with a price floating around the low 70s. Indeed, Ms. De Santis’ notes of the meeting record: “property worth $70MM.”

[180] In her notes of the meeting Ms. De Santis wrote: “4 shareholders are buying out 7 shareholders.” De Santis understood that “there was going to be a prior transaction so that ultimately we would get a 48% interest in College Square”:

But there was a prior transaction whereby the family – I didn’t know who the shareholders were, that we would be dealing with ultimately owned 4 of the 11 shareholders who owned the property.

Lachance knew a family reorganization would have to take place before the property could be sold to FCR, but she was not told about any of the details of the intra-family discussions, including the price of any sale. De Santis’ evidence was to the same effect – she was never interested in knowing what David Katz was going to do with his family. Lachance was aware that any deal with FCR could not proceed until the family arrangements were finalized. She described the meeting as “an exploratory” one: “Rita De Santis had provided a general outline of principles guiding the partnership, and we sat to explore these issues”.

[181] Ms. De Santis recalled that at the meeting they discussed a timeline under which an agreement amongst shareholders would be reached by the end of September or early October, and that agreement would be subject to David Katz arranging the financing to buy them out. David Katz stated on cross-examination that he might have been “too exuberant and maybe too optimistic in terms of timeline…Perhaps I was naïve enough to believe that the negotiations between the corporations and the selling shareholders would be wrapped up fairly quickly and I was wrong.”

[182] On cross-examination before trial Carsley was questioned at some length about the portion of his August 26 memorandum where he wrote: “…whereas First Capital has already agreed to a value of $71 million for which they would be purchasing a share”, information which he received from David Katz. The following exchange occurred:

Q. And you put down here when you say “whereas First Capital has already agreed to a value of $71 million for which they would be purchasing a share”, I suggest to you sir, that is not what he said to you and it was not part of that discussion?

A. I can’t tell you any more than what is here. I can tell you that what my understanding of what was being relayed was that given that Mr. Katz had done a financial analysis or had done at least some rough numbers.

And knew, and had a reasonable expectation of what he was going to have to pay to the departing shareholders. And he knew the debt levels of the property and the leveraging of the property at the time. And how much money he was going to have to raise in order to provide the liquidity necessary. That’s if First Capital or anybody else who was going to look at this was not prepared to consider values at those levels, there was really nothing more to talk about.

All of the discussions regarding co-ownership, buy, sells, and shotguns and carrying interest are all very interesting. But if you can’t put the numbers together, you are basically wasting your time…

Q. And – so that he never would have said as you marked down here, that – and I’m sure you don’t mean that First Capital had already agreed to a value of $71 million? There was no agreement as to the $71 million?

A. What I said and as far as I’m concerned what he meant, is that a deal could not be made from what I understood at less than the value of $71 million.

But having said that, there was no meeting of the minds so to speak as to an agreement where two parties were bound to one another or had any rights with respect to one another…If there was already an agreement, there would not be the necessity of an agreement in principle. To put it bluntly, we were far from there…So in my mind there was never an agreement at that point. (emphasis added)

Katz testified that he had not told Carsley that FCR had agreed to a value of $71 million for purchasing an interest in College Square. He said he could not have told Carsley that because “I had no indication from First Capital that that was the case”.

[183] On cross-examination on the summary judgment motion it was suggested to David Katz that in August, 2004, he had discussed with Lachance an actual sale of an interest in College Square. Here is the ensuing exchange:

Q. Well, you’re discussing an actual sale of an interest in the property?

A. No, I was not, Mr. Bennett. What I was discussing with First Capital in August 04 were co-ownership principles. And what First Capital was aware of at that time, was my need to be able to fund a share redemption transaction. And they were aware of the fact that I would need a value ascribed to College Square in a third party transaction that would be what I felt at the time, would be in the low 70 million range. That’s what was known. There was no agreement being transacted with First Capital at that time, there was no contemplating that an agreement would be transacted at that time…It’s inappropriate for anybody, you or anybody else to characterize that August timeframe as a timeframe that involved First Capital and myself and perhaps other non-seller shareholders being in a transaction mode. We were most certainly not in a transaction mode…

It’s very important to understand that any discussions we had about co-ownership were not on the basis that there was a transaction that we were about to engage in, it was on the basis that at some point in time given certain circumstances and conditions precedent, there may have been an opportunity for First Capital to purchase an interest in it.

Later in the transcript of that cross-examination of David Katz the following exchange occurred:

Q. You were discussing a co-ownership arrangement in October 2004 with First Capital?

A. I was discussing co-ownership principles.

Q. Okay.

A. And co-ownership framework. That does not constitute a sale, Mr. Bennett.

[184] Katz testified that he did not tell Farber, Andy Katz, Jameson or Day about the August 25 meeting he had with FCR. When asked why he had not, he responded:

Because this – the discussions that I was having with First Capital in my view were very preliminary, it didn’t involve – it wasn’t – we weren’t in a transaction mode. I was trying to satisfy myself first and foremost that co-ownership principles could be arranged in a manner that both sides could live with. I needed to understand that a co-ownership framework could be developed, and until I satisfied myself there was certainly not much point in involving my brother or sister.

Farber confirmed that Katz had not told her about the August 25 discussions; so too did Andrew Katz.

B.3 After the August 25 meeting

[185] Following the August 25 meeting Rita de Santis prepared a revised memorandum outlining various issues concerning any co-ownership structure between FCR and the Leikin Group both for College Square and other properties they might co-own. The memo was sent to David Katz on September 8, who returned a marked-up copy to Sylvie Lachance on September 20, offering to meet with her to discuss it. In late August and early September, the Leikin Group sent FCR some information on an environmental issue at College Park, as well as a summary of the terms of two key leases. Lachance testified that she “was expecting that we could finalize something during the fall, I started inquiring and asking for some summary of documents”:

At this preliminary stage, I deemed it important to know what were the issues in the main two leases. So this is the beginning of the due diligence.

This is all part of preliminary dealing towards concluding, if possible, a transaction that will be followed by a complete due diligence process…

[186] Discussions between FCR and the Leikin Group did not proceed any further at that time. In mid-October Rita de Santis received a call from Fred Carsley who informed her “that for reasons relating to conflict of interest, this file is on hold for at least 1 month.” Lachance explained:

There was a point in time where the deal died, disappeared, it didn’t get finalized…

[A]t a point of time in the fall, the deal could not be finalized, the deal could not happen. It simply disappeared, and the deal was not there. It was my understanding that the family reorganization had not occurred, had not happened, and that was it. There was no transaction that could be made. So everything suddenly disappeared. We didn’t have a deal any more, and, unfortunately, we didn’t finalize a transaction that fall.

[187] Ms. De Santis did not recall the details of the call from Mr. Carsley; she simply understood that David Katz needed more time to settle with the selling shareholders. De Santis had no further involvement in the matter until the middle of May, 2005, when FCR learned about the RBC Capital-managed bid process for College Square. She had no discussions with the Leikin Group between October, 2004 and May, 2005.

[188] On his cross-examination on the summary judgment motion David Katz testified that he had not informed his fellow shareholders in the Leikin Group about his discussions with First Capital:

Q. You didn’t advise them that First Capital would – the co-ownership principles you were discussing related to co – to First Capital taking an ownership interest in College Square?

A. That would have been terribly misleading.

Q. …[Y]ou didn’t disclose to the selling shareholders any of the discussions you had with First Capital from July 14th through October 12th, did you? You didn’t disclose them to the selling shareholders?

A. No, I did not.

Q. …And you didn’t disclose that First Capital had an interest in acquiring an ownership interest in College Square?

A. There wouldn’t have been a need to disclose something that the selling shareholders were already aware of.

Q. Well, they weren’t aware of it.

A. Yes, they most certainly were, Mr. Bennett.

Q. All right. Where did you make them aware of it?

A. April 15th, 2004 Board meeting.

B.4 Findings of fact

[189] Let me repeat some of the findings of fact which I made in my Summary Judgment Reasons about the dealings between FCR and Katz:

(i) What First Capital did, as early as January, 2004, was to express an interest in acquiring part of College Square and it engaged in some discussions with David Katz to that end in January and February, 2004, as well as in the August to October, 2004 time period;

(ii) At the time the shareholders executed the LOI on April 18, 2005, First Capital had not made any offer to acquire an interest in College Square, let alone enter into any binding agreement to do so. To the contrary, First Capital was told by the Leikin Group in October, 2004 that no further discussions could be held until the company had resolved its internal affairs;

(iii) First Capital made its first, and only, offer to purchase an interest in College Square by its LOI dated July 8, 2005;

(iv) David Katz commenced discussions with First Capital about the possibility of that company acquiring an interest in College Square in January, 2004. He continued those discussions in February, 2004, and from July until October, 2004. As was described in the engagement letter for RBC Capital, by October, 2004 those discussions had reached an “advanced” stage before they were terminated by the Leikin Group.

[190] The discussions which Katz held with Lachance on August 25, 2004, were more advanced than those they had held back in February and March. FCR evidently was taking the discussions more seriously since by August Lachance had received approval from her superior to proceed with the discussions, although she had no authority to transact on a specific price without authorization from her seniors. The communications between FCR and Katz in August, September and October, 2004, did not involve FCR expressing a price at which it might be interested in acquiring College Square, let alone the making of an offer to purchase. It would be fair to say that Katz appreciated he had found in FCR an entity willing to continue discussions with him about College Square, but that is as far as matters had progressed by October when Katz terminated the discussions.

[191] I also accept Katz’s evidence that the context in which the August discussions with FCR took place was very different than that in which the March discussions had taken place. Katz initiated discussions with FCR in early 2004 in an effort to find a partner for the Leikin Group which might be willing to consider a strategic alliance and which he could present to the Board as a potential co-venturer. Katz’s efforts to interest the Board in a strategic alliance failed at the April 15 Board meeting – Harris, Kesler and Spieler showed no interest in any such alliance. Then came the Prehogan letters in June when it became clear that an unbridgeable divide over the core assets had emerged between two groups of shareholders, prompting the shareholders who wished to continue their ownership of College Square to search for ways to finance the buy-out of the other shareholders.

[192] As that search evolved through July and August, securing the involvement of an equity investor emerged as an increasingly attractive financing option. As an experienced businessman, and as a shareholder interested in continuing his ownership interest in College Square, Katz knew that he had to gain some understanding whether third party equity participation was even possible at a level which would enable the buy-out of the Selling Shareholders. I find that it was in that context in which Katz resumed his discussions with Lachance in August, 2