SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Renegade Capital Corporation, Applicant
- v. -
Dominion Citrus Limited, Dominion Citrus Income Fund, R. Peter McLaughlin, Peter M. Kozicz, Eric Skillins and Paul Scarafile, Respondents
BEFORE: Mr. Justice H.J. Wilton-Siegel
COUNSEL: Derek J. Bell and Emrys Davis, for the Applicant, Renegade Capital Corporation
Peter Wardle, James Camp and Julia Wilkes, for the Respondents, Dominion Citrus Limited, Dominion Citrus Income Fund, R. Peter McLaughlin, Peter M. Kozicz, Eric Skillins and Paul Scarafile
John Callaghan, for Robert Fortune
HEARD: March 22, 2013
ENDORSEMENT
1On this application, the applicant, Renegade Capital Corporation (the “Applicant” or “Renegade”), seeks, among other things, an order requiring the trustees of the Dominion Citrus Income Fund (the “Fund” or the “Trust”) to call a special meeting of the holders of units of the Fund (the “Unitholders”). The purpose of the meeting is to allow the Unitholders to vote on whether to authorize the trustees of the Fund to vote the common shares of Dominion Citrus Limited (the “Company”) in support of a special resolution to be considered at a special meeting of the shareholders of the Company called for March 26, 2013 (the “Special Meeting”). The Applicant also seeks an order adjourning the Special Meeting to permit the meeting of the Unitholders to take place. The application is opposed by the Fund, the Company and the Fund’s trustees, who appear together and are herein collectively referred to as the “Respondent”.
Factual Background
2The Fund is a publicly traded, unincorporated, open-ended limited purpose income trust established under the laws of Ontario pursuant to a declaration of trust dated November 21, 2005 (the “Declaration of Trust”). The Fund’s assets consist of the Common Shares (defined below) and the Secured Notes (defined below). The Fund does not carry on an operating business. The Fund has 21,186,412 issued and outstanding units (the “Units”) that are listed on the Toronto Stock Exchange (the “TSX”).
3The Company is a corporation incorporated under the Business Corporations Act, R.S.O. 1990, c. B.16, as amended, (the “OBCA”) that carries on the business of supplying fresh produce to retail, foodservice and food distribution customers in Ontario, Quebec and the United States.
4The issued and outstanding capital of the Company consists of 20,475,845 common shares (the “Common Shares”) and 1,021,150 Series A Preference Shares (the “Preference Shares”). The Preference Shares are also listed on the TSX. In addition, the Company has issued participating secured notes in the aggregate principal amount of $19,258,000, of which $18,051,000 plus accrued interest remains outstanding (the “Secured Notes”). The Fund owns the Common Shares and Secured Notes, whereas third parties own the Preference Shares as described below.
5The Fund’s current trustees are R. Peter McLaughlin (“McLaughlin”), Peter M. Kozicz (“Kozicz”), Eric Skillins (“Skillins”) and Paul Scarafile (“Scarafile”) (collectively, the “Trustees”). McLaughlin owns 2,697,499 Units in the Fund, representing approximately 12.7% of the outstanding Units, through Greenbriar Holdings Limited (“Greenbriar”), a corporation understood to be controlled by him.
6The Company’s current directors are McLaughlin, Scarafile, Barry Cracower, Jason Fielden (“Fielden”) and William R. Ash. Through Greenbriar, McLaughlin owns 134,874 Preference Shares of the Company, representing approximately 13.2% of the outstanding Preference Shares. Kozicz owns 2,562 Preference Shares.
7Renegade is a corporation controlled by Michael Blair (“Blair”), a former director of the Company and Trustee of the Fund. It holds 3,750,000 Units in the Fund, representing approximately 17.7% of the outstanding Units, and 46,000 Preference Shares, representing approximately 4.5% of the outstanding Preference Shares of the Company.
The Secured Notes
8The Secured Notes are governed by the terms of an amended and restated participating note indenture dated December 15, 2009 (the “Secured Note Indenture”). The Secured Notes mature on January 1, 2016 and bear interest at a base rate, currently 5%, plus additional interest equal to the least of: (1) 5.5% of the indebtedness represented by the Secured Notes; (2) an amount equal to the taxable income of the Company for the year, minus an amount equal to the base interest; and (3) an amount equal to the distributable cash of the Company for the year minus an amount equal to the base interest.
9The Secured Notes were originally issued on or about January 1, 2006, when the current income trust structure was put in place. The Secured Notes were necessary to effect the tax advantages available at that time to an income trust. The Secured Notes were issued to a predecessor corporation of the Company, during one of the steps of the plan of arrangement that established the Fund, in consideration of a transfer of 95% of the aggregate value of the common shares of the Company at the time. However, as debt instruments, the Secured Notes rank prior to the Preference Shares in any liquidation of the Company. The significance of this priority is discussed below.
10The Secured Notes were restructured in 2009. At that time, the base interest rate was reduced from 13% to 5%, and the Company was granted an interest holiday for 2010 to address its financial situation. In consideration of these amendments, pursuant to a general security agreement, the Company granted a security interest over all of the personal property, but not the real property, of the Company to the trustee under the Secured Note Indenture.
11The Company paid the interest due on the Secured Notes during 2011. As a consequence, the Fund made a special distribution of $0.0275 per Unit to the Unitholders on December 19, 2011, which was satisfied by a distribution in kind in the form of additional Units in the Fund. Since 2011, the Fund has granted a further interest holiday to the Company for the period December 1, 2011 to March 31, 2012, which was extended to December 31, 2012, and which was further extended most recently to March 31, 2013.
The Preference Shares
12The Preference Shares have a stated capital of $2.25 per share and entitle the holder to a cumulative floating rate cash dividend calculated using the bank prime rate on January 1 and July 1 in each year, plus 2%, subject to a minimum rate of 4% per annum and a maximum rate of 8% per annum, payable semi-annually on January 20 and July 20 of each year.
13As of December 31, 2012, the Preference Shares had accrued $442,285.60 in undeclared and unpaid dividends. Under the terms of the Preference Shares, the Preference Shares become voting if four consecutive dividend payments are not made. As of December 31, 2012, eight consecutive dividends had not been made. Therefore, the Preference Shares are entitled to vote together with the Fund, as the holder of the Common Shares, on the Special Resolution (defined below) on the basis of one vote per Preference Share. Pursuant to the OBCA, the holders of the Preference Shares are also entitled to vote separately as a class on the Special Resolution.
14The Preference Shares are redeemable at the option of the Company at any time pro rata for cash equal to $2.25 per share plus any accrued and unpaid dividends (the “Redemption Price”).
15In addition, the Preference Shares are retractable at the Redemption Price at the option of the holders thereof effective April 1, 2013 for payment on April 15, 2013, provided the holder delivers notice to the Company at any time between January 1, 2013 and March 31, 2013. As of the date of the hearing of this application, the Applicant and one other Preference Shareholder are the only Preference Shareholders that have provided the Company with notice requiring retraction of their shares. However, I have proceeded on the basis that all of the remaining Preference Shareholders would exercise their retraction rights if, for any reason, the Special Resolution is not approved at the Special Meeting on March 26, 2013. If all of the Preference Shareholders were to exercise their right to retract the Preference Shares, the aggregate Redemption Price would be approximately $2.74 million, as of April 13, 2013.
16The provisions of the Preference Shares provide that the Company has the option of satisfying the Redemption Price for any shares being retracted in cash or common shares of the Company. However, the share conditions regarding the determination of the number of common shares to be issued to satisfy the Redemption Price refer to the market price on the TSX of the common shares of the Company. The common shares of the Company have not traded on the TSX since January 1, 2006, when the income trust structure was put in place. The Company takes the position in the Circular (defined below) that “the method of determining the number of shares that would be issued to satisfy the Redemption Price refers to the market price of the Common Shares on the TSX and is consequently inoperable because the Common Shares are no longer traded on the TSX”. There is, however, no judicial or regulatory decision to this effect at the present time.
17At the time that the income trust structure was put in place, the Preference Shareholders voted on a resolution regarding certain proposed amendments to the rights and conditions attaching to the Preference Shares. The resolution included amendments that would have permitted the Company to satisfy the Redemption Price in respect of Preference Shares that had been retracted by the payment of Units of the Fund. The resolution included a further amendment that would also have permitted the Company to satisfy the Redemption Price of any Preference Shares in respect of which the Company exercised its right of redemption in Units of the Fund. The Preference Shareholders did not approve this resolution at a meeting of Preference Shareholders held shortly after the meeting of common shareholders of the Company that approved implementation of the income trust structure. Accordingly, the proposed amendments were not implemented. As a result, from the inception of the income trust structure on January 1, 2006, the Fund’s interest in the Company has taken the form of Secured Notes that rank ahead of the Preference Shares and Common Shares that rank behind the Preference Shares, as a matter of their respective expressed terms and conditions.
The Financial Condition of the Company
18The parties agree that the Company is insolvent on a balance sheet test (i.e. its assets are less than its liabilities). It is also agreed that the Company is unable to obtain bank financing for its working capital, after having canvassed the market, and is dependent upon its suppliers for credit. The parties disagree, however, on the proper characterization of the current financial prospects for the Company.
19Renegade characterizes the Company as insolvent or, at a minimum, on the eve of insolvency. It points to an ongoing decline since 2005 of total assets and net income. It says that the actual decline in total assets and net income is larger when adjusted to include the interest payable by the Company to the Fund, which is netted out on a consolidation of the financial accounts of the Fund and the Company. It also says the nine-month results ending September 29, 2012 are not representative of the likely outcome for fiscal 2012, given the experience in 2011 when the nine-month results were also positive but the Company suffered a substantial loss for the fiscal year.
20The Respondent takes the position that the Company is not insolvent but rather “is an enterprise with a promising future and is more than capable of meeting its obligations as they become due”. This view is based on the Respondent’s view that, with the support of the Fund, the Company is “far from insolvent”. It is understood that ‘the support of the Fund’ on which the Company relies, and to which it believes it is entitled, is a waiver of interest payments as required to meet the Company’s obligations as they fall due. Consistent with this view, the Respondent believes that it is more appropriate to consider the financial condition of the Fund and the Company on a consolidated basis given that they are managed as a consolidated entity. On a consolidated basis, the Respondent says that, for the nine months ended September 29, 2012, the consolidated entity had a net profit of $492,000, on track for the first true net profit in five years, as compared with a net loss of $1,534,000 in the 2010 fiscal year.
21The Respondent also says that the Company’s liquidity position will be significantly improved if the transaction contemplated by the Settlement Agreement (defined below) is implemented. It says that its current ratio will increase to 1.1:1 (as the Preference Shares will drop into non-current liabilities and the accrued dividends will be waived), the Company’s cash balance will be $1.825 million, and there will be no operating debt.
22It appears that EBITDA was negative in the 2010 fiscal year, but has since improved and was positive for the 2011 fiscal year and for the nine months ended September 29, 2012. The Company has, therefore, been able to meet its liabilities as they fall due because it is cash flow positive, although this has required the interest holiday on the Secured Notes. The parties disagree on the extent to which this situation is maintainable, particularly in light of the Preference Shareholders’ retraction right arising on April 1, 2013.
23It is Blair’s view that the situation is not maintainable. In 2011, in his capacity as a director of the Fund, he attempted to get the Trustees’ support for some form of insolvency proceeding to address both the declining profitability of the Company and the retraction obligation in respect of the Preference Shares. At a Trustees’ meeting on December 8, 2011, the Trustees resolved instead to pursue a restructuring of the Company’s operations, assisted by the interest holiday on the Secured Notes referred to above. Blair resigned as a Trustee shortly after this Trustees’ meeting.
24The Trustees’ resolution at the meeting of December 8, 2011 reflected the majority view that the Company had a future as a going concern under its then new management, headed by Fielden, which was implementing a restructuring plan for its operations that, in the Trustees opinion, had begun to show success. At that meeting, Scarafile is reported in the minutes to have said that he wanted a return on his investment but “felt there would be nothing left if the business was broken up”. The Respondent says that, at this meeting, the majority reached the same conclusion after reflecting on the choices available to the Company as they understood them – being some unspecified insolvency proceeding proposed by Blair, which they believed would leave little if anything for the Unitholders, or continuation of the Company as a going concern with restructured operations, which they considered had the promise of returning some value to the Unitholders in the long-run.
25It is not possible to reach any conclusion regarding the current level of profitability of the Company, or the sustainability of the Company as a going concern, based on the record before the Court. I have the following two observations regarding this dispute between the Trustees and Blair which inform the conclusions reached below.
26First, the parties do not dispute the actual financial results on a consolidated or unconsolidated basis. They dispute, instead, the proper perspective from which to assess the financial prospects of the Company. The Respondent says that the financial condition of the Company should be assessed on a consolidated basis. Renegade says that the financial condition of the Company should be assessed on an unconsolidated basis which, as mentioned, takes into account interest paid or accrued in each year on the Secured Notes.
27Second, this dispute also reflects a more fundamental difference in approach to the income trust structure.
28The Renegade position treats the Fund and the Company as separate entities, with the Trustees and the Board responsible to different constituencies. At its most basic, Renegade insists that the Secured Notes represent obligations that must be satisfied in accordance with their terms, including their legal priority relative to the Preference Shares.
29The Respondent treats the Fund and the Company as a single operating entity, with the Trustees and the Board responsible to the same constituencies. The Respondent considers that the economic interests of the Fund are to be equated with the economic interests of the Company. This is reflected, for example, in the joint meetings of the Board and the Trustees to consider and approve the transaction contemplated by the Settlement Agreement (defined below), as well as the joint special committee established to review the negotiations described below. With this perspective, the Respondent considers it appropriate for the Fund to “support” the Company by contractually postponing and subordinating the Secured Notes given the Company’s financial circumstances.
The Settlement Agreement
30On February 28, 2013, the Company announced that the Trustees, on behalf of the Fund, and the Company had approved the terms of a proposed settlement with a significant holder of Preference Shares, Solar Harvest Company Ltd. (“Solar Harvest”). This company, which is controlled by Robert Fortune (“Fortune”), owns 482,500 Preference Shares, representing approximately 47.2% of the outstanding Preference Shares. The press release indicated that the Company intended to call the Special Meeting of the Company’s shareholders to approve the terms of the settlement, which are set out in an agreement dated February 28, 2013 among the Fund, the Company, Solar Harvest and Fortune (the “Settlement Agreement”), and to incorporate the terms of the Settlement Agreement into the Company’s articles to apply to all of the Preference Shares.
31The following describes the principal terms of the transaction contemplated by the Settlement Agreement (the “Proposed Transaction”), based on the descriptions in the Circular (defined below), as the actual documents giving effect to the Proposed Transaction are not before the Court apart from the Settlement Agreement.
32By way of overview, the effect of the Proposed Transaction is to: (1) waive all accrued and unpaid dividends on the Preference Shares; (2) restructure the current retraction right of the Preference Shareholders as a series of mandatory quarterly cash payments over the period April 1, 2013 to May 1, 2019; (3) postpone repayment of all principal and interest, whether accrued before or after the Proposed Transaction, on the Secured Notes to payment of the mandatory cash payments on account of the Preference Shares, with the exception of the permitted annual interest payments described in (4) below; (4) restrict annual interest payments on the Secured Notes made after January 1, 2013 to an amount equal to the amount of any payments made in the same year to the Preference Shareholders (the “Permitted Annual Interest Payments”); (5) provide the Preference Shareholders with the benefit of a guarantee of the Fund of payment of the mandatory quarterly cash payments referred to in (2) above (which guarantee is limited in recourse to the security described in (6) below); and (6) pledge the security given in favour of the Secured Notes to the Preference Shareholders as security for the Fund’s obligations under its guarantee, effectively subordinating the Secured Notes to the Preference Shares.
Approvals
33The Proposed Transaction is subject to the approval of: (1) at least two-thirds of the votes cast by the holders of the Common Shares and Preference Shares at the Special Meeting, voting as a single class; (2) at least two-thirds of the Preference Shareholders, voting separately as a class; and (3) the TSX, if and to the extent required by the TSX. It is understood that TSX approval has been received.
34As mentioned, the Company has called the Special Meeting of the Company’s shareholders to be held on March 26, 2013. The Special Meeting has been called to consider and vote upon a special resolution authorizing the amendments to the Preference Share conditions described below to implement the terms of the Settlement Agreement described herein (the “Special Resolution”). In connection with the Special Meeting, the Company has delivered to the Company’s Preference Shareholders a notice of special meeting of shareholders and management information circular dated February 28, 2013 (the “Circular”).
Priority and Payment Arrangements
35The Settlement Agreement provides that upon receiving the approvals described above, the Fund will execute the Guarantee (defined below) and the Note Pledge Agreement (defined below), together with amended articles of the Company giving effect to the amendments to the conditions attaching to the Preference Shares described below. Such documents are to be delivered to Solar Harvest, Fortune and the Preference Shareholders, in the case of the latter by a posting on SEDAR.
Share Provision Amendments
36The Settlement Agreement provides for the following amendments to the Preference Shares:
The Preference Shareholders will irrevocably waive their rights to approximately $440,000 of presently accrued and unpaid dividends. In addition, the Preference Shares will cease to accrue dividends going forward;
The retraction right of the Preference Shareholders will be deleted and replaced by a schedule of mandatory cash payments by way of reduction of stated capital, commencing with a payment of $60,000 after approval at the Special Meeting, followed by quarterly payments in each twelve month period commencing August 1, 2013 and ending May 1, 2019 in varying amounts totaling approximately $2.4 million (the “Scheduled Preference Share Payments”); and
All unpaid Scheduled Preference Share Payments will become due and payable in the event any person acquires “control” (as defined in the OBCA) of the Fund or the Company. In addition, the Company shall have the right to make full or partial prepayments at any time.
The amendments to the Preference Share conditions giving effect to these provisions are herein referred to as the “Proposed Amendments”.
Secured Notes Interest Payments
37The Settlement Agreement further provides, as mentioned, that the Company agrees in favour of the Preference Shareholders that the annual interest payments on the Secured Notes as of January 1, 2013 will not, in the aggregate, exceed the annual payments made to the Preference Shareholders in accordance with the Scheduled Preference Share Payments and any prepayments to Preference Shareholders, being the amount of the Permitted Annual Interest Payments. In addition, the Company and the Fund agree that, until the Scheduled Preference Share Payments have been paid in full, no payments of principal or interest shall be made on the Secured Notes after January 1, 2013 apart from the Permitted Annual Interest Payments.
The Guarantee
38The Settlement Agreement contemplates that the Fund will execute and deliver to a collateral agent, on behalf of the Preference Shareholders, a limited recourse guarantee of the Company’s obligations to the Preference Shareholders pursuant to the amended Preference Share conditions, including payment of the Scheduled Preference Share Payments (the “Guarantee”). The Fund’s liability under the Guarantee will be limited to the amounts owing by the Company to the Fund under the Secured Notes, and all security related thereto (collectively, the “Collateral”). Accordingly, enforcement of the Guarantee by the collateral agent and the Preference Shareholders will be limited recourse to the Collateral and any proceeds of realization arising from the Assignment (defined below). The Guarantee will also contain an obligation of the Fund that would restrict the Fund from receiving payments from the Company under the Secured Notes, except for the Permitted Annual Interest Payments.
The Note Pledge Agreement
39The Settlement Agreement also contemplates that the Fund will execute and deliver to the collateral agent, on behalf of the Preference Shareholders, a note pledge security agreement pursuant to which the Fund will grant a security interest in the Collateral (the “Note Pledge Agreement”). The security interest in the Note Pledge Agreement will become enforceable upon failure by the Company to satisfy its obligations to the Preference Shareholders pursuant to the amended Preference Share conditions, including payment of the Scheduled Preference Share Payments.
40The Note Pledge Agreement will also contain an assignment to the Preference Shareholders of all amounts owing by the Company to the Fund, as the holder of the Secured Notes, including all principal and interest owing on the Notes apart from the Permitted Annual Interest Payments (the “Assignment”).
41Pursuant to the Settlement Agreement, the Fund has agreed to hold any amounts received on the Secured Notes, other than in respect of Permitted Annual Interest Payments, in trust for the Preference Shareholders up to an amount equal to the amount remaining to be paid in respect of the Scheduled Preference Share Payments, and will pay such amount to the Preference Shareholders prior to any distribution or other payment for the benefit of the Fund. It is assumed that this commitment will be set out in the Guarantee or the Note Pledge Agreement.
42The collective effect of the provisions of the Guarantee and the Note Pledge Agreement is: (1) to postpone payment to the Fund of all amounts owing on or in respect of the Secured Notes, other than the Permitted Annual Interest Payments, to payment in full of the Scheduled Preference Share Payments; and (2) to grant a security interest in the assets of the Company in favour of the Preference Shareholders (via a security interest in the security interest granted earlier in favour of the holders of the Secured Notes) to secure the Fund’s Guarantee of payment of the Scheduled Preference Share Payments which, effectively, ranks the security position of the Preference Shares ahead of the security position of the Secured Notes.
Voting Support
43In the Settlement Agreement, Solar Harvest agreed, among other things, to vote in favour of the Special Resolution and to vote against, and forebear from taking, any actions that might impede, interfere with, delay or discourage the transaction contemplated by the Settlement Agreement. Greenbriar has executed an agreement dated February 28, 2013 having substantially similar commitments to those of Solar Harvest.
44The Fund also has agreed in the Settlement Agreement to vote the Common Shares in favour of the Special Resolution and to vote against any action that would impede, interfere with, delay or discourage the transaction contemplated by the Settlement Agreement.
The Negotiations Between the Company and Solar Harvest Resulting in the Settlement Agreement
45The Settlement Agreement was the outcome of a negotiation with Solar Harvest which the Company initiated in June 2012. In view of the retraction date of April 1, 2013 and the Company’s inability to satisfy its retraction obligations in cash, the Company sought an agreement to defer the retraction date.
46In January 2013, the Company retained Klein Farber Corporate Finance Inc. (“Klein Farber”) to provide financial advisory services to the Company in connection with a possible restructuring of the Preference Shares.
47On February 5, 2013, at a meeting attended by Fortune, Fielden, Skillins, Klein Farber representatives as well as legal counsel for Solar Harvest and the Company, it became clear to the Company that Solar Harvest was not prepared to agree to the Company’s preferred option of a 2-3 year extension of the retraction period in return for a modest up-front payment. In addition, Solar Harvest advised that it believed that the creation of the Secured Notes in 2005, and the granting of the security interest in favour of the Secured Notes in 2009, was oppressive behavior under the OBCA as regards the Preference Shareholders, and that it was prepared to take legal action against the Company and possibly the Fund if a mutual agreement could not be reached.
48On February 8, 2013, Klein Farber delivered a tentative proposal to the Board and the Trustees setting out its views. The Board and the Trustees met together on four other occasions during February 2013 to consider proposals negotiated between Solar Harvest and Klein Farber on behalf of the Company.
49On February 19, 2013, the Board and the Trustees approved the formation of a joint special committee of the Fund and the Company, comprised of Fielden, Scarafile and Skillins (collectively, the “Special Committee”), to negotiate a resolution with Solar Harvest together with Klein Farber. None of the members of the Special Committee own any Preference Shares.
50The business terms of the Settlement Agreement were approved by the Board at a meeting held on February 25, 2013. McLaughlin had previously declared a conflict of interest due to his position as a Preference Shareholder and Unitholder. He did not participate in any negotiations with Solar Harvest and abstained from voting on the proposed arrangements at the meeting on February 25, 2013.
Applicable Provisions of the Declaration of Trust
51The following sets out the principal provisions of the Declaration of Trust relied upon by the parties. I have italicized the provisions upon which the Respondent relies in arguing that the Declaration of Trust does not require a vote of the Unitholders in respect of the Proposed Transaction.
52Article 4.1 describes the operations and activities of the Fund as restricted to ten specific classes. These include:
(a) acquiring, investing in, transferring, disposing of and otherwise dealing with securities, including the New Dominion Common Shares and Participating Notes…; …
(e) guaranteeing (as guarantor, surety or co-principal obligor) the payment of any indebtedness, liability or obligation of the Company … and mortgaging, pledging, charging, granting a security interest in or otherwise encumbering all or any part of the assets of the Fund, including securities issues by the Company or any direct or indirect subsidiary of the Fund, as security for that guarantee and subordinating its rights under the Participating Notes to other indebtedness;
(f) disposing of any part of the Fund Assets, subject to the provisions of this Declaration of Trust;
(g) undertaking all other usual and customary activities or taking all actions for the conduct of the activities of the Fund in the ordinary course;
53The rights of Unitholders are extremely limited, as provided in Article 2.6. In particular:
The legal ownership of the Fund Assets and the right to conduct the activities of the Fund are vested exclusively in the Trustees… and no Unitholder has or is deemed to have any right of ownership in or any other interest in, any of the Fund Assets, except as specifically provided herein.
54The powers of the Trustees, as set out in Article 9.1, are extremely broad:
9.1 Powers of the Trustees
Subject to the terms and conditions of this Declaration of Trust, the Trustees in respect of the Fund Assets may exercise any and all rights, powers and privileges that could be exercised by a legal and beneficial owner thereof and shall supervise the investments and affairs of the Fund. Subject to the specific limitations contained in this Declaration of Trust, the Trustees shall have, without further or other action or consent, and free from any power or control on the part of the Unitholders, full, absolute and exclusive power, control and authority over the Fund Assets and over the affairs of the Fund to the same extent as if the Trustees were the sole and absolute beneficial owners of the Fund Assets in their own right, to do all such acts and things as in their sole judgment and discretion are necessary or incidental to, or desirable for, carrying out the trust created hereunder. In construing the provisions of this Declaration of Trust, presumption shall be in favour of the powers and authority granted to the Trustees. The enumeration of any specific power or authority herein (including pursuant to Section 9.2) shall not be construed as limiting the general powers or authority or any other specified power or authority conferred herein on the Trustees. To the maximum extent permitted by Applicable Laws, the Trustees shall, in carrying out investment activities, not be in any way restricted by the provisions of the laws of any jurisdiction limiting or purporting to limit investments that may be made by trustees.”
55Article 9.2 gives the Trustees a lengthy list of specific powers which they may exercise “without any action or consent by the Unitholders”:
9.2 Specific Powers and Authorities
Subject only to the express limitations contained in this Declaration of Trust and in addition to any other powers and authorities conferred by this Declaration of Trust or which the Trustees may have by virtue of any present or future statute or rule of law, the Trustees without any action or consent by the Unitholders shall have and may exercise at any time and from time to time the following powers and authorities which may or may not be exercised by the Trustees in such manner and upon such terms and conditions as they may from time to time determine proper; …
(r) to guarantee the obligations of the Company or any affiliate of the Company or the Fund pursuant to any good faith debt for borrowed money incurred by the Company or the affiliate, as the case may be, and pledging securities issued by the Company or the affiliate, as the case may be, as security for such guarantee;
(v) to mortgage, hypothecate, pledge or otherwise create a security interest in all or any moveable or personal, immovable or real property or other assets of the Fund, owned or subsequently acquired, to secure any obligation of the Fund;
(y) to manage the Fund Assets; …
(gg) to do all such other acts and things as are necessary, useful, incidental or ancillary to the foregoing and to exercise all powers and authorities that are necessary, useful, incidental or ancillary to carry on the affairs of the Fund, to promote the purpose for which the Fund is formed and to carry out the provisions of this Declaration of Trust.
56The Applicant argues that the Trustees are required to call a meeting of the Fund’s Unitholders in the present circumstances by virtue of the provisions of Article 9.5 of the Declaration of Trust, which reads as follows:
9.5 Restrictions on Trustees Powers
(a) Notwithstanding section 9.4, the Trustees may not under any circumstances whatsoever vote the New Dominion Common Shares or, where applicable, the Participating Notes, nor permit any of the securities of any other member of the Fund Group that are directly or indirectly owned or controlled by the Fund, to authorize any transaction which is materially adverse to the Unitholders, including, among other things:
(i) any sale, lease or other disposition of all or substantially all of the assets of any members of the Fund Group, except as part of an Internal Reorganization with an affiliate or subsidiary of any member of the Fund Group or the Fund or a permitted charge, pledge or lien in accordance with Section 9.2(p); or
(ii) any amalgamation, arrangement or other merger of any member of the Fund Group with any other entity, except as part of an Internal Reorganization with an affiliate or subsidiary of any member of the Fund Group or the Fund;
(iii) the winding-up or dissolution of any member of the Fund Group prior to the end of the term of the Fund, except as part of an Internal Reorganization with an affiliate or subsidiary of any member of the Fund Group or the Fund; or
(iv) any material amendment to the constating documents of any member of the Fund Group to change the authorized share capital or units or otherwise amend the rights, privileges, restrictions and conditions attaching to any class of shares or units of those entities in a manner that may be prejudiced to the Fund or the Unitholders.
without the approval of the Unitholders by Special Resolution at a meeting of Unitholders called for that purpose.
(b) Except pursuant to a pledge in accordance with Section 9.2(r) hereof, the Trustees shall have no power to sell or otherwise dispose of any of the new Dominion Common Shares, the Participating Notes (except pursuant to an in specie redemption under Section 6.5) or to sell all or substantially all of the Fund Assets or cause the Company to sell all or substantially all of its assets, except: (i) with the approval of the Unitholders by Special Resolution at a meeting of the Unitholders called for that purpose, or (ii) as part of an internal reorganization of the direct or indirect assets of the Fund as a result of which the Fund has the same interest, whether direct or indirect, in the assets as the interest, whether direct or indirect, that it had prior to the reorganization (an “Internal Reorganization”).
(c) The Trustees shall only vote the New Dominion Common Shares and exercise the rights under the Participating Notes in the manner provided for herein or under the Participating Note Indenture, as the case may be.
Positions of the Parties
57The following summarizes the views of the parties regarding the merits of the Proposed Transaction. It is not intended to be exhaustive but rather to identify the principal matters raised by the parties that have given rise to this litigation. I have addressed their respective legal positions on the two principal questions in the analysis of those questions below.
The Applicant
58The Applicant’s position is informed by its view that the Proposed Transaction would prejudice the Fund and the Unitholders in the following four ways.
59First, it says the Proposed Transaction would severely limit the annual interest payments that can be made on the Secured Notes. The Applicant says that the restriction on interest payments on the Secured Notes to the Permitted Annual Interest Payments will restrict the Company to paying only $300,000 between April 1, 2013 and May 1, 2014, which represents an interest rate of approximately 1.56%. It says that the highest interest rate the Company can ever pay will occur in the fifth year of the Scheduled Preference Share Payments; moreover, even in that year, the Company can only pay $620,000 for an effective interest rate of approximately 3.22%, which it characterizes as far below what the Fund would be entitled to receive in the ordinary course.
60Second, it says the Proposed Transaction would postpone repayment of the principal and unpaid interest on the Secured Notes to the repurchase of all of the Preference Shares in accordance with the Scheduled Preference Share Payments. This is the undisputed consequence of the postponement language in the Guarantee, the Assignment, the agreement to hold any amounts received in excess of payments on account of the Permitted Annual Interest Payments in trust for the Preference Shareholders, and the pledge of the security in the Note Pledge Agreement previously granted in favour of the holders of the Secured Notes.
61Third, it says the Proposed Transaction would postpone the maturity date of the Secured Notes by at least three years past the current scheduled retirement date of January 1, 2016 by virtue of tying repayment to the completion of the Scheduled Preference Share Payments, which are not to be completed until May 1, 2019.
62Fourth, the Applicant objects to the provision of the Proposed Transaction that requires the Company to immediately repay its entire obligation to the Preference Shareholders in the event of a change of control of the Company or the Fund. It says that this restriction discourages any person from attempting to obtain control of the Fund – and thereby paying a control premium on the Units – because it will trigger a significant obligation to the Preference Shareholders, which will likely engage the Guarantee given by the Fund.
The Respondent
63The Respondent argues that the Unitholders will receive the following benefits from the Proposed Transaction: (1) a waiver of $340,000 in dividend arrears on the Preference Shares; (2) a waiver of the retraction rights of the Preference Shareholders in favour of payments totalling $2.4 million over the six-year period to 2018; and (3) a waiver of all future dividends. It says that implementation of the Proposed Transaction should permit the Company to continue as a going concern making payments on the Secured Notes, if it so chooses, generating yields against its current market capitalization estimated by Klein Farber to be 4.9%, 7.435%, 9.8%, 11% and 12.7% over the next five years. There is, however, no support for these calculations in the materials before the Court on this application.
64In addition, the Respondent submits that the Proposed Transaction will avoid the prospect of insolvency or litigation to determine the competing rights of the holders of the Secured Notes and the Preference Shares in the event of a liquidation of the Company. The Respondent says it has been advised by the joint solicitors of the Fund and the Company, Cassels Brock & Blackwell LLP (“Cassels Brock”), that it was impossible to say with any certainty what the outcome of any such litigation might be. The legal opinion of Cassels Brock is not, however, before the Court on the application.
65Lastly, the Respondent believes that Renegade’s intention to cause the Company to commence an insolvency proceeding entails a significant risk for the Unitholders. It says that an insolvency process would be “perilous” to the Company. The Respondent argues that, in an insolvency, the Company’s international suppliers would stop doing business with it. It says that these suppliers represent a large portion of the Company’s produce and almost all of its high margin products. It says that it also expects that the quality and availability of produce provided by its North American suppliers would decline drastically in response to a concern for payment. Collectively, the Respondent believes such a decline in quality and availability would rapidly erode the Company’s business.
Analysis and Conclusions
Issues Addressed on this Application
66There are two principal questions raised by the Applicant:
Are the Trustees required by Article 9.5(a) of the Declaration of Trust to obtain the approval of the Unitholders by a special resolution passed at a meeting of Unitholders in order to vote the Common Shares at the Special Meeting of the Company?
Did the Trustees breach their duty to exercise the degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances in reaching their decision to approve the Proposed Transaction and enter into the Settlement Agreement?
67In each case, the relief sought is an order requiring the Trustees to convene a meeting of the Unitholders to consider a special resolution under the Declaration of Trust authorizing the Trustees to vote in favour of the Proposed Transaction at the Special Meeting of the Company called for March 26, 2013 by voting in favour of the Proposed Amendments. The Applicant also seeks an order requiring the Company to adjourn the Special Meeting until after such meeting of Unitholders is held.
68I will address each of the two principal questions in turn.
Do the Trustees Require the Approval of the Unitholders to Vote the Common Shares at the Special Meeting of the Company to Authorize the Proposed Transaction?
69The Applicant argues that the Proposed Transaction either falls within the specific type of transaction contemplated by Article 9.5(a)(iv) or falls generally within the introductory language of Article 9.5(a) as a transaction which is materially adverse to the Unitholders. In either case, the Trustees would require the approval of the Unitholders given by special resolution at a meeting of Unitholders in order to vote in favour of the Proposed Transaction at the Special Meeting of the Company called to approve the Special Resolution.
Preliminary Observations
70Before proceeding to this issue, I propose to set out certain observations that inform the conclusions below.
71This issue involves the contractual interpretation of Article 9.5(a) of the Declaration of Trust. The applicable principles of contractual interpretation were set out by Blair J.A. in Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254 at para. 24:
… a commercial contract is to be interpreted,
(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;
(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the "cardinal presumption" that they have intended what they have said;
(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties;3 and (to the extent there is any ambiguity in the contract),
(d) in a fashion that accords with sound commercial principles and good business sense, and that avoid a commercial absurdity.
72In this case, in addition to the plain meaning of the Declaration of Trust, the context in which the Declaration of Trust was created and executed is relevant. The principal purpose of the income trust structure was to provide the Company’s shareholders with a potentially more beneficial tax consequence on receipt of distributions from the Company. From this, I think two important principles of interpretation of the Declaration of Trust must follow.
73First, the Company’s shareholders did not intend to change in any material way the respective rights and obligations of the Company’s directors or shareholders when they established the Fund and exchanged their Common Shares for Units of the Fund.
74However, implementation of the income trust structure involved the creation of Secured Notes that were intended to be enforceable in accordance with their terms. In particular, it was intended that the Secured Notes would constitute debt instruments in order that, among other things, payments in respect of the Secured Notes would constitute interest expense of the Company for tax purposes. In effect, the rights associated with the Common Shares prior to the transaction by which the income trust was established are now represented collectively by the rights associated with both the Secured Notes and the Common Shares.
75However, in this case, the Company had previously issued Preference Shares which remained outstanding after the income structure was implemented. As debt instruments, the Secured Notes necessarily ranked ahead of the Preference Shares. Therefore, in analyzing the issues on this application, the rights of the holders of the Secured Notes cannot be assimilated into the rights attaching to the equity of the Company associated with the Common Shares.
76From the foregoing, I conclude that a second important principle of interpretation of the intention of the parties at the time of the creation and execution of the Declaration of Trust was that the rights of the Unitholders in respect of the Secured Notes and the Units should not be materially different from the rights that the common shareholders of the Company would have had if such shareholders held Secured Notes and Common Shares directly in the Company immediately prior to the establishment of the income trust structure. Similarly, the rights and powers of the Trustees in respect of modification of the rights attaching to the Secured Notes and the Common Shares and the implementation of transactions of fundamental importance to the Unitholders should not be materially different from the rights and powers of the directors of the Company if the shareholders held Common Shares and Secured Notes in such manner. As is discussed below, I am of the opinion that this intention is, in fact, also reflected in the language of Article 9.5(a) of the Declaration of Trust.
Analysis
77I will analyze the issues on this application by first setting out my conclusions regarding the interrelationship of the relevant provisions of the Declaration of Trust and addressing an important issue of contractual interpretation pertaining to Article 9.5(a). I will then address whether the provisions of Article 9.5(a)(iv), in particular, mandate a vote of the Unitholders in the present circumstances and, if not, whether the general introductory language of Article 9.5(a) requires such a vote.
The Interrelationship of the Relevant Provisions of the Declaration of Trust
78In my view, the provisions of the Declaration of Trust referred to by the parties on this application interact in the following manner.
79First, as the Respondent argues, one of the purposes of the Trust, set out in Article 4.1(e), can be interpreted as applying to the present circumstances, depending upon whether or not an “obligation of the Company” extends to an obligation to retract the Preference Shares. Assuming that it does, however, this provision addresses only the purposes of the Fund. It is protection to the Unitholders that neither the Trustees nor the other Unitholders will seek to extend the activities of the Fund beyond the specific purposes for which the Fund was created. It does not address the powers of the Trustees, except to the extent that it may invalidate actions of the Trustees that are directed toward purposes that do not fall within the specifically enumerated purposes of the Fund.
80Second, while it does not appear that the specific powers of the Trustees in Article 9.2(r) would authorize the Guarantee, there is a reasonable argument that the powers in Article 9.2(v) extend to authorizing the commitments of the Fund in the Note Pledge Agreement and the Settlement Agreement respecting security. In any event, however, the powers granted to the Trustees in Article 9.2(gg) appear sufficient to authorize all of the documentation giving effect to the Proposed Transaction, assuming “obligation of the Company” extends to the obligation arising on the retraction of the Preference Shares. Article 9.2(gg) grants all powers necessary to, among other things, carry out the affairs of the Fund and the purpose of the Fund. By virtue of the specific purposes in Article 4.1(c), this provision provides the necessary authority to the Trustees. In addition, the broad italicized language of Article 9.1 supports this interpretation.
81Accordingly, I conclude that the Trustees had authority to pursue the Proposed Transaction on behalf of the Fund. However, the fact that the Trustees had such authority does not answer the question of whether the Trustees had the authority to enter into a commitment in respect of the Proposed Transaction that was binding on the Fund in the absence of a vote of the Unitholders.
82Third, the circumstances in which a Unitholder vote is required are addressed in Article 9.5, which overrides a general provision in Article 9.4 that provides that the Trustees have the power to vote the Common Shares in meetings of the Company. There is no provision in the Declaration of Trust that expressly states that the authority granted to the Trustees in Articles 9.1 and 9.2 is subject to the provisions of Article 9.5. However, I am satisfied that the language of these provisions compels this result. I note that the Respondent agreed with this interpretation at the hearing of this application.
83Article 9.5 does not expressly refer to Articles 9.1 and 9.2. Nevertheless, I am of the opinion that this is the result of the introductory language of each of Articles 9.1 and 9.2. The voting provisions of Article 9.5 constitute “terms and conditions” of the Declaration of Trust for purposes of Article 9.1 and “express limitations” contained in the Declaration of Trust for purposes of Article 9.2. It is also consistent with the manner in which the Declaration of Trust is drafted. There is no attempt made to describe “watertight compartments” of actions of the Trustees not requiring Unitholder approval and actions requiring Unitholder approval, apart from the specific transactions described in paragraphs (i) to (iv) of Article 9.5(a). In particular, as discussed below, the introductory language of Article 9.5(a) expressly contemplates transactions that are materially adverse to the Unitholders that are not expressly excluded from the transactions that would also fall within the express powers of the Trustees under section 9.2. In the same manner, certain transactions could be adverse but not materially adverse – for example, a limited interest holiday – or materially adverse – for example, a permanent waiver of interest.
84In this manner, the Declaration of Trust operates such that, on the one hand, the Trustees have the power to pursue Transactions within their powers and, on the other hand, a Unitholder vote is required in respect of transactions that are properly authorized but are nevertheless materially adverse to the Unitholders.
The Contractual Interpretation of Article 9.5(a)
85Article 9.5(a) is structured as a statement of a general principle followed by “including without limitation” language. The introductory language states a general principle that the Trustees may not vote the Common Shares to authorize any transaction “which is materially adverse to the Unitholders”. It then proceeds to refer specifically to four specific types of transactions that require a Unitholder vote.
86The wording of Article 9.5(a) leaves open whether the transactions in paragraphs (i) to (iv) of Article 9.5(a) represent specific transactions that are understood to be materially adverse per se or, as the Respondent suggests, are included within the provisions of Article 9.5(a) whether or not a proposed transaction that is described by one of these paragraphs in any particular circumstance is properly characterized as materially adverse to the Unitholders. As discussed further below, I agree with the Respondent.
87However, the important point for present purposes is the clear statement by the use of the “without limitation “ language that the enumeration of the four specific types of transactions in paragraphs (i) to (iv) of Article 9.5(a) is not intended to be exhaustive of the category of transactions that can be characterized as “materially adverse to the Unitholders”. This language is evidence of an intention to apply this provision broadly to include other circumstances that are not specifically described in these paragraphs and, in particular, that are not described in paragraph (iv). If authority is necessary for this conclusion based on the drafting approach in Article 9.5(a), it can be found in the decision of the Supreme Court in National Bank of Greece (Canada) c. Katsikonouris, [1990] 2 S.C.R. 1029, paras. 12-14.
88This raises, however, the important issue of whether the determination that any particular transaction qualifies as a “materially adverse transaction” is an objective determination or is a determination in respect of which a court should defer to the judgment of the Trustees in application of the “business judgment rule”. In this case, the Trustees have concluded, implicitly if not explicitly, that the Proposed Transaction, when considered as a whole, is not materially adverse to the Unitholders. It is their view that the Unitholders would realize a better outcome if the Proposed Transaction were implemented than they would if it were not implemented and the Preference Shareholders exercised their retraction rights on April 1, 2013.
89The Respondent argues that the determination of whether or not a proposed transaction is materially adverse to the Unitholders is to be made by the Trustees and is a determination to which the Court should give deference in accordance with, and subject to, the limitations of the “business judgment rule”.
90The Applicant says that the determination is an objective one to be made by the Court and to which the “business judgment rule” has no application. In the alternative, it submits that the decision-making of the Trustees does not satisfy the requirements of the “business judgment rule” and should be set aside in favour of a determination of the Court that the Proposed Transaction is materially adverse to the Unitholders. In view of the determination below, it is unnecessary to reach a conclusion on the Applicant’s second argument.
91For this purpose, I adopt the description of the “business judgment rule” articulated by Lax J. as follows in UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2002), 214 D.L.R. (4th) 496, paras. 152-153, 27 B.L.R. (3d) 53 (Ont. S.C.J.), aff’d (2004), 250 D.L.R. (4th) 526 at para. 6, 183 O.A.C. 310 (Ont. C.A.)[UPM]:
The business judgment rule protects Boards and directors from those that might second-guess their decisions. The court looks to see that the directors made a reasonable decision, not a perfect decision. This approach recognizes the autonomy and integrity of a corporation and the expertise of its directors. They are in the advantageous position of investigating and considering first hand the circumstances that come before it and are in a far better position than a court to understand the affairs of the corporation and to guide its operation.
However, directors are only protected to the extent that their actions actually evidence their business judgment. The principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate diligence in arriving at decisions. Courts are entitled to consider the content of their decision and the extent of the information on which it was based and to measure this against the facts as they existed at the time the impugned decision was made. Although Board decisions are not subject to microscopic examination with the perfect vision of hindsight, they are subject to examination. [citations omitted]
92While the “business judgment rule” was developed in the context of corporate boards of directors, jurisprudence now establishes that the principle also operates in respect of trustees of income trusts and other “business” trusts in relation to business decisions taken by the trustees of such trusts: See Rio Tinto Canadian Investments Ltd. v. Bone, 2001 CarswellOnt 2418 (WL Can) at para. 16 (Ont. S.C.J.), Farley J. aff’d on other grounds 41 E.T.R. (2d) 283 (Ont. C.A.); and Laxey Partners Ltd. v. Strategic Energy Management Corp., 2011 ONSC 6348 at para. 74. I think it is also clear from the case law that the consideration of the process followed by a board in reaching a business judgment and the assessment of the reasonableness of that judgment is a contextual analysis dependent on the particular circumstances of each case, including, but not limited to, the nature and size of the corporation.
93I conclude that the determination of whether or not the Proposed Transaction is materially adverse to the Unitholders is an objective determination to be made by the Court to which the “business judgment rule” has no application.
94The consequence of the application of the “business judgment” rule to the determination of whether or not a proposed transaction is materially adverse to the Unitholders is that a Unitholder’s right to vote in respect of proposed transactions that do not fit within paragraphs (i) to (iv) of Article 9.5(a) would be severely limited, if not empty as the Applicant argues. The only circumstance in which a Unitholder vote would proceed would be the circumstance of a proposed transaction that the Trustees considered was materially adverse but nevertheless was one that the Trustees were prepared to have put to the Unitholders or otherwise considered should be put to them, for example, to insulate the Trustees from liability. For the following reasons, I do not think that this was the intention of the parties when the Declaration of Trust was created.
95First, the plain meaning of the language of Article 9.5(a) is clear. The prospect of an adverse consequence to the current position of the Unitholders calls for a Unitholder vote. If the fact that the Trustees approved the transaction were sufficient to remove the transactions from the category of a “materially adverse transaction”, the Unitholders would lose that right in the very circumstances in which Article 9.5(a) contemplates that it would operate. If that had been intended, the Declaration of Trust could easily have been drafted to refer to “a transaction which is materially adverse in the opinion of the Trustees”. The absence of such language indicates a contrary intention.
96Second, I think that an objective determination makes commercial sense in the circumstances. As the present circumstances demonstrate, there can be transactions that proceed in circumstances where the result is materially adverse to the Unitholders but is better, at least in the minds of the Trustees, than any other alternative. In other words, it is a “Hobson’s choice” in which all the alternatives are materially adverse to the Unitholders, and the exercise is to select the alternative that is the least materially adverse. On the Trustee’s view, there would be no vote as the Trustee’s approval of a particular alternative would constitute a determination that the proposal was not materially adverse. I do not think this result was intended by the parties. In such circumstances, it is desirable from the Trustees’ view, as well as from the Unitholders perspective, that the Unitholders be given the opportunity to indicate whether they agree with the Trustees’ business judgment before they bear the adverse effects of a proposed transaction.
97Third, as mentioned above, the Respondent agrees that the Unitholders are entitled to a vote in respect of a transaction that falls within paragraphs (i) to (iv) of Article 9.5(a) irrespective of whether the proposed transaction is characterized as a transaction that would be materially adverse to the Unitholders. I am satisfied that this result reflects the intention of the parties to reproduce in contractual language the circumstances in which a holder of Common Shares would have had a right to vote on a proposed transaction prior to the establishment of the income trust structure. This is consistent with the more general principle of contractual interpretation discussed above to the effect that the Declaration of Trust should be interpreted with a view to preserving, rather than altering in either direction, the rights and obligations of the Unitholders and the Trustees from those which would have existed if the current capital structure had existed directly between the Company and the common shareholders immediately prior to the establishment of the income trust structure.
98Applying this principle to the present circumstances, I do not think that it was intended to deprive the Unitholders of a vote in circumstances in which they would have been entitled to a vote as holders of the Secured Notes. There can be no doubt that, in such capacity, proposed amendments to the Secured Notes which were materially adverse to the holders of the Secured Notes would have given rise to a requirement of a vote of the holders under the Secured Note Indenture, regardless of the view of the directors as to the merits of the Proposed Transaction considered as a whole.
99Lastly, as the Respondent acknowledges, the implication of its position is that every situation in which the Trustees approved a transaction that was objectively materially adverse to the Unitholders would, if opposed by one or more Unitholders, require a judicial determination as to whether the Trustees’ decision was entitled to the benefit of the “business judgment rule”. This impractical result cannot have been intended. The intention of a Declaration of Trust is to set out rules that govern the rights and obligations of the Trustees and the Unitholders that are sufficiently clear that they can be applied in most circumstances without judicial involvement.
Does the Proposed Transaction Fall Within Paragraph (iv) of Article 9.5(a)?
100In its application record, the Applicant suggested that its principal argument in respect of Article 9.5(a) was that the present circumstances fell within the provisions of Article 9.5(a)(iv). At the hearing, as is addressed below, it argued more strenuously that the circumstances were engaged by the general language that introduces Article 9.5(a). This section addresses the first argument. The next section addresses the second argument.
101The Respondent says that, in asserting that the Trustees are restricted from voting the Common Shares in favour of the Special Resolution by virtue of the provisions of Article 9.5(a)(iv), the Applicant conflates the proposed amendments to the constating documents of the Company with the other terms of the Proposed Transaction contemplated by the Settlement Agreement.
102As a factual matter, the Respondent says that the Settlement Agreement and the Circular clearly indicate that the only proposed amendments to the articles of the Company are the following: (1) elimination of the right of the holders of the Preference Shares to dividends in arrears totalling $340,000 and the elimination of the accrual of further dividends going forward; (2) deletion of the right of retraction and the substitution of an obligation of the Company to make the Scheduled Preference Share Payments over a six-year time period; and (3) inclusion of a right in favour of the Company to make prepayments of the Scheduled Preference Share Payments and an acceleration of all outstanding Scheduled Preference Share Payments in the event of a change in control of the Fund or the Company. These are the Proposed Amendments as defined above.
103The Respondent says that the provisions of the Proposed Transaction which the Applicant actually opposes are the following: (1) the Fund’s agreement to guarantee the Company’s obligations to Preference Shareholders, with recourse against the security held in favour of the Fund as the holder of the Secured Notes; (2) the Fund’s agreement to forego interest payments above the Permitted Annual Interest Payments; and (3) the Fund’s agreement to hold amounts received from the Company, other than in respect of the Permitted Annual Interest Payments, in trust for the Preference Shareholders until the Company’s obligations in respect of the Preference Shares are fully satisfied.
104The Respondent says that these provisions of the Proposed Transaction represent contractual obligations of the Fund that are contained in the Settlement Agreement and the documents which are contemplated to implement the Proposed Transaction, in particular the Guarantee and the Note Pledge Agreement, but do not form part of, and are not included in, the Proposed Amendments. As a result, the Respondent says that these provisions do not come within the wording of Article 9.5(a)(iv), since they do not constitute a “… material amendment to the constating documents of any member of the Fund Group”.
105I agree with the Respondent on this issue. The language of Article 9.5(a)(iv) is clear in referring to amendments to constating documents. I am not persuaded that the words “in a manner” are sufficiently broad that they extend to the totality of the Proposed Transaction or to the other elements of the Proposed Transaction that are not implemented by amendments to the articles of the Company. I would add that I consider the Applicant’s position on the present issue to be contrary to its approach generally to the issues on this application. As discussed above, the Applicant proceeds on the basis that the Respondent, in particular the Trustees, failed to the treat the Fund and the Company separately in considering the merits of the Proposed Transaction. In this case, I consider that the Applicant has failed to distinguish the elements of the Proposed Transaction that affect the Company from those which affect the Fund.
Is the Proposed Transaction Materially Adverse to the Unitholders for the Purposes of Article 9.5(a)?
106I have concluded above that the determination of whether the Proposed Transaction is materially adverse to the Unitholders is to be made by the Court on an objective basis without application of the “business judgment rule”. Accordingly, the remaining issue is whether the Court should find that that the Proposed Transaction objectively constitutes a “transaction which is materially adverse to the Unitholders” for the purposes of Article 9.5(a). The onus of demonstrating that it does rests with the Applicant.
107As a preliminary matter, I note that it could be argued that Article 9.5(a) does not apply on the ground that, in voting the Common Shares at the Special Meeting, the Trustees are not “voting to authorize any transaction” which is materially adverse to the Unitholders. The Respondent did not, however, raise this issue although, as discussed above, it did assert a somewhat similar argument based on the more specific language in Article 9.5(a)(iv). In any event, I would reject any such argument for the following reasons.
108First, even if it is literally the case that the Special Resolution addresses only the Proposed Amendments, there is no doubt that approval of such Amendments is a condition of implementation of the Proposed Transaction. Among other things, it triggers the Fund’s obligation to deliver the Guarantee and the Note Pledge Agreement. In this sense, a vote for the Proposed Amendments is a vote that authorizes the Proposed Transaction. Second, I think that it is appropriate to interpret the language of Article 9.5(a) broadly to capture circumstances, such as the present, which could have been structured to require a vote on one or more essential elements of the Proposed Transaction. To do otherwise would open up the possibility that the Trustees could structure proposed transactions so as to avoid a vote of Unitholders in respect of a transaction that was clearly materially adverse to them. In this case, the postponement and subordination arrangements could have been effected by amendments to the Secured Note Indenture. The fact that the relevant covenants are given in the Guarantee and the Note Pledge Agreement, rather than the Secured Note Indenture, should not obscure the fact that, in essence, the materially adverse features of the Proposed Transaction take the form of amendments to the rights and obligations attaching to the Secured Notes.
109The Applicant relies on the four features of the Proposed Transaction mentioned above to argue that the Proposed Transaction materially adversely affects the Unitholders by materially adversely affecting the Secured Notes. I consider that the principal impact of the Proposed Transaction is to postpone all payments on the Secured Notes to payment of the Scheduled Preference Share Payments, apart from the Permitted Annual Interest Payments. The subordination arrangements, involving the granting of security in the Note Pledge Agreement, the trust arrangement respecting excess monies received and the Assignment, are mechanisms for ensuring that this postponement operates in all circumstances, including insolvency. In addition, but of a more secondary nature, the Proposed Transaction also imposes a limit on annual interest payments on the Secured Notes and provides for a potential “poison pill” in the form of an acceleration of the Scheduled Preference Share Payments in the event of a change of control of the Fund or the Company. The Applicant says that these elements of the Proposed Transaction are, by definition, adverse because they are borne entirely by the Secured Notes without receiving any valuable consideration.
110The Respondent says that the language of Article 9.5(a) requires the Court to consider the Proposed Transaction as a whole in making its determination as to whether the Proposed Transaction is materially adverse to the Unitholders. It says that the Proposed Transaction is beneficial on an overall basis to the Unitholders given the benefits to the Company and, in particular: (1) the waiver of $340,000 in dividend arrears on the Preference Shares; (2) the waiver of the retraction rights of the Preference Shareholders in favour of the Scheduled Preference Share Payments over the six-year period to 2018; (3) the waiver of all future dividends; (4) the resulting avoidance of bankruptcy and continuation of the Company as a going concern; and (5) the avoidance of litigation to determine the competing rights of the holders of the Secured Notes and the Preference Shares in the event of a liquidation of the Company.
111Do these arrangements constitute the Proposed Transaction a “transaction which is materially adverse to the Unitholders” for the purposes of Article 9.5? I conclude that the Proposed Transaction is a materially adverse transaction for the following reasons.
112First, I am not persuaded that the Respondent is correct that the determination must be made on an assessment of the overall Proposed Transaction in the manner proposed by the Respondent. In this case, as a result of the establishment of the income trust structure, the interest of the Common Shareholders has been divided between the Common Shares and the Secured Notes. If there were no Preference Shares, or if the Company were not insolvent on a balance sheet basis, it would be appropriate to assess the Proposed Transaction on the basis proposed by the Respondent (although of course there would have been no need for this transaction). In that case, the interest of the Unitholders would be the same as the Company, given that the Secured Notes would be subordinated to the only other stakeholders in the Company i.e. any bank finance and any trade creditors (disregarding for this purpose the security which would also have been unnecessary). However, because of the Company’s financial condition and the existence of the Preference Shares ranking ahead of the Common Shares, the economic interest of the Unitholders resides in the Secured Notes. This is not the same as the economic interest of the Company as a whole. In these circumstances, the fact that the Proposed Transaction is beneficial to the Company does not mean that it is necessarily to the Unitholders.
113Further, in the absence of evidence that the Proposed Transaction will reduce the risk of insolvency to the point that there is no reasonable likelihood of insolvency over the six-year period of the Scheduled Preference Share Payments, it is appropriate to consider the adverse effects on the Secured Notes in the event of insolvency alone. In this regard, the Proposed Transaction would deprive the holders of the Secured Notes of whatever proceeds would otherwise be available to them on an insolvency. At a minimum, the Proposed Transaction defers the commencement of repayment of the Secured Notes for three years during which period the Fund, as the holder of the Secured Notes, remains exposed to the risk of insolvency. In the event of a failure to make the Scheduled Preference Share Payments, the Proposed Transaction also gives the Preference Shareholders extra leverage over the Company that they do not currently have by virtue of the provisions of section 32(2) of the OBCA.
114The adverse effects respecting payments that would otherwise be made in respect of the Secured Notes therefore, in my opinion, are clear and unequivocal. In the present circumstances, these effects are also material. A postponement of all principal for at least three years in respect of a company that is currently insolvent on a balance sheet basis, has been unprofitable for a number of years, and is entirely reliant for credit on its suppliers must surely be materially adverse on its own.
115Second, based on the foregoing, the Respondent argues that the issue for the Court is whether there is evidence suggesting that benefits accruing to the Unitholders from the Proposed Transaction will more than offset the adverse effects established by the Applicant. For the reasons set out below in this section, I do not think that this is the correct approach to the determination of whether a transaction is materially adverse. Even if it were, however, I conclude that the Court could not reach the conclusion urged by the Respondent.
116In making any such assessment, the Court cannot rely on the judgment of the Trustees for the reasons addressed above. It must base its review on the record. The Respondent argues that the record supports a conclusion that, on balance, the Unitholders will be better off if the Proposed Transaction were implemented and the Company continues as a going concern, even with the economic effects on the Secured Notes. I do not agree. Based on the materials before the Court, it is not possible to reach any conclusion regarding the likely outcomes under either a going concern scenario after implementation of the Proposed Transaction or the most likely insolvency scenario if the Transaction were not implemented, let alone any conclusion based on a comparison of these two scenarios. To be clear, this is not to be taken as a conclusion regarding the judgment taken by the Trustees on this issue. This is addressed below. It is simply a statement regarding the ability of the Court to reach a conclusion on the basis of the record before it.
117Lastly, and in any event, I think that the Respondent’s approach to the question is incorrect, bearing in mind the purpose of a Unitholder vote. The Respondent approaches the question as a relative matter – is the Proposed Transaction materially adverse in the sense that the impact on the Secured Notes is worse than another alternative? It answers the question in the negative by asserting that the Proposed Transaction is better than the insolvency alternative. Apart from the issue of proof, even accepting that it might to possible to reach that conclusion, in my opinion, the test is an absolute one for two reasons.
118First, an absolute test is consistent with the principle discussed above that the Declaration of Trust should be interpreted to reflect a continuation of the rights of Secured Noteholders in an income trust structure. I do not think there would be any question that if the Common Shareholders had held the Secured Notes prior to the establishment of the income trust structure, they would have been entitled to a vote in respect of the proposed arrangements pertaining to the Secured Notes under the terms of the Secured Note Indenture. Second, as a practical matter, I do not think that the parties would have intended that, if it were necessary to litigate this issue, it would be either desirable or appropriate for the Court to render a decision that is essentially a business judgment in such circumstances. The very purpose of a Unitholder vote in these circumstances is to permit the parties who are adversely affected by a proposed transaction to determine whether, on balance, the potential benefits justify acceptance of the adverse consequence of the Proposed Transaction. In circumstances in which the determination of the Trustees is not conclusive, it is, in my opinion, both preferable and intended by the parties that the Unitholders rather than the Court should determine whether a proposed transaction is better than any other alternative.
119Based on the foregoing, I therefore find that the Trustees do not have the authority to vote the Common Shares in support of the Special Resolution in the absence of approval of the Unitholders by a special resolution under the Declaration of Trust passed at a meeting of Unitholders called for that purpose.
Did the Trustees Breach their Duty of Care, Diligence and Skill?
120Article 9.7 of the Declaration of Trust, and the common law, impose two obligations on the Trustees. First, the Trustees must act "honestly and in good faith with a view to the best interests of the Fund." Second, the Trustees must "exercise the degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances."
121The Applicant expressly says that it does not allege a breach of the duty of good faith. I would support this conclusion. There is nothing in the record that indicates that the Trustees acted otherwise than with a view to the best interests of the Fund. However, the Applicant submits that the Trustees failed to satisfy their obligation of care, diligence, and skill in arriving at the decision to enter into the Proposed Transaction.
122As the Applicant has acknowledged, it makes perfect sense under normal operating circumstances for the Fund and the Company to engage and rely on the same advisors. That is inherent, among other things, in the purposes of the Fund, as set out in the Declaration of Trust, which do not permit the Trust to use any monies received from the Company for any other business. However, in the circumstances in which the Company is facing insolvency, the interests of the Fund and the Company diverge. As a holder of the Secured Notes, the Fund has a separate interest as a creditor in addition to its interest as shareholder (which would be identical to that of the Company). As a secured creditor, the Fund has an interest that ranks ahead of any unsecured creditors that must be taken into consideration. More importantly, in the particular circumstances of this case, the Fund also has an interest as a holder of debt, whether secured or unsecured, that ranks ahead of the Preference Shares, which must also be taken into account. The latter, in particular, is a serious complicating factor in any consideration of the best course of action for the Fund.
123The Applicant alleges that the Trustees did not satisfy their obligation of care, diligence and skill to the Fund in reaching the decision to approve the Proposed Transaction and are not entitled to the benefit of the “business judgment rule” in respect of that decision. The Applicant alleges that the Trustees reached their decision on an uninformed basis. In reliance on the language in UPM, supra, at para. 153, it says that the Court should find that the decision of the Trustees was unreasonable in the circumstances. Accordingly, they say that the decision of the Trustees constituted a breach of trust that entitles the Applicant to an order requiring a vote of the Unitholders to ratify the alleged breach of trust and approve the Proposed Transaction or to withhold approval of the Proposed Transaction.
124The Respondent submits that the decision of the Trustees, including the process followed in arriving at that decision, was appropriate in the circumstances. It says say that the Trustees are entitled to the deference afforded by the operation of the “business judgment rule” and, accordingly, that neither the Court nor the Applicant is entitled to second-guess that decision. On this basis, the Respondent also submits that the Trustees did not breach the Declaration of Trust.
125In deciding whether to enter the Settlement Agreement, the Respondent says that the Trustees were faced with a difficult decision requiring the evaluation of a complex matrix of legal and business issues under tight time constraints. The Respondent engaged in arms-length negotiations with Solar Harvest and Fortune which resulted in what its financial advisor described as an “optimal outcome.” It says that, in all the circumstances, the Trustees made a reasonable decision with the benefit of advice from legal advisors and financial advisors.
126The Respondent also submits that the Trustees followed a robust process in connection with the negotiation and approval of the Settlement Agreement in which, together with the board of directors of the Company, it: (a) retained Cassels Brock as the legal advisor to the Fund and the Company; (b) received the advice of Klein Farber as financial advisor, who led the negotiations with Solar Harvest and ultimately made recommendations to both boards; (c) considered the issue over five separate meetings; (d) considered legal advice on the legal position being taken by the Preference Shareholders in the negotiations; (e) considered the views of Company management; (f) identified and considered conflicting interests of the Unitholders and the Preference Shareholders, including the possibility of arguments being raised regarding the appropriateness of granting security to the Preference Shareholders to the detriment of the Unitholders; (g) considered the professional opinion of its financial advisor; and (h) determined that the ultimate outcome was in the best interests of the Fund and the Unitholders, as well as all other stakeholders, and was preferable to all other options.
127The record indicates, and Mr. Wardle has confirmed, that the Trustees based their decision in this matter on the earlier decision taken by the Trustees at the meeting on December 8, 2011 that a continuation of the Company as a going concern after having restructured its operations held the promise of returning some value to the Unitholders in the long-run while an insolvency would leave little or nothing for the Unitholders. Given that the financial results of the Company in 2012 showed an improvement over 2011, the Trustees remained of this view and say that they did not need to revisit the issue in 2013. Accordingly, from the Trustees’ perspective, any settlement with the Preference Shareholders that improved the prospects of the Company’s continuation as a going concern was also in the best interests of the Unitholders, apart from an arrangement that secured the Company’s real property in favour of the Preference Shareholders which was rejected.
128Given the determination above, it is unnecessary to reach a conclusion as to whether the Trustees’ decision to support the Proposed Transaction satisfied their duty of care, diligence and skill and I therefore decline to do so. However, in view of the prospect of continued litigation between the various stakeholders of the Company, I wish to make a few observations.
129First, for the reason discussed above, the Unitholders’ interest in the Company is represented by the Secured Notes, rather than the Common Shares, for the foreseeable future. Given the fact that there is a real possibility of insolvency, as evidenced by, among other things, the fact that the Company is currently insolvent on a balance sheet basis, the Trustees must address the interest of the Unitholders in their capacities as potential creditors. It is not correct to conclude that the interests of the Company and the Fund are identical. This reality is heightened by the presence of Preference Shareholders who apparently assert an interest prior to the Secured Notes.
130Second, the Trustees did address the correct question in December 2011 – that is, on balance, will the Unitholders be better off if the Company continues as a going concern or in an insolvency scenario? However, the Trustees were required to address that question again in February 2013 on the basis of the position of the Secured Notes at that time and having regard to the Proposed Transaction. I note, for example, that the issue of litigation by the Preference Shareholders had not arisen at the time of the Trustees’ decision in December 2011. In order to satisfy their responsibilities, it was necessary not merely to follow a “robust process”, although that is important, but also to reach their decision on an informed and current basis.
131Third, while such a decision need not, in all circumstances, require sophisticated financial analysis, it does require some precision regarding the nature and financial consequences of the scenarios under consideration. It is not clear on the record to what extent this information was before the Trustees in February 2013. In particular, it is not clear that the Trustees addressed the insolvency scenario with any degree of clarity, given that Klein Farber did not purport to give advice on the insolvency alternatives facing, or available to, the Company. In addition, if there is a business plan of the Company for the period of the Scheduled Preference Share Payments and beyond upon which the Trustees were able to reach a conclusion regarding the going-concern scenario, it is not before the Court.
132Fourth, it is also important that the assessment be made on a basis that excludes the possibility of any conflict of interest. The extent to which the Trustees’ decision was based on a concern for litigation by the Preference Shareholders is unclear, as are the underlying circumstances giving rise to the possibility of such litigation. The Court is not in a position to address the substantive issue and I do not wish this observation to be taken as a criticism of any of the parties involved. Moreover, given that the minutes would not likely describe in detail any discussion that did take place on this issue, it would be inappropriate to conclude that a detailed decision did not occur. However, I think it is important to observe that the Trustees are required to understand the circumstances under which this litigation risk can have arisen in the first place in reaching their conclusion regarding the merits of any proposed course of action that takes any such litigation risk into consideration.
133Fifth, the Respondent submits that, in assessing whether the Trustees complied with their obligations of care, diligence and skill, the Court should consider the fact that the Fund and the Company are small entities having limited resources whose directors have varying degrees of sophistication. They rely on a passage in Re BCE Inc., 2008 SCC 69 at para. 109 [BCE] to the effect that the nature and size of a corporation may be relevant in assessing the reasonableness of expectations. While this is undoubtedly true, the Fund is a public vehicle that is listed on the TSX. As noted in BCE, supra, at paras. 75, 109, greater latitude may be given in the context of a small, closely held corporation than in other contexts. The credibility of the public capital markets requires that the corporate governance of public entities be conducted on an informed basis by qualified individuals regardless of the size of the entity.
Additional Issues
134For completeness sake, the following additional issues were also raised by the Applicant and have been dealt with in the following manner.
135First, in the application, the Applicant also sought certain relief personally against McLaughlin and Scarafile. The Applicant asserted that McLaughlin and Scarafile, as Trustees of the Trust and directors of the Company, knew that the Trustees were in breach of trust in authorizing the Fund to execute the Settlement Agreement and in committing the Fund to vote the Common Shares in favour of the Special Resolution. The Applicant submitted that the Company knowingly participated in the breach of trust by executing the Settlement Agreement and calling the Special Meeting because of these relationships of McLaughlin and Scarafile. The Applicant sought the removal of McLaughlin and Kozicz as directors, and replacement directors elected at the special meeting of Unitholders sought on this application. In addition, the Applicant sought a declaration that Greenbriar is not entitled to vote its Units at a meeting of the Unitholders in favour of the transaction contemplated by the Settlement Agreement.
136The Applicant did not raise any of these issues at the hearing of the motion. It is my understanding that the Applicant no longer seeks the relief described above. In any event, I do not find any support in the record for the allegations described above or the relief sought in respect of such allegations.
137Second, the Applicant submits that the Company is insolvent or on the eve of insolvency and, therefore, the transaction contemplated by the Settlement Agreement contravenes section 4(2) of the Assignments and Preferences Act, R.S.O. 1990, c. A. 33. The Applicant reasons that this is further evidence that the Trustees’ decision to approve the Proposed Transaction constitutes a breach of their duty of care, diligence and skill. In view of the decision above, it is also unnecessary to address this issue. I would also observe that section 4(2) applies to transfers by debtors but not to transfers by creditors. As the impugned transfer is the granting of security by the Fund in favour of the Preference Shareholders, the provision would not be applicable in the present circumstances.
Conclusion
138I have concluded above that the Trustees do not have the authority under the Declaration of Trust to vote the Common Shares in support of the Special Resolution in the absence of approval of the Unitholders by a special resolution under the Declaration of Trust at a meeting of Unitholders called for that purpose. This finding does not, however, constitute a finding that the Trustees have breached Article 9.5(a) of the Declaration of Trust as of the present time. This raises the question of whether the Court should order that the Special Meeting should be adjourned pending such a vote by the Unitholders.
139The Respondent submits that, as proper notice was given and the proposed class votes comply with the provisions of the Company’s articles, there is no basis for enjoining the holding of the Special Meeting. While this is correct, it does not take into account the position in which the Trustees find themselves. In order to avoid breaching Article 9.5(a) of the Declaration of Trust, the Trustees must forego voting until such time as a meeting of the Unitholders has been held. If the Special Meeting were to proceed nonetheless with the Trustees abstaining, the Preference Shareholders’ votes in favour of the Proposed Amendments would pass the Special Resolution. Accordingly, the Trustees must seek an adjournment of the Special Meeting pending a meeting of the Unitholders. Given the relative number of votes of the Common Shareholders and the Preference Shareholders, a resolution to this effect would pass. In these circumstances, I consider that it is appropriate for the Court to order that the Special Meeting be adjourned rather than, by remaining silent, require the Special Meeting to be convened and immediately adjourned after a vote of the shareholders.
140Accordingly, the Court finds that, by virtue of the provisions of Article 9.5(a) of the Declaration of Trust, the Trustees of the Dominion Citrus Income Fund do not have the authority to vote the Common Shares of Dominion Citrus Limited in favour of the Special Resolution to be voted upon at the Special Meeting of the shareholders of the Company called for March 26, 2013 in the absence of the approval of the Unitholders. In addition, the Court orders that the Special Meeting of the Company be adjourned pending a meeting of the Unitholders to consider a special resolution under the Declaration of Trust that would grant such approval to the Trustees.
141As mentioned above, the Applicant also seeks as relief, among other things, an order of this Court convening a meeting of Unitholders. Given the determinations above, I am not persuaded that such an order is necessary or appropriate at this time. As it is not possible to anticipate the consequences of the determination herein, it is not clear that a Unitholders meeting will be necessary or, if necessary, that an order of the Court will be necessary to convene such a meeting. Accordingly, I decline to grant such relief. The Applicant is, however, at liberty to bring on a further motion in this proceeding at a later date if it considers that it is necessary to do so in order to convene a Unitholders meeting.
Costs
142If the parties are unable to agree on costs, they shall have 30 days from the date of this Endorsement to submit a costs outline and to make written submissions not exceeding five pages in length.
Wilton-Siegel J.
Date: March 27, 2013