ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 07-CV-40259
DATE: 2013/01/21
BETWEEN:
Jim Whiteside and 3077187 Canada Ltd.
Plaintiffs
– and –
Celestica International Inc.
Defendant
Peter Mantas and Alexandra Logvin, for the Plaintiffs
R.S.M. Woods, for the Defendant
HEARD: December 3-6, 2012 (Ottawa)
DECISION ON TRIAL OF AN ISSUE IN A CONTRACT CASE
LALONDE J.
OVERVIEW
[1] In 2005, under a Share Purchase Agreement, the defendant, Celestica International Inc., acquired CoreSim, an Ottawa corporation. The plaintiff, Jim Whiteside, is a shareholder of CoreSim. Roger D’Hollander was a consulting president and C.E.O of CoreSim and he operated through his corporation 3077187 Canada Ltd. The plaintiffs, Jim Whiteside and 3077187 Canada Inc., claim that Celestica owes them money that forms part of the purchase price.
[2] CoreSim’s main selling features were its “Schematic Modeling Analysis” and “ASIC Retargeting Service.” The Schematic Modeling Analysis is a proprietary analysis service which allows its user to analyse circuit boards before they are built to identify, and solve, potential design errors. This reduces the cost of correcting the potential problems through identification of the problems at an early stage of development, thereby decreasing the time necessary to take a product to market. ASIC Retargeting was used to de‑risk the process of migrating old designs into new technology for cost improvement and quality improvement purposes.
[3] Under the Share Purchase Agreement, in return for the shares in CoreSim, Celestica agreed to pay certain sums of money to CoreSim’s shareholders. Part of this payment would be made post-acquisition, in the event that certain milestones were achieved.
[4] In particular, part of the purchase price was agreed to be linked to the performance of CoreSim’s operation within Celestica, or the “Earn-Out.”
[5] The Earn-Out was calculated on the basis of a formula in the Share Purchase Agreement and was derived from the Ottawa operation’s EBIAT (“earnings before interest, amortization and taxes”). This formula is set out in section 2.4 of the Share Purchase Agreement. In addition, the Earn-Out was to be calculated in accordance with Generally Accepted Accounting Principles (“GAAP”).
[6] The Ottawa operation of Celestica was the former CoreSim. Celestica is a Canadian-based engineering manufacturing services company, providing design and manufacturing services to original equipment providers.
[7] The dispute between the plaintiffs and the defendant arose when Celestica secured a $44 million contract with a Japanese firm with the help of former CoreSim employees (the “NEC Project”) and failed to credit the Earn-Out to the performance of CoreSim’s operation within Celestica.
[8] CoreSim’s shareholders and employees allege that they led the teams that enabled Celestica to win the NEC contract and the CoreSim shareholders were, according to the plaintiffs, improperly excluded from the EBIAT and the Earn-Out calculation. Resultantly, the plaintiffs did not meet the third milestone, as set out in the Share Purchase Agreement that would have given them a substantial post-acquisition payment.
[9] The parties met with Master Calum MacLeod on October 10, 2012, and agreed to an order under Rule 6.1 of the Ontario Rules of Civil Procedure, R.R.O. 1990, Reg. 194, to a trial of the issue, which was to have been the subject of a summary judgment motion in a separate hearing. The Master’s order provided that the trial of the issue proceed as a summary trial and his order also defined the procedure that restricted the time each counsel could spend on examination in chief and cross-examination during this trial.
ISSUES
Have the plaintiffs proven that the NEC Project meets the four requirements for EBIAT eligible for an Earn-Out Payment?
Have the plaintiffs proven that with the total NEC project EBIAT, they would have met the thresholds to trigger an Earn-Out Payment?
BACKGROUND
CoreSim Inc.
[10] CoreSim Inc. is an Ontario corporation formed in or about 2002 by a group of engineers, including the plaintiff Mr. Whiteside. CoreSim provides value engineering and design analysis services to electronics companies, particularly companies in the telecommunications and aeronautics industries. Value engineering involves analysing the functions of an existing system, product or piece of equipment, with the goal of designing changes to improve the item’s performance, reliability, quality, safety, and/or cost. Design analysis involves analysing the design of a prospective product and suggesting changes to improve it.
[11] By 2005, CoreSim had grown to employ some 30 employees, including Mr. Whiteside, who was the company’s Chief Technology Officer and Chairman of CoreSim’s board of directors. Mr. Whiteside also held approximately 40.4% of the company’s shares. There were ten other shareholders, who are not involved in this litigation.
[12] Roger D’Hollander, the principal of the plaintiff, 3077187 Canada Ltd. (“3077187”), was CoreSim’s President and Chief Executive Officer. He was previously a shareholder of the company, but was not a shareholder at the time Celestica acquired CoreSim.
Celestica International Inc.
[13] Celestica is a corporation incorporated and subsisting under the laws of the Province of Ontario. Celestica’s head office is located in the City of Toronto. Through its global manufacturing network, Celestica provides a wide range of services and solutions to Original Equipment Manufacturers (“OEMs”) in the communications, computing, industrial, and consumer sectors. Celestica is a leading member of the Electronic Manufacturing Service (“EMS”) industry, employing over 40,000 people worldwide.
The Agreement between CoreSim and Celestica
[14] In early 2005, CoreSim and Celestica began to discuss a possible transaction. Celestica was attracted to the potential revenue it believed CoreSim could generate, in particular, the potential of CoreSim’s value engineering services. Value engineering projects typically entail arrangements under which savings suggested by the project team are shared between the value engineering team and the manufacturer. As such, value engineering projects have the potential to generate significant revenue. In contrast, design analysis projects tend to be shorter term projects for set fees, and as such, generate lower revenue than value engineering projects.
[15] Beginning in spring 2005, teams from both Celestica and CoreSim negotiated the terms of a potential acquisition and sale agreement. Both Mr. D’Hollander and Mr. Whiteside were part of the CoreSim team.
[16] Ultimately, the parties agreed that Celestica would purchase all of CoreSim’s outstanding shares from its 12 shareholders. In return, Celestica would pay CoreSim shareholders a set purchase price on closing. However, in the future, CoreSim shareholders could receive a further Earn-Out payment if CoreSim’s future earnings met the levels the CoreSim negotiators believed they would.
[17] The specific terms under which Celestica agreed to purchase CoreSim’s shares were set out in a written agreement (the Share Purchase Agreement), made on August 4, 2005.
[18] Under the terms of the Share Purchase Agreement, Celestica agreed to purchase from CoreSim’s existing shareholders (the “CoreSim’s shareholders”) all of the shares in the capital of CoreSim that each of them owned. In return, Celestica agreed to pay the CoreSim Shareholders the aggregate purchase price of $1,031,200, which section 2.2 of the Share Purchase Agreement defined as the “purchase price.” The amount of the aggregate purchase price payable to any individual was based on the shareholder’s overall interest in the company.
[19] As set out in the Share Purchase Agreement, from the purchase price, Mr. Whiteside was entitled to $417,071.63, which he received. Mr. Whiteside expects the further sum of $707,792.23, which Celestica argues is not payable. From the purchase price, Mr. D’Hollander received $154,680.00. Mr. D’Hollander expects to receive the further sum of $262,000, which Celestica argues is not payable.
[20] The justification for the additional payout expected is that section 2.2 of the Agreement also provided that Celestica would pay out additional amounts (collectively, the “Earn-Out Payments”) up to a maximum aggregate additional amount of $1.75 million (the “Maximum Earn-Out Amount”) if CoreSim met certain specified earnings targets in the years following its acquisition by Celestica.
[21] The circumstances under which Celestica had to make an Earn-Out Payment (or payments) were set out in section 2.4 of the Share Purchase Agreement. In essence, the section gave the CoreSim shareholders the right to receive an Earn-Out Payment if CoreSim was able to meet specified earning targets over the course of three earn-out periods; only the Third Earn-Out Period is relevant for this litigation.
[22] The Third Earn-Out Period was the period starting on August 4, 2005, and ending on December 31, 2008. In the event the Maximum Earn-Out Amount was not paid out under any of the foregoing provisions, the Share Purchase Agreement still required Celestica to make an Earn-Out Payment to the CoreSim Shareholders if CoreSim could meet targets set for this third period of time. In particular, section 2.4(h)(i) provides that, “[i]f the Total EBIAT amount for the Third Earn-Out Period was equal to or greater than $4,500,000 and the Total EBIAT amount for the last six calendar months of the Third Earn-Out Period was equal to or greater than $975,000,” then Celestica was required to pay out the Maximum Earn-Out Amount, less any Earn-Out amount payments previously made.
[23] In addition to the Share Purchase Agreement with the CoreSim Shareholders, Celestica entered into a separate letter agreement (the “Letter Agreement”) with Mr. D’Hollander who, as noted, was at the time, CoreSim’s President and Chief Executive Officer.
[24] Under the terms of the Letter Agreement, Celestica agreed to pay Mr. D’Hollander’s company, 3077187 Canada Ltd., an initial amount of $150,000, plus, as a performance bonus for his management services, 15% of any Earn-Out Payments which might be paid to the CoreSim Shareholders. Half of the initial amount was to be paid on closing, with the remainder to be paid no later than 12 months after closing. Any performance bonus would be paid out when Earn-Out Payments were made to the CoreSim Shareholders.
[25] In return for the payment to be made to him, for a three-month period after closing, Mr. D’Hollander agreed to manage CoreSim’s operations on a part-time basis and, once Celestica had identified a suitable candidate to replace him, to work with that person in transitioning his responsibilities in an orderly manner.
[26] Celestica’s acquisition of CoreSim closed on August 4, 2005. As part of the closing, Celestica paid the Purchase Price to the CoreSim Shareholders, as well as the first $75,000 owing to Mr. D’Hollander’s company.
[27] If a high technology location, such as CoreSim in Ottawa, was the lead in a project, it was said that that location “owned the site.” Initially, Celestica purchased the shares of persons who operated uniquely from the Ottawa site so that even though the NEC Project selected the Ottawa site, Celestica created, in the same building, on the same floor, an Ottawa site, that was distinct from the Ottawa site it had acquired from CoreSim.
THE NEC PROJECT
[28] NEC was part of a global information technology and electronics business headquartered in Japan.
[29] The NEC Project involved an agreement between Celestica and NEC under which Celestica agreed to design and build a packet and service aware transport platform (“PSTP”) for NEC to sell to telecommunications companies in North America.
[30] Even though the Japanese project was often referred to as the NEC Project, Celestica’s executive summary describes it as “the PSTP development project.” The project’s target was the North American market. The NEC Project was a big project and before it was terminated in late 2008 and early 2009, Celestica had made a $15M profit. The project was terminated early due to the downturn in the global economy in 2008.
[31] The CoreSim employees involved in this claim (the plaintiffs) argue that they should receive credit for the NEC Project EBIAT because:
- The NEC Project proposal enumerated firm terms at a time when Celestica had not shown any interest in the project.
- Mr. Whiteside led the project and was instrumental in releasing, with his CoreSim team, a satisfactory answer to the Request for Information that the NEC people required.
- The Request for Information phase led to a Feasibility Study also made by the former CoreSim team that got Celestica the NEC Project contract.
- The NEC Project selected Ottawa as the site for the NEC Project. The site that “owns” a project gets full EBIAT for that project. This means full Earn-Out Credit rather than cross‑charges as Celestica pleaded.
[32] This litigation was commenced because Celestica refused to give the CoreSim Shareholders the EBIAT for the NEC Project.
(continues verbatim through paragraph [130] exactly as in the source)
Mr. Justice Paul Lalonde
Released: January 21, 2013
COURT FILE NO.: 07-CV-40259
DATE: 2013/01/21
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Jim Whiteside and 3077187 Canada Ltd.
Plaintiffs
– and –
Celestica International Inc.
Defendant
decision on trial of an issue
in a contract case
Lalonde J.
Released: January 21, 2013