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COURT FILE NO.: CV-11-9151-00CL

DATE: 20130918

BETWEEN:

MICHAEL BOYD and DAVID HUNTER

Plaintiffs

– and –

HSBC BANK CANADA and HSBC CAPITAL (CANADA) INC.

Defendants

Ross Morrison, for the Plaintiffs

Deborah E. Palter and Kyla E.M. Mahar,

for the Defendants

HEARD: July 22 and 23, 2013

1In this action, the plaintiffs Michael Boyd and David Hunter (collectively, the “plaintiffs”) seek a determination of their entitlement to certain monies owed to each of them in respect of a carried interest plan established by the defendant HSBC Capital (Canada) Inc. (“HCCA”). The plan was established to reward certain HCCA employees involved in a private equity fund established by HCCA.

Background

2The following facts pertaining to the issues in this action are not in dispute.

The Parties

3HCCA is the merchant banking subsidiary of HSBC Bank Canada (“HSBC”) (collectively, HCCA and HSBC are referred to as the “defendants”).

4Michael Boyd (“Boyd”) was employed by HSBC and by HCCA as a vice-president from September 12, 1997 until January 24, 2002, when his employment was terminated.

5David Hunter (“Hunter”) was employed by HSBC from March 11, 1986 to April 30, 2006. From December 23, 1998 until April 30, 2006, Hunter was also employed by HCCA as a vice-president.

The 1998 Fund

6In late 1998, HSBC established a private equity fund referred to herein as the “1998 Fund”. In connection with the 1998 Fund, HCCA also established a carried interest plan (the “Plan”) to reward HCCA employees involved in the 1998 Fund. The Plan was structured with a view to aligning the interests of the HCCA employees involved in the 1998 Fund (herein referred to as the “Participants”) with the success of the investments of the 1998 Fund.

7The Plan was initially drafted as a “deal by deal” carried interest plan, under which a Participant would be paid his percentage of the profit pool realized on the sale of each individual investment of the 1998 Fund, based on his points in the pool at the time of realization of the investment.

8After consultation with prospective investors, however, the terms of the 1998 Fund and the Plan were changed. As finalized, the terms of the 1998 Fund required that all capital advanced by investors had to be returned, along with a 7% hurdle rate of return and management fees, prior to any profit split between the investors and HSBC / the Participants. This would result in losses from unprofitable investments being set off against profits from profitable investments. It also lengthened the expected time of payout of the Plan from 3-5 years to 6-8 years.

9Under the terms of the 1998 Fund, after the profit split became operative, profits of the 1998 Fund were to be split 80% to the investors and 20% to HCCA, as the fund manager. Of the 20% received by HCCA (herein referred to as the “carried interest”), 5% was retained by HCCA and 15% was to be paid to the Participants in the Plan according to the points awarded to them.

10Participation in the Plan was by invitation only. It was anticipated that the Plan would have four or five Participants, who were current employees of HCCA, as well as a possible new hire. Boyd and Hunter were invited to participate from the outset of the Plan.

11During his employment, Boyd was awarded 48 points in the Plan. As a term of his settlement at the time of termination of his employment, he agreed that he would not be eligible for an award of further points in the future. During his employment, Hunter was awarded 87 points in the Plan. His points in the Plan were fixed at this number in his settlement agreement. Both understood that their interest in the Plan would be diluted by further awards of points to Participants who continued to be employed by HCCA.

The Terms of the Plan in December 1998

12The final draft of the Plan, as approved by the board of directors of HCCA, was provided to the initial Participants, including Boyd and Hunter, on or about December 23, 1998 (herein referred to as the “final draft of the Plan”). The following provisions of the Plan are relevant for the issues in this action:

Eligibility

Membership of the plan will be by invitation and will be restricted to selected professional staff in HCCA. Participation will be recommended by the C.E.O. of HCCA and approved by the HIB designate and the Board of Directors of HCCA. At the present time, it is estimated there will be between four and five participants in the carried interest plan with possibly one more (yet to be recruited) by the end of 1999.

Allocation

All professional staff in the merchant bank involved in the management of the Fund would share in a maximum carried interest of 15% of the pre-tax profits (with 5% retained by the shareholder through HCCA) of the investment fund achieved upon the successful realization of any investment.

At the commencement of the plan, each of the professional staff will be granted a specified number of points. An example of the initial allocation might be:

Job Points

C.E.O. 25-30

Senior Manager (3-4) 10-15 each

Manager 10

Any new hires to the business can also be allocated points. It is also proposed that subsequent annual allocations of points are made to recognize differences in the amount of time and effort participants have spent on merchant bank activities, given that many will be “wearing two hats”, and to recognize contribution to merchant bank results. As a result, the participants’ share in the total pool may vary from year to year depending on the number of points held by the participant at the end of the year in which the investments are realized.

Points are valued at the end of the year when investors have received the return of capital invested plus the hurdle rate/expenses, and is realized as follows:

Value of 1 point = Pool to be paid to executives under the Carried Interest Arrangement

Total number of points

All grants of points, which will occur at the beginning of each year, will be approved by the HIB designate and the Board of Directors of HCCA upon the recommendation of the C.E.O. The maximum number of points to be allocated in any one year will be set in order to prevent excessive dilution of the interested participants to whom points have been granted and may be adjusted annually. After full investment, the number of incremental points awarded annually will be fewer to reflect the lower amount of work associated with monitoring investments.

The Board of Directors of HCCA retains the sole discretion over the allocation of any forfeited points arising from employee turnover (see Termination and Transfers below).

Valuation and Vesting

In order to achieve the carried interest, the full amount invested plus the hurdle rate on investments and management fees/other expenses must be returned to investors. Once this has been achieved, estimated in years six to eight, then the 20% carried interest will accrue to HCCA. Then 15% of this carried interest will be allocated and paid to employees as points will be valued as set out above.

Vesting of points will begin at the end of the third year after an award. Points will be vested equally at the end of the third, fourth and fifth years after awarding. The vesting of points will not affect the valuation or payments to employees unless that employee has left HCCA (see Termination and Transfers).

Appendix II illustrates the carried interest plan valuation assuming the total Fund (assuming the Fund size is $100 million) is invested in equal portions over the first three years, that all investments are realized after five year from initial investment and an internal rate of return of 20% is achieved. Under this scenario, the total carried interest paid to HCCA in years seven and eight would be $26.9 million against a value added by HCCA during that period of $148.8 million. Appendix III provides a guideline of the type of income that may be received by individual job holders based on the assumptions in Appendix II. [italics added]

The Performance of the 1998 Fund

13The 1998 Fund made 16 investments, investing in total $87,398,639. The last investment was made on March 2004, apart from certain follow-on investments later. The 1998 Fund exited its last investment in July 2009 and, accordingly, no points were awarded for any year after 2009. The 1998 Fund will be wound up after certain residual matters are resolved.

14Between 2006 and 2010, the 1998 Fund generated a total of $20,498,191 of carried interest that became monies of the Plan for distribution to the Participants. In addition, the 1998 Fund generated $6,832,729 in carried interest during those years that was retained by HCCA.

The August 2006 Distribution

15By early 2006, the 1998 Fund had generated sufficient returns to the investors that the 80% / 20% profit split between the investors and HCCA / the Participants became operative, i.e a carried interest was generated. In 2006, the 1998 Fund generated a carried interest of $12,240,217, of which 15% or $9,180,163 became monies of the Plan that were available for distribution to the Participants.

16Prior to making the first interim distribution of monies in the Plan, HCCA issued a letter to the Participants dated August 1, 2006 (the “August 2006 Letter”) setting out the terms under which it proposed to make the interim distribution. The following are the relevant portions of that letter:

HSBC Capital (Canada) Inc. (‘HCCA”), as General Partner of PEF 1998, is considering making an interim distribution of anticipated proceeds from disposition of investments of PEF 1998. Any such distribution may result in a payment to participants in the HCCA Carried Interest Plan. Participants in the PEF 1998 Carried Interest Plan (“Participants”) will be able to receive interim distributions provided that they confirm their agreement with the terms of such distribution as described in this letter.

As you are aware, the extent of your participation in and entitlement to distributions of profits in the Carried Interest Plan is based on the ratio of points allocated to you in relation to the total number of points allocated to all participants over the life of the Plan. Because it is as yet uncertain what the final number of points will be and, accordingly, what the final percentage interest of each participant will be, HCCA is proposing to make any interim distribution on a basis that is subject to adjustment as further distributions are made.

The total amount of the proposed distribution under consideration is expected to be $5,500,000. The results of such a distribution and your allocation based on points awarded up to the end of fiscal 2005 is set out in Appendix I to this letter.

Further distributions are expected to be made by HCCA as investments of PEF 1998 are disposed of in future years. Percentage entitlements of all Participants to the total amount distributed will be finally determined based on the aggregate number of points awarded at the time of distribution of the final proceeds. Appendix II to this letter sets forth an illustration of a sample employee’s resulting percentage interest assuming full distribution and wind up of PEF 1998 by 2008.

Please note that we have been advised that carried interest payments made to employees will be treated as employment income for tax purposes and accordingly will be subject to income tax withholdings at source. The examples and calculations provided are before any such withholding. Also, please note that the terms on which any interim distribution, and on which further distributions of amounts payable to you under the Carried Interest Plan would be made, will be subject to a reserve for contingencies, including expenses and any anticipated liabilities in connection with the distributions or investments. This reserve will be assessed and determined by HCCA in its discretion at the time of disposition of remaining investments. In addition, all amounts paid to you in a distribution are subject to repayment by you if it is later determined that an overpayment has been made to Participants.

In order to proceed with such an interim distribution to you and to provide for the possibility of any required adjustments among Participants (permitting Participants to get the benefit of the maximum distribution in the short term while minimizing reserve requirements), HCCA will require your confirmation of and agreement with the proposed method of distributions, including income tax withholding and potential repayment of overpaid amounts, as described in this letter.

Would you please indicate your confirmation of and agreement with the terms of the proposed distributions on the basis described in this letter and the attached appendices by signing and returning to us the enclosed copy of this letter.

17Each of Boyd and Hunter signed an acknowledgment and confirmation on the signature page of the August 2006 Letter sent to them, which provided that each agreed to participate in distributions from the 1998 Fund by HCCA on the basis described in the August 2006 Letter and appendices.

18In addition, Boyd sent the following letter dated August 9, 2006 to David Mullen (“Mullen”), the chief executive officer and head of private equity for North America of HCCA:

Dear Dave:

I received your courier package only today as I had a problem with its delivery to my home address and had to have it re-directed. I was very pleased to read the contents and have enclosed a signed copy as you requested.

Of course I am delighted the fund has performed so very well and I look forward to a first distribution of the carried interest as described in your letter.

I note in your example the anticipation of adding about 100 points to the pool in each of 2007 and 2008. My only comment is there was only a total of 247 points awarded in the pool for the years up to 2001, and in fact there were only about 552 points in the pool by the end of 2004 when the fund had finished its investing activities. The obvious effect of adding more points to the pool late in the fund’s life when there are no new investments and fewer investments to manage is to materially dilute those former employees who are not participating in the issuance of new points.

With this in mind I have a simple request to act with “fairness” in the issuance of any new points in the PEF 1998 carried interest pool going forward.

Subsequent Distributions

19A further interim distribution was made to the Participants in November 2006. By letter dated November 28, 2006 (the “November 2006 Letter”), HCCA advised the Participants of the interim distribution and included a schedule showing each Participant his pro rata share in the Plan at the time of the distribution as well as the amount of his entitlement on this distribution. The November 2006 Letter stated that the distribution was being made on the terms and conditions set forth in the August 2006 Letter.

20HCCA made a third distribution of monies in the Plan on or about June 27, 2007. Prior to making the distribution, HCCA sent the following letter to each of the Participants (the “June 2007 Letter”):

As you are aware, HSBC Capital (Canada) Inc. (“HCCA”), as General Partner of PEF 1998, has determined to make certain interim distributions of proceeds realized from the disposition of investments of PEF 1998. Such interim distributions were made in August and December 2006 and are being made on the terms and conditions set forth in our letter of August 1, 2006, as agreed to by you.

HCCA currently anticipates that the earliest that it will be able to complete winding up of the Fund and make the final distribution of proceeds of PEF 1998 is by the latter part of 2009. Hopefully, by that time the full extent of each participant’s entitlement as well as the expenses and requirements to meet liabilities associated with these investments should be ascertained so as to permit such final payments to be calculated and any necessary adjustments to be made with respect to interim and final distributions. At the time of this final payment, each participant will receive any balance of their pro rata share of the total amount distributed based on the number of points awarded to that participant in relation to the total number of points awarded to all participants.

Recognizing that the timing of the final distribution is uncertain and will not occur for some time, HCCA has determined to proceed with one further interim distribution at this time, in order to allow participants to get the benefit of a current distribution from realized proceeds that takes account of their estimated final entitlement while minimising the likelihood of adjustments that may require a repayment of any interim payments to participants.

Attached to this letter is a calculation of your interim distribution payment. We remind you that while we are attempting to provide adequate reserves against any contingencies and adjustments, participants may be required to repay any amount they receive in excess of their actual entitlement as finally determined by HCCA.

21In response, Boyd emailed HCCA stating that he had received the August 2006 Letter, which he described as the “PEF1998 Carried Interest Plan Distribution Agreement dated August 1, 2006”, and requested a cheque for the interim distribution contemplated by the June 2007 Letter.

22Two further distributions were made in 2008 and 2009. Neither Boyd nor Hunter received any monies in these distributions as HCCA calculated that there was a possibility that they had received substantially all of the monies in the Plan to which they were entitled, given HCCA’s expectation of the total points to be awarded over the life of the Plan. Neither Boyd nor Hunter were advised of these distributions or of the hold-back applied to any distributions to which they would otherwise have been entitled at the time of such distributions.

The Final Distribution

23In total, 1057 points were awarded in the Plan. Of that amount, 562 points were awarded to the end of the 2004 calendar year, being the year in which the last investment was made as described above. The balance of the points were awarded later. Of that remaining amount, 105 points were awarded in respect of 2005, 120 were awarded in respect of each of 2006 and 2007, and 75 were awarded in respect of each of 2008 and 2009.

24Accordingly, Boyd’s interest in the Plan was reduced from 7.1964% at the time of the August 2006 distribution (reflecting the points awarded in respect of the calendar years ended 2005) to 4.5412% after the last award of points in the Plan. Similarly, Hunter’s interest in the Plan was reduced from 13.0435% to 8.2308% during the same period.

25In 2011, HCCA made a further, and essentially final, distribution to all Participants which calculated the Participants’ respective entitlements on an adjusted basis to reflect their pro rata share of the 1057 points awarded during the life of the Plan. On this basis, HCCA acknowledges that Boyd is entitled to an additional $135,566 from the Plan and that Hunter is entitled to an additional $245,714 from the Plan.

26As a condition of receipt of such monies, HCCA required that the Participants agree to certain terms, including a release in favour of HCCA and HSBC and a written acknowledgement that the distribution of the final allocations was subject to the terms and conditions contained in the August 2006 Letter. As Boyd and Hunter have refused to agree to these terms, HCCA has chosen not to pay either of them the amount HCCA calculates to be their final entitlements.

The Issues

27The plaintiffs raise two issues that are interrelated but must be kept separate for purposes of the analysis in this action.

28The principal issue in this action is the correct method of calculating distributions of monies in the Plan.

29Boyd and Hunter argue that HCCA was required to calculate entitlements to each distribution based on the respective interests of the Participants in the Plan at the time of the realization of each investment, and therefore at the time of each distribution, as they say HCCA was required to pay out realization proceeds immediately upon receipt. On this basis, Boyd and Hunter submit that they are owed $450,967 and $980,508, respectively.

30HCCA submits that it administered the Plan correctly in calculating the Participants’ entitlement based on the total points awarded over the life of the Plan, treating all distributions prior to the final distribution as interim distributions and adjusting the final distribution to take account of such interim distributions. As mentioned, on this basis, HCCA calculates the remaining entitlements of Boyd and Hunter to be $135,566 and $245,714, respectively.

31The second issue raised by the plaintiffs is whether the extent of the dilution in their respective positions by the award of additional points to other Participants after the termination of the plaintiffs’ employment contravened the provisions of the Plan.

Analysis and Conclusions

32Each of the issues raised by the plaintiffs asserts a breach of the Plan by HCCA as the manager of the Plan. Although they also allege oppression under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”), as the statute governing HCCA, the plaintiffs acknowledge that such allegations cannot succeed in the absence of a finding that HCCA contravened the terms of the Plan in its administration of the distribution of monies from the Plan and of the award of points in the Plan. Accordingly, the issues raised by the plaintiffs require contractual interpretation of the Plan.

33In order to address these issues, it is first necessary to identify the documents that comprise the Plan, and the relevant provisions therein, after setting out the applicable principles of contractual interpretation. I will then address each of the issues raised by the plaintiffs in turn.

Applicable Law

34The 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, as follows:

… 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; 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.

35In addition, in the present circumstances, as discussed below, the comments of Estey J. in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888 at p. 901, regarding the manner of approaching a matter of contractual interpretation in the face of an ambiguous provision, are also relevant:

Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. … [italics added]

The Plan

36The plaintiffs’ case is based on a definition of the terms of the Plan that is limited to the provisions of the final draft of the Plan. Based on the record, however, I am satisfied that the terms of the Plan also comprised certain additional terms pertaining to the manner of administration of the Plan to which Boyd and Hunter agreed and/or acquiesced.

37In this regard, the following matters are relevant. First, the final draft of the Plan was not executed in any manner by the Participants nor did it contain an entire agreement clause. Second, as mentioned, shortly after the commencement of the Plan, HCCA determined to award points in respect of contributions made in any calendar year retrospectively after the end of the year. Boyd and Hunter raised no objection to this departure from the strict wording of the final draft of the Plan and must therefore be treated as having accepted this amendment to the terms of the Plan. Third, the August 2006 Letter expressly contemplated an acknowledgement and confirmation of the terms of the interim distributions contemplated therein, which was given by each of Boyd and Hunter. While the November 2006 Letter and the July 2007 Letter did not include a similar requirement, each Letter expressly stated that the interim distributions proposed therein would be made according to the terms set out in the August, 2006 Letter. By their acceptance of these interim distributions without objection to such terms, Boyd and Hunter must be treated as having acknowledged and confirmed such terms on these two further occasions. Accordingly, I conclude that the provisions of the August 2006 Letter supplemented the terms of the Plan as set out in the final draft of the Plan.

38Based on the foregoing, I conclude that Boyd and Hunter agreed, either directly or by acquiescence, to terms of the Plan comprised collectively of the final draft of the Plan, as amended in practice prior to the August 2006 Letter and as supplemented by the August 2006 Letter, the November 28, 2006 Letter and the June 27, 2007 Letter. Insofar as the determination of the terms of the Plan also involves an assessment of what a reasonable third party observer would conclude based on the behaviour of the parties, I am satisfied that any such observer would reach the same conclusion on the facts of this case.

What are the Terms of the Plan Respecting Distributions?

The Position of the Plaintiffs

What are the Terms of the Plan Respecting Distributions?

39As set out above, the plaintiffs argue that the terms of the Plan required that the entitlements of the Participants to any distribution be calculated using their respective entitlements in the Plan at the time of such distribution.

40As support for this position, the plaintiffs rely principally on the wording of the last sentence of the first paragraph under “Valuation and Vesting” in the final draft of the Plan (italicized above). They argue that, in conjunction with the language regarding the valuation of points as described earlier in the Plan (also italicized), the phrase “allocated and paid as points will be valued as set out above” requires that allocation and payment must occur in the year in which any investment is realized and therefore must proceed on the basis of points awarded as of the date of realization.

41The plaintiffs also submit that the language of Appendix I to the final draft of the Plan confirms this approach. They base this argument on the language of step 3 in the distribution analysis which is headed “Proceeds from investment are distributed”.

42The plaintiffs also argue that if HCCA had intended to reserve a right to hold back monies from distributions in order to implement its approach to distributions, it would have made, or should have made, specific reference to such right in the final draft of the Plan. They argue that the absence of such language therefore reflects an intention that all monies received on realization at any time were to be distributed at such time and, accordingly, would have to be distributed in accordance with the points awarded as of the date of distribution.

43Lastly, the plaintiffs submit that HCCA did not have the authority under the Plan to withhold from the plaintiffs the fact that further distributions were made in 2008 and 2009, in which the plaintiffs did not participate due to the imposition of holdbacks, or to refrain from communicating the amount actually distributed to all Participants in 2007.

Conclusions

44I conclude that the terms of the Plan contemplated that a Participant’s entitlement would be calculated on the basis of the Participant’s points relative to the total of the points awarded over the life of the Plan. Accordingly, I conclude that the entitlement of Boyd and Hunter is to be calculated as of the time of the final distribution and adjusted based on the interim distributions received by them prior to such time. I reach this conclusion for the following reasons.

45First, I do not think that the single passage in the final draft of the Plan relied upon by the plaintiffs is dispositive of the issue. Rather, I think the only reasonable conclusion is that the provisions of the final draft of the Plan are ambiguous in respect of this issue, no doubt reflecting imperfect re-drafting after the Plan was changed from a “deal by deal” carried interest plan.

46In this regard, I note, for example, that the literal meaning of the statement in the final draft of the Plan that points are to be valued at the end of the year when the investors have received their hurdle rate of return is inconsistent with the positions of both parties in this proceeding. Other provisions are capable of being read to support either position – for example, the last sentence of the third paragraph under “Allocation”. Similarly, Appendix I of the final draft of the Plan, upon which the plaintiffs rely, is expressly described in the text of the final draft of the Plan as an example of a breakdown in returns between “the investors and HCCA” for one investment. It addresses the split between HCCA and the investors collectively. It does not purport to deal with the entitlement of individual investors. Insofar as the final draft of the Plan deals with the income potentially receivable by individual investors, the matter is addressed in Appendix III. However, Appendix III is overly simplified to the point that it does not address the issues on this motion because it assumes a constant pro rata participation in the Plan throughout the life of the Plan.

47This ambiguity is, however, removed by the language of the August 2006 Letter, and Appendix II thereto, to which both Boyd and Hunter expressly agreed. This Letter expressly provides for interim distributions. This can only be a meaningful concept if any interim distributions are followed by a final distribution which reconciles a Participant’s interest according to his final participation in the Plan. This, in turn, can only be a final reconciliation at the end of the Plan based on points awarded over the life of the Plan.

48This intention is clearly expressed, in particular, in the second sentence of the August 2006 Letter (italicized above) and is referred to again in the italicized passages in the fourth and the sixth paragraphs of the Letter. Moreover, there is no language in the August 2006 Letter capable of supporting the plaintiffs’ position. While the note to Appendix II leaves something to be desired in terms of clarity, the meaning is clear if one works through the calculation in Appendix II, which Boyd acknowledges he failed to do. Accordingly, I also think that Appendix II unequivocally indicates that a Participant’s entitlement is based on his total points at the end of the life of the Plan.

49In addition, the same intention is expressed in the second and third paragraphs of the June 2007 Letter. These paragraphs not only indicate that the distribution is being made as an interim distribution but also expressly state in the last sentence of the second paragraph that the final payment will take into account “the total number of points awarded to all participants”. Neither Boyd nor Hunter raised any issue with this statement of intention at any time prior to commencing this litigation.

50Second, to the extent that it is necessary to interpret the terms of the Plan having regard solely to the terms of the final draft of the Plan, the principle articulated by Estey J. in Consolidated-Bathurst would apply, given the ambiguity in the language of that document. In my opinion, the position of HCCA is commercially reasonable and the position of Boyd and Hunter is not for two reasons.

51Most importantly, the approach of Boyd and Hunter does not give any credit for a Participant’s contribution to the exit transaction taken in respect of any realized investment. This flows from the fact that, despite the language of the final draft of the Plan, and without objection from the plaintiffs, HCCA awarded points in the Plan in respect of contributions made in any calendar year on a retrospective basis after the end of such year. In these circumstances, the plaintiffs’ approach would work a serious injustice insofar as it could result in no or negligible credit being given for work done to exit an investment which generates proceeds to be distributed to the Participants. Any award of points for such activity would be made after the distribution of the proceeds to which it relates. This, in turn, could provoke adverse economic behavior on the part of the Participants, who might spend their time elsewhere.

52In addition, I am not persuaded that Boyd or Hunter would have selected their approach at the inception of the Plan. As Appendix II to the August 2006 Letter demonstrates, a party who participates over the entire life of the Plan would prefer to continue to receive additional points in the Plan reflecting his contribution not only to sourcing an investment but also to managing and exiting the investment. Under such an assumption, a Participant might expect his overall position in the Plan to increase under a number of scenarios. At the least, he would not expect his position to decline if he was contributing to the success of the Fund. It is only if a Participant anticipates the occurrence of a termination of employment that a Participant would, at the time of conception, consider the plaintiffs’ approach to distributions to be more desirable.

53For the same reason, I am not persuaded that the approach of the plaintiffs is consistent with the objective of a carried interest plan, being to incentivize the Participants to maximize the value of the investments of the related fund. It would be perverse if the principal beneficiaries of a distribution policy were, as in the present case, Participants who have left the employment of HCCA prior to the termination of the 1998 Fund. It would be particularly perverse if a party were to benefit from such a policy notwithstanding that the party left the employment of HCCA before the 1998 Fund was fully invested, as would be the case with Boyd.

54Third, as a related matter, the plaintiffs argue that their approach is commercially reasonable because it gives effect to the principle that Participants who source investments should be disproportionately rewarded. I do not think that this approach is more commercially reasonable than the approach of HCCA in the present circumstances.

55For this purpose, commercial reasonableness must be assessed by reference to the objective of the Plan, being to incentivize Participants to maximize the value of the 1998 Fund’s investments. The plaintiffs’ approach entails application of an arbitrary rule under all circumstances. While such a rule may often be appropriate, there is no necessary reason why it should be appropriate in all circumstances. As HCCA points out, in circumstances where ongoing management of an investment and successful exiting of the Plan contribute significantly to the value of the investments, the plaintiffs’ approach would fail to align the interest of the Participant with the objective of maximization of the value of the investments. Conversely, as discussed further below, under the Plan, HCCA had the discretion to award additional points in sufficient number to reward Participants for their on-going involvement in a particular investment that realized a disproportionate profit contribution to the 1998 Fund over several transactions. Because the plaintiffs’ approach fails to reward Participants for such activities, it would discourage Participants from spending time on such activities. In summary, the plaintiffs’ approach is not commercially reasonable insofar as it entails an inflexible rule in circumstances where flexibility may well be required to further the objective of the Plan by continuing to motivate the Participants after full investment is achieved.

56In reaching this conclusion, I do not necessarily accept HCCA’s further position that equality of points is in some manner an important principle on its own. Since the total number of points in the Plan was never fixed, HCCA retained considerable discretion to determine any such “equality”. The effect of HCCA’s approach, combined with post-year end awards of additional points, is to give HCCA the ability to adjust the Participants’ interests in the Plan retroactively over a number of years to reflect its view of the relative contributions of Participants to the Plan over its life. In such circumstances, the alleged “equality” of points is a subjective concept. This discretion is at the heart of the plaintiffs’ second issue and is addressed below. However, for present purposes, I conclude for the reasons set out above that this approach results in a more commercially reasonable approach to distributions than the plaintiffs’ approach, insofar as it more closely gives effect to the objectives of the Plan.

57Fourth, as a matter of contractual interpretation, I am not persuaded that the absence of any reference to holdbacks in the final draft of the Plan is indicative of an intention to distribute all realization proceeds received at the time of receipt. If, as I conclude is the case, the terms of the Plan called for entitlements to be determined at the end of the Plan, any interim distributions, and any holdbacks imposed in respect of any interim distributions, were entirely discretionary on the part of HCCA. These are mechanisms to allow distributions at a date or dates that are earlier than the date, at the end of the Plan, upon which the Participants become entitled to their respective entitlements in the monies received in the Plan.

58Accordingly, I do not regard this submission as meaningful. Rather, I conclude that HCCA either had or did not have the authority to take such actions depending upon whether it had the authority under the Plan to approach distributions from the Plan in the manner it did.

59Similarly, I do not think that there is any significance to the fact that HCCA was able to retain the portion of the carried interest payable to it as the administrator of the Plan from the date of receipt. HCCA’s relationship to these monies was entirely different from the Participants’ relationship to the monies in the Plan. HCCA had an absolute entitlement to the monies payable to it. The entitlement of the Participants was governed by, and subject to, the terms of the Plan. This argument of the plaintiffs begs rather than answers the question raised in this action.

Was the Award of Points by HCCA After the Departure of Boyd and Hunter in Contravention of the Terms of the Plan?

60Boyd and Hunter consider that the award of points in the years 2006 to 2009 inclusive was unduly dilutive.

61The plaintiffs’ specific claim is that that the award of points in the years 2006 to 2009 inclusive was contrary to the terms of the Plan, insofar as the final draft states that “[a]fter full investment, the number of incremental points awarded annually will be fewer to reflect the lower amount of work associated with monitoring investments.”

62I conclude, however, that HCCA has not contravened the Plan in its award of points. I will address the issue in this section by first setting out my determination of the extent of HCCA’s discretion in the awarding of additional points under the Plan and then addressing whether HCCA exceeded this discretion in the actual award of points in respect of the years after 2006.

63I am satisfied that, under the terms of the Plan, HCCA had complete discretion in the awarding of points in the Plan over the life of the Plan, subject only to the qualification that HCCA could not exercise such discretion for an improper purpose or possibly in a manner that was oppressive for purposes of the CBCA (given the determination herein, it is not necessary to address the issue of whether HCCA’s administration of the Plan could give rise to a claim of oppression). The intention of the parties that HCCA would have such broad discretion is evidenced in a number of ways.

64First, it is a necessary corollary of the operation of two features of the Plan: (1) the principle that a Participant’s entitlement would be calculated on the basis of the Participant’s points relative to the total of the points awarded over the life of the Plan; which is reinforced by (2) the awarding of points in respect of any calendar year on a retrospective basis after the end of each such year. Given these provisions, HCCA had the discretion to award points in respect of any given year to reflect the contributions to the profit pool made in all prior years given the profit ultimately realized in respect of any particular investment.

65Second, I am satisfied that the parties understood that HCCA’s discretion would be unqualified in order to allow points to be awarded on a basis that was consistent with the objective of the Plan. From the perspective of the Participants at the commencement of the 1998 Fund, this was the most important principle, as it permitted them to be appropriately compensated for their contributions to the success of the Fund however that was achieved. This principle also established the standard by which HCCA’s award of additional points in the exercise of its discretion would be assessed. An award of points that was consistent with the objective of the Plan to align the interests of the Participants with the success of the 1998 Fund would be consistent with the Plan. An award that could not reasonably be demonstrated to be consistent with such objective of the Plan, but was instead made to further other purposes, would contravene the terms of the Plan.

66Third, the terms of the Plan do not contain any express qualification on the broad discretion of HCCA, apart from the provision relied upon by the plaintiffs which is discussed below. This was implicitly recognized by Boyd in his letter dated August 9, 2006, to Mullen, in which he included a “simple request” that HCCA act with fairness in the issuance of any further points in the 1998 Fund. There is no mention in this letter of any contractual restriction on such discretion.

67Given this determination, I turn to the issue raised by the plaintiffs. The plaintiffs’ position gives primacy to a particular statement in the final draft of the Plan. In effect, they say that this statement constitutes an express qualification on the discretion of HCCA. Put another way, the plaintiffs’ position implies that, in the event of a conflict between the qualification relied upon by the plaintiffs and the principle that points are to be awarded on a basis that best gives effect to the objective of the Plan, the former must prevail. I do not accept this position. Instead, I conclude that the statement relied upon by the plaintiffs must be considered to be in the nature of an expression of an expectation, subject to adjustment if circumstances warranted in the exercise of HCCA’s discretion, rather than a formal commitment.

68I reach this conclusion on the basis of the following reasoning.

69As a matter of contractual interpretation, the plaintiffs’ interpretation of the Plan gives undue emphasis to one sentence in the final draft of the Plan without regard to the entirety of the terms of the Plan as described above. The extent of the commitment expressed in this statement must be assessed in the context of the Plan’s objective to align the interests of the Participants with the success of the 1998 Fund. It cannot have been intended that any award of points after full investment of the assets of the Fund would be restricted such that the constraint would contradict the Plan’s objective.

70I also do not believe that, at the time of the establishment of the Plan, the plaintiffs would have considered that this principle was to be given the significance that they now place upon it. Rather, I am satisfied that they would have expected that HCCA would have retained the discretion to depart from this statement of expectation if circumstances warranted a higher award of points to either of them as a result of a disproportionate contribution to the Plan pool. The issue only arose as a result of the departure of the plaintiffs from HCCA.

71This raises the issue of whether HCCA exercised its discretion in awarding points after 2006 in a manner which complied with the provisions of the Plan as set out above. I conclude that it did for the following reason.

72The explanation for the number of points awarded after 2006 is related to the profit experience of the 1998 Fund. The evidence before the Court is that in excess of 50% of the profits realized by the 1998 Fund, and therefore of the monies received by the Plan, related to a single investment that was sourced and managed by Participants other than Boyd and Hunter. Moreover, the profits associated with this investment were realized in a series of transactions over several years. The evidence before the Court indicates that the award of points after 2006 was made on a basis that retrospectively adjusted the total points outstanding to reflect the contributions of the relevant individuals in respect of this investment.

73The statement relied upon by the plaintiffs that the number of additional points to be awarded annually will be fewer after full investment to reflect the lower amount of work associated with monitoring investments implicitly assumes that no single investment in the related fund will contribute the majority of the monies received by the Plan. The example in Appendix II to the final draft of the Plan illustrates this assumption in operation.

74As a business matter, a carried interest plan is not, however, a partnership among the Participants in which it is expected that relative contributions by each of the Participants will equalize over time. To the extent that the performance of a single investment dominates the results of a carried interest plan as a result of a number of transactions, I think it would be assumed at the outset by all Participants, who might equally expect to be the parties responsible for such an investment, that appropriate adjustments would be made over the life of the investment to reflect a Participant’s successive contributions to such results as each transaction occurs.

75In summary, the evidence before the Court is that HCCA exercised its discretion in the awarding of points after 2006 in a manner that was consistent with the discretion given to it by the terms of the Plan. In particular, I conclude that the terms of the Plan granted HCCA the authority to depart from the expectation of the parties at the time of the establishment of the Plan, given the particular circumstances of the contribution to the profit pool of the Plan. Accordingly, I conclude that HCCA did not contravene the provisions of the Plan in awarding points after 2006. In such circumstances, the plaintiffs can have no claim for damages based on a breach of the terms of the Plan or for oppressive behavior under section 248 of the CBCA.

Conclusion

76Based on the foregoing, I conclude that Boyd and Hunter are entitled to the amounts in the Plan calculated by HCCA, being $135,566 in the case of Boyd and $245,714 in the case of Hunter.

Costs

77If the parties are unable to agree on costs, they shall have thirty days to submit costs submissions not to exceed five pages in length. Any submission seeking costs shall also include a costs outline as required under the Rules of Civil Procedure.

Wilton-Siegel J.

Released: September 18, 2013

COURT FILE NO.: CV-11-9151-00CL

DATE: 20130918

ONTARIO

SUPERIOR COURT OF JUSTICE