Court File and Parties

COURT FILE NO.: 10/21173 (Hamilton)

DATE: 2013-08-08

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Lina Pavone as the Estate Trustee for The Estate of Osvaldo Pavone and Lina Pavone, Luigi Pavone and Simonetta Jez, Plaintiffs (Responding Party)

AND:

603631 Ontario Limited and Novacro Machining Inc. and Pietro Pavone and The Estate of Susan Pavone and Mathew Pavone and Angela Gabriele and Michelle Gabriele formerly known as Michelle Pavone and Ostelio Pavone and Luca Pavone and Giuseppe Pavone and Cory Pavone and Guila Pavone and Natasha Pavone and Francesco Montecchia and Nick Montecchia and Maria Montecchia and Cleta Montecchia and Remo Pavone and Vera Pavone and Sheila Rodrigues and Val Rodrigues and Marco Pavone, Defendants (Moving Party)

BEFORE: The Honourable Mr. James W. Sloan

COUNSEL: David Thompson - Counsel for the Respondent (Moving Party) Barry Yellin - Counsel for the Plaintiffs (Responding Party)

HEARD: June 18, 2013

ENDORSEMENT

[1] The major facts of this case are not in dispute.

[2] In the early 1980s, five brothers went into the machine shop business together under the name Novacro Machining Inc.

[3] In 1987, an estate freeze was effected and ownership of the shares of Novacro were transferred to 603613 Ontario Limited.

[4] Novacro prospered and each year dividends were declared.

[5] In 2006, one of the brothers, Osvaldo, became very sick and passed away in 2011.

[6] Up until Osvaldo’s illness in 2006, all five brothers worked more or less equally in the business.

[7] Notwithstanding Osvaldo's illness and his inability to work in the business, bonuses were declared on an equal basis for the years of 2006 and 2007.

[8] In 2008 and 2009, notwithstanding that bonuses were declared, no bonus was given to Osvaldo.

[9] After receiving a letter from Osvaldo's lawyer, bonuses were again distributed equally in the years 2010 and 2012, on a without prejudice basis. There were no bonuses declared in 2011.

[10] On December 20, 1996, a unanimous shareholders agreement was executed between the two corporations and the five brothers.

[11] Unfortunately, there is nothing in the shareholders agreement allowing a majority of shareholders to purchase the interest of the other shareholders in the event that they no longer wish to be in business together.

[12] In this case the four surviving brothers do not get along with Osvaldo's widow.

[13] In July 2010, the plaintiffs brought an action against the defendants for oppressive conduct, the main trust of which was that no dividends were paid to Osvaldo in 2008 and 2009 and that the other four brothers substantially increased their own salaries.

[14] Despite, some attempts to arrive at an out-of-court settlement, including my encouragement before and after the hearing of this motion, a settlement at this point is still elusive.

[15] The defendants have brought a motion seeking a court order imposing a compulsory buy sell agreement between the parties, pursuant to Section 248 of the Ontario Business Corporations Act, R.S.O. 1990, Chapter B.16.

The Business Corporations Act

[16] Section 248 (3) reads as follows:

“In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing, …. (g) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder; …”

[17] The defendants seek an order that they must buy and the plaintiffs must sell the subject shares.

[18] To make such an order the court would first have to come to the conclusion that there is oppressive conduct going on within the meaning of section 248 (2) which reads:

Where, upon application under subsection (1), the court is satisfied that in respect of the corporation or any of its affiliates,

(a) any act or omission of the corporation or any of its affiliates effects or threatens to affect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interest of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

[19] This case appears to be the reverse of the usual oppression remedy case when a majority of the shareholders are treating a minority shareholder oppressively.

[20] In this case, 80% of the shareholders are complaining about the actions or inactions of 20% of the shareholders.

[21] The defendants submit that I do not have to find blameworthy conduct but that I only need to find that there is a deadlock.

[22] The issue here is simply one of money, not governance of the Corporation. The brothers’ position is set out at paragraph 98 of the affidavit of Pietro Pavone where he states:

“We are not prepared to continue to do so with Lina remaining as a shareholder who refuses to contribute to the business. We are at a stalemate. We are prepared to sell our shares in 603 to Lina or to buy Lina's shares in 603.”

[23] The evidence is that Lina never contributed to the business. Her only connection to the business was that she was married to one of the five brothers, Osvaldo.

[24] The defendants do not want Lina contributing to the business, which she likely knows nothing about. In addition, she is now 60 years of age and has some health problems.

[25] What is abundantly clear from the material before me is that the defendants do not think it is fair that they must go to work every day and split the net profits of the business equally with Lina. This can hardly be construed as oppressive conduct within the meaning of the Ontario Business Corporations Act.

[26] Lina is a shareholder and all shareholders should be treated equally. That is certainly not to say that the remaining brothers who work full-time in the business should not be paid appropriately for their work and perhaps receive bonuses and other perks in addition to their salaries.

[27] However, I do not see how the situation here, for the four brothers actually running the business, is different than the top management of larger corporations. They are entitled to be appropriately remunerated but they do not have a carte blanche on their own salaries and perks and bonuses when there are other shareholders that they must account to.

[28] Rather than attempting to agree on an appropriate valuator, the defendants hired their own valuator and attempted to put some pressure on the plaintiff to sell at or near that valuation.

[29] There is nothing in the material before me to suggest that the parties attempted to resolve their differences by use of an independent expert to set salaries and bonuses and dividends.

[30] Since there is no buy sell clause(s) in the agreement, it can certainly be argued that at the time the agreement was entered into, all parties wanted the families of their deceased brother(s) to be looked after by means of the continuous flow of money that ownership of the shares in the company would bring. This is what is happening.

[31] I also note that when Osvaldo was sick and all of the defendants were clearly aware that it was likely that his spouse would become one of their shareholders, they walked away from completing a deal for the purchase of shares.

[32] It can certainly be argued that they did so because they thought the price they would have to pay was higher than they wanted to pay. That was their choice.

[33] However, to now say that the plaintiff must sell her shares at today’s price, in what has been described as difficult market conditions for the company, does not seem objectively fair.

[34] I am not persuaded that the defendants have bought themselves within section 248 of the Ontario Business Corporations Act and I dismissed their motion with costs.

Cross Motion

[35] I am not prepared to order the defendants to obtain a forensic accounting and share valuation.

[36] The plaintiff is certainly entitled to production of the accounting records of the corporations and with better evidence may be able to convince the court at a later date that the defendants should obtain such evaluation or of course she could undertake such evaluation herself.

[37] The remainder of the cross motion for the court to set a timetable was essentially not argued before me and I simply adjourn that issue sine die on five days notice. I am not seized of this matter.

[38] Based on the discussions before me and as is stated earlier in this endorsement the issues here pertain to money. The parties may be well advised to agree on an accountant to do an appropriate valuation on the basis that the company would pay for the evaluation which would essentially then be paid by all five shareholders. The parties should certainly consider mediation with an experienced commercial mediator.

[39] If the parties are unable to agree on costs, Mr. Yellin shall forward his brief submissions on costs to me by August 21, 2013. Mr. Thompson shall forward his brief response to me by August 28, 2013. Mr. Yellin shall then forward her/his reply, if any, to me by September 6, 2013. Cost submissions may be sent to my attention by email, care of Kitchener.Superior.Court@ontario.ca

James W. Sloan J.

Date: August 8, 2013