SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-13-10172-00CL
DATE: 2013-08-13

RE: BRIAN GLUCKSTEIN and GLUCKSTEIN HOLDINGS INC.,
Applicants

AND:

CHECKMATE CAPITAL PARTNERS INC., HARVEY WISE HOLDINGS INC., HARVEY WISE, DANIEL CHITIZ, PAUL PATHAK, RISA SOKOLOFF, CHITIZ PATHAK LLP and GLUCKSTEINHOME INC.

Respondents

BEFORE: Newbould J.

COUNSEL:
Peter H. Griffin and Brent Kettles, for the applicants

Benjamin Zarnett and Daniel Cappe, for the respondents Checkmate Capital Partners Inc., Harvey Wise Holdings Inc., Harvey Wise, Daniel Chitiz, Paul Pathak and Risa Sokoloff

HEARD: August 9, 2013

ENDORSEMENT

[1] The applicants move to remove Davies Ward Phillips & Vineberg LLP (“Davies”) as solicitors for the respondent GlucksteinHome Inc. (“GlucksteinHome”).

GlucksteinHome

[2] GlucksteinHome was incorporated in March 2010. The original shareholders were Brian Gluckstein, the respondent Harvey Wise and the respondent Checkmate Capital Partners Inc. Checkmate holds its shares for the respondents Paul Pathak, Risa Sokoloff, Daniel Chitiz and others. Paul Pathak, Risa Sokoloff, Daniel Chitiz are partners of the respondent ChitizPathak LLP, a law firm that until recently handled the legal affairs of GlucksteinHome. In December, 2001 shares were issued to Steven Goldhar who is not a respondent.

[3] In June 2008, GlucksteinHome changed its share structure, creating differing classes of shares. As a result, each of the shareholders transferred all of their shareholdings to GlucksteinHome’s treasury and GlucksteinHome issued from treasury a series of new shares, of varying classes, to Mr. Gluckstein, the applicant Gluckstein Holdings Inc., Checkmate, Mr. Wise, the respondent Harvey Wise Holding Inc. and Mr. Goldhar. As a result, Mr. Gluckstein and his corporation hold approximately 39% of the shares of GlucksteinHome, Checkmate approximately 31%, Mr. Wise through his holding company approximately 28% and Mr. Goldhar approximately 1%.

[4] The directors of GlucksteinHome are Mr. Gluckstein, Ms. Sokoloff, Mr. Wise and Mr. Pathak. Mr. Gluckstein is the chairman and Ms. Sokoloff is the president

Relevant factual background

[5] This action arises out of dispute regarding a licence agreement between Brian Gluckstein and GlucksteinHome made in April 2000 which on its face was for 10 years. Under the licence agreement, Mr. Gluckstein granted to GlucksteinHome the right to use the name, likeness and endorsement of Mr. Gluckstein, including the name GlucksteinHome in its trademarks or trade names. The licence provided Mr. Gluckstein with complete control regarding the use of his name and the promotion of the business and products of GlucksteinHome and control over the design and quality of all products of GlucksteinHome, the branding and price-points and marketing. It further provided that, upon termination of the licence, GlucksteinHome is to cease use of “the Gluckstein name and likeness”, change its corporate name, and assign any trade-marks containing the name “Gluckstein” that are owned by the GlucksteinHome to Gluckstein.

[6] Mr. Gluckstein now takes the position that by its terms, the licence has expired. The respondents, officers, directors or shareholders of GlucksteinHome, take the position that because of events after the ten year licence, the licence has continued in existence. In particular, they rely on an agreement between GlucksteinHome and Hudson’s Bay Company for the supply of products, which agreement runs until at least 2015. This agreement with HBC confirms that GlucksteinHome owns certain trade-mark rights, including a registered Canadian trade-mark for GlucksteinHome. Mr. Gluckstein signed this agreement on behalf of GlucksteinHome.

[7] The existing contract with HBC is up for renewal in 2015. Since 2012, GlucksteinHome has been in discussions and negotiations for an agreement with the wholesale division of HBC to begin selling GlucksteinHome designed and branded products internationally. It is said that a large U.S. department store chain is keen to purchase such products through this arrangement with HBC and that HBC recently indicated that it wants to now negotiate the renewal of the existing contract, as well as the expanded wholesale arrangement.

[8] Mr. Gluckstein says that while the licence agreement terminated in accordance with its terms in 2010, it was only in 2013 that he realized that. He sought to renegotiate the deal with Mr. Pathak. That went nowhere. In March, Ms. Sokoloff denied the existence of any licence agreement. Counsel on both sides were retained. Counsel for the respondents took the position that by asserting that the licence agreement had expired, Mr. Gluckstein was breaching his fiduciary duties to GlucksteinHome.

[9] On June 28, 2013, a formal notice of a directors meeting of GlucksteinHome called for July 3, 2013 was sent by Ms. Sokoloff as president. The notice stated that the items of business included (i) considering a draft agreement between GlucksteinHome and HBC and to authorize members of the board or officers to finalize the agreement with advice from counsel and (ii) authorizing the retaining of counsel to advise GlucksteinHome with respect to the agreement with HBC.

[10] Later on June 28, 2913, this application was commenced. Included in the relief sought is (i) a declaration that the licence agreement has been terminated and that GlucksteinHome holds all of its trademarks in trust for Mr. Gluckstein, and (ii) an order winding up GlucksteinHome.

[11] Mr. Gluckstein did not attend the directors meeting of July 3, 2013. Rather he sent a solicitor, Mr. Jeffrey Kaufman, who objected to the resolutions regarding HBC and the retaining of counsel to GlucksteinHome.[^1] All of the other directors did attend. At the meeting, the directors present approved the retainer by GlucksteinHome of Patricia Olasker of Davies as corporate counsel to deal with HBC, and Kent Thomson of Davies as litigation counsel to defend this application.

Issues

[12] On this motion, Mr. Gluckstein seeks an order that Davies be removed as lawyers for GlucksteinHome. During argument, it became apparent that Mr. Gluckstein is more concerned with the retainer of Davies to deal with HBC than to defend the action.

[13] Objection to the retainer of Davies is based on two grounds, one being a provision in a unanimous shareholders’ agreement, and the other on common law grounds.

(a) Unanimous shareholders’ agreement

[14] Effective March 16, 2000, Mr. Gluckstein, Mr. Wise and Checkmate, the sole shareholders of GlucksteinHome, executed a USA. Article 1.02 provides:

Subject to applicable law, and unless otherwise specifically provided herein, no matter requiring the approval of the board of directors of the Company shall be undertaken or effected by the Company without the prior unanimous approval of the board of directors.

[15] Mr. Gluckstein takes the position that the resolution authorizing Davies to be retained required the unanimous approval of the directors, and as he did not approve it, but rather sent his lawyer to oppose the resolution being put, the resolution is invalid.

[16] The respondents put forward several answers to this.

[17] They say that all of the directors present approved the resolution. I doubt that is a valid argument. The word “unanimous” in the USA connotes approval of all of the directors. It is clear that Mr. Gluckstein did not approve the resolution.

[18] In addition, they say that section 1.02 of the USA fetters the discretion of the directors by requiring unanimity. Such a fettering is only permissible pursuant to a unanimous shareholders’ agreement, that is, one among all of the shareholders of the corporation, and as Mr. Goldhar later became a shareholder and did not sign the USA, the respondents assert that section 1.02 became invalid when Mr. Goldhar became a shareholder. However, section 108(8) of the OBCA, which came into force in 2008 and thus in effect at the time of the board meeting on July 13, 2013, provides that a new shareholder shall be deemed to be a party to a USA made before the new shareholder acquired shares in the company. Thus at the time of the board meeting, Mr. Goldhar was deemed to be a party to the USA. I do not understand how section 1.02 the USA became “invalid” on the date Mr. Goldhar became a shareholder, as contended by the respondents. The USA did not so provide. Section 1.02 remained a part of the USA.

[19] Further the respondents say that the USA terminated when the corporate reorganization took place in 2008 when the shareholders surrendered their common shares to treasury and had issued to them or their holding companies class A preferred shares and common shares. They rely on section 2.01 of the USA that states;

Section 2.01 Duration of Agreement. The rights and obligations of each Shareholder under this Agreement shall terminate as to such shareholder when it or he has transferred all Shares owned by him or it. This Agreement shall terminate upon the earliest to occur of (a) written agreement by all Shareholders, (b) any amalgamation involving the Company or any merger or consolidation of the Company in which the Company is not the surviving corporation, (c) the acquisition by any Shareholders of beneficial ownership of all outstanding Shares and (d) the completion of a public offering of the Company’s equity securities.

[20] The first sentence of this section says the rights and obligations of a shareholder terminate when the shareholder “has transferred” all shares owned by him or it. It does not say, as these provisions usually do, that the rights terminate when the shares have been transferred to another person or corporation. The USA is not a model of drafting and it is very short, but I would imply a term in the first sentence that it means that the rights of a shareholder terminate if the shareholder has transferred all shares to someone else or treasury and has obtained no shares from treasury in some corporate reorganization. The first sentence is not intended to provide when the USA terminates as a whole. That sentence does not state that the agreement is terminated when the shares are transferred. The second sentence is the one that deals with the termination of the agreement, and none of its conditions have occurred. I cannot read section 2.01 to provide that the agreement came to an end with the corporate reorganization that changed the nature but not extent of the shareholdings of the shareholders.

[21] The respondents further rely on the opening words of section 1.02 that requires unanimous consent of the directors. Those words are “Subject to to applicable law”, which means that the unanimity requirement is subject to applicable law. They contend that the applicable law is that a director cannot vote on a matter on which he has a conflict of interest. Paragraph 47 of their factum states the argument clearly:

47. Section 1.02 is explicitly “subject to applicable law”. In this case, the applicable law is that a director cannot vote on a matter on which he has a conflict of interest. For example, section 132 of the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”), which provides that a director may not: (i) attend any part of a meeting during which a contract or transaction in which he or she has a conflict of interest will be discussed; (ii) vote on any resolution approving a contract or transaction in which he or she has a conflict of interest; or (iii) be counted for the purposes of the quorum on a contract or transaction in which he or she has a conflict of interest. Section 1.02 must therefore be read as requiring the unanimous vote of those directors capable of voting – otherwise the board could never approve resolutions on which one or more of them had a conflict of interest.

[22] I accept this contention. Mr. Gluckstein could not vote on any resolution at the meeting on which he had a conflict. He clearly had a conflict in voting on who should be retained by GlucksteinHome to defend the application that he has brought against it. Thus there is no basis to set aside the retainer of Davies to act for GlucksteinHome in this application on the grounds that the resolution was not unanimously approved as required by section 1.02 of the USA.

[23] A somewhat more difficult question is whether Mr. Gluckstein is in conflict with GlucksteinHome with respect to the law firm to be retained by the company to deal with HBC. Corporate counsel in that circumstance would be acting for the company as a whole and its board of directors, one of whom is Mr. Gluckstein.

[24] It is clear that under the licence agreement, which GlucksteinHome is asserting to still exist in the negotiations with HBC over a new agreement, it is Mr. Gluckstein who has complete control over the business of GlucksteinHome, including the products and their marketing.

[25] An essential component of the current HBC contract is that it requires the extensive time and commitments from Mr. Gluckstein. It requires that Mr. Gluckstein meet on a regular basis in respect of product presentation, product design, marketing, public relations, sale strategies, in-store marketing and merchandising, and personal appearances. None of the other directors have any role in these things. An essential term of the proposed HBC contract is that Mr. Gluckstein is to remain as Chairman of GlucksteinHome and actively be involved with GlucksteinHome and the products to be marketed under the GlucksteinHome name.[^2] Mr. Gluckstein has a vital interest in this issue.

[26] If Mr. Gluckstein has a conflict as to the law firm to be retained by GlucksteinHome to deal with HBC, it would follow that he would have a conflict in dealing at board meetings as to the instructions to be given to that firm. Yet he has a clear interest in that issue. If Mr. Gluckstein is right and the licence has expired, it does not necessarily mean that he has no interest (and an obligation if counsel for the respondents is right,) in seeing a deal done by GlucksteinHome with HBC. He would be vitally interested in the deal. That would not preclude him from negotiating new terms between himself and GlucksteinHome, and the terms of any new or renegotiated deal with HBC might well be instrumental in that. But to say that he has no right or interest in having input at the board level of GlucksteinHome as to the HBC negotiations would not be right. Counsel for GlucksteinHome, Mr. Thomson, has effectively acknowledged this. In his with prejudice letter of July 5, 2013 to Mr. Griffin, Mr. Thomson stated GlucksteinHome had instructed him to co-operate with Mr. Gluckstein to work out an agreement with HBC on a without prejudice basis to his application and to have Ms. Sokoloff or someone else meet with him to address any concerns he had. This was the same sort of thing that Mr. Griffin had proposed to Mr. Zarnett in June, without success. Litigation claims can and often do melt with negotiations and time.

[27] I am on the view that Mr. Gluckstein does not have a conflict in participating at the board level of GlucksteinHome as to the law firm to be chosen to act in the negotiations with HBC. Thus the resolution for that purpose authorizing Ms. Olasker of Davies to be retained for that purpose required his approval, which was not provided, and it is therefore invalid.

(b) Common law principles

[28] Mr. Gluckstein takes the position that Davies is in a conflict with him and cannot act. I take this argument not to refer to Davies acting for GlucksteinHome in defending the application, but rather in dealing with HBC. Any firm acting for GlucksteinHome in defending the application would be in conflict with Mr. Gluckstein.

[29] A law firm should not act for a client with whom it is in conflict. That is too well ingrained in Canadian law to require authority. The question is whether Davies in acting for GlucksteinHome in relation to the HBC negotiations is in conflict with GlucksteinHome. Mr. Gluckstein is Chairman of GlucksteinHome and a director.

[30] The concern is that Davies is in conflict with Mr. Gluckstein. Davies, in defending the litigation started by Mr. Gluckstein, is opposed to Mr. Gluckstein. Davies must take its instructions regarding HBC from the board of GlucksteinHome, and advise the board. That is, it must give advice to Mr. Gluckstein as a director of GlucksteinHome with whom it is in conflict. Further, in light of the importance of the role Mr. Gluckstein would play in new contract with HBC, it is highly unlikely that lawyers advising GlucksteinHome and involved in the negotiations with HBC could do their job properly without discussing these things with Mr. Gluckstein. Indeed, Mr. Thomson of Davies has already written to Mr. Griffin saying that he is instructed to meet with Mr. Gluckstein to discuss his concerns regarding HBC. Davies should not do this, however, because it is acting against Mr. Gluckstein in the litigation.

[31] It is apparent that the defence of GlucksteinHome by Davies to the application brought by Mr. Gluckstein is affecting the stance taken by Davies with Mr. Gluckstein regarding HBC. While Mr. Thomson held out an olive branch in his letter to Mr. Griffin of July 5, 2013 offering some sort of without prejudice arrangement regarding HBC, he also on the same day wrote to Mr. Griffin alleging a breach of duty of Mr. Gluckstein toward GlucksteinHome and threatened a substantial law suit against Mr. Gluckstein if he did not co-operate in the dealings with HBC. There is obviously a serious risk that the advice Davies would give the board of GlucksteinHome regarding its dealings with HBC could not help but be affected by its views of the litigation in which Davies has necessarily taken an aggressive stance against Mr. Gluckstein.

[32] It seems clear from the record that HBC wishes to have input from Mr. Gluckstein regarding any new deal, which is hardly surprising given his central and critical importance to the business of GlucksteinHome and the obligations that any agreement with GlucksteinHome would impose on Mr. Gluckstein. As a practical matter, if Mr. Gluckstein is not comfortable in dealing with Davies regarding its role with respect to HBC, which is understandable as they are opposite him in his lawsuit, one may wonder what the point of the other directors is in having Davies act in connection with HBC and what they hope to achieve by that.

[33] In the circumstances, I am of the view that the retainer of Ms. Olasker of Davies to advise GlucksteinHome with respect to HBC is improper and that a different firm with no conflict with Mr. Gluckstein should be retained.

Conclusion

[34] The retainer of Davies by GlucksteinHome is permitted. The retainer of Davies by GlucksteinHome to act in connection with any agreement with HBC is not, and that retainer must be terminated.

[35] As success is divided, there shall be no order as to costs.

Newbould J.

Date: August 13, 2013

[^1]: Mr. Gluckstein contends that Mr. Jeffrey voted against the resolutions. The evidence on whether he voted, or had a right to vote, is contested. The evidence of Mr. Jeffrey does not go so far as to say he “voted”. It only says that he objected to each matter put to a vote.

[^2]: Neither side has put in evidence the existing or draft new agreements with HBC. Mr. Gluckstein has sworn to what they contain regarding his obligations, and there is no evidence to contradict his statements in that regard.