Leggat et al. v. Jennings et al. Jennings et al. v. Leggat et al.

[Indexed as: Leggat v. Jennings]

Ontario Reports

Ontario Superior Court of Justice,

MacKenzie J.

March 12, 2014

119 O.R. (3d) 605 | 2014 ONSC 1580

Case Summary

Corporations — Oppression — Parties to oppression proceedings agreeing that car dealerships which were subject of dispute should be segregated from litigation with view to preserving their value — Parties asking court to determine whether asset sale or shares sale was more appropriate — Parties' banker giving notice of intent to realize upon its security if dealerships were not separated from litigation by fixed date — Shares sale being most efficient and time-sensitive manner of proceeding.

The parties agreed that an ongoing shareholders' dispute and oppression proceedings required that the car dealerships that were the subject of the dispute be segregated from the litigation with a view to preserving their value. They asked the court to determine whether an asset sale or a shares sale was more appropriate.

Held, a shares sale should be adopted.

The parties' common banker had given notice of intent to realize upon its security if the dealerships were not successfully separated from the litigation by a fixed date. Given the exigency of the timeline, a shares sale was the most efficient and time-sensitive manner in which to proceed.

MOTIONS for directions.

N. Rabinovitch, for Jennings et al.

S. Laubman, for Leggat et al.

J. Berkow, for defendant C. Beck.

J. Simpson, for BMO.

Endorsement of MACKENZIE J.: —

Overview

[1] I have before me two motions, one by each of the parties, in the above actions being the "Leggat interests" and the "Jennings [page606] interests". The defendant in action nos. 7135/12 and 6925/13, Craig Beck, and BMO, a non-party in the subject matter of the motions, have also appeared on the hearing of these motions.

[2] The subject of the motions can be simply stated: to determine the appropriate sales process to be followed in separating the dealerships in question (PenFord and Fox Chrysler) as going concerns from the dispute between the Leggat interests and Jennings interests in their capacities as shareholders, directly or indirectly, of such dealerships.

[3] Briefly put, the Leggat interests favour an asset sale of the dealerships and the Jennings interests favour a share sale of the dealerships.

[4] The parties are agreed that the ongoing shareholders' dispute and their oppression proceedings require the dealerships as primary assets that are the subject of the dispute be segregated from the litigation with a view to preserving the value of the same, pending the determination of their respective rights and obligations.

[5] This common intention is heightened by the fact that the banker for both dealerships (BMO) has taken the position that the parties must come to a resolution of their difficulties insofar as it affects the operations and financial integrity of the dealerships on or before April 30, 2014.

[6] BMO has given notice of intent to realize upon its security if a successful separation of the dealerships from the litigation has not been accomplished by that time. BMO has set out its position in a standstill agreement entered into in early January 2014.

Background

[7] It is not necessary for purposes of determining the issue in these motions to enter into any detailed description of the litigation that has precipitated these motions. Essentially, the motions derive from a previous court appearance before me on or about November 26, 2013.

[8] At that date, the parties through counsel who are appearing on these motions with the court's assistance entered into a consent order providing for, among other things, interim relief in the protracted dispute concerning the ongoing business of both dealerships and the conduct of the financial affairs in the dealerships. The "other things" referred to in the consent order included a case supervision conference scheduled for December 6, 2013, before Coats J. The agenda agreed to by the parties for such conference was to make a proposal for the sales process relating to the dealerships. [page607]

[9] The parties have since prepared and submitted in these motions their respective sales proposals, outlining measures deemed by them to be appropriate in aid of such proposals. They have agreed on the valuation of the dealerships and on the appointment of a monitor to supervise whatever sales process the court determines to be appropriate.

Analysis

[10] As noted above, the parties' sales proposals have a similar intent, namely, to separate the operations of the dealerships from the issues in dispute between the parties through a sale of the operating assets and goodwill of each dealership. A point of contention, however, remains as to the mechanism or instrument for the separation of such assets and goodwill from their conflicted interests. Thus, the question here may be posed: should this separation be accomplished by a sale of the shares in the dealerships or by a sale of the operating assets per se of each of the dealerships, in both cases with a reservation of the rights and interests of each of the parties after discharging the existing BMO indebtedness?

[11] The impetus for deciding the appropriate sale process is the fact of the significant deadline of April 30, 2014, as set out in the standstill agreement between the parties and BMO. If the sale cannot be completed by that date, BMO as lender for both dealerships will be in a position to exercise and realize upon its security and essentially have the potential of rendering nugatory the dealerships as going concerns.

Positions of the parties

[12] The Leggat interests and the Jennings interests in their respective motion materials have included a proposal process, in accordance with their respective views as to whether it should be an asset sale (Leggat interests) or a share sale (Jennings interests).

[13] They have each filed a two- or three-page memorandum setting out their sales process proposals. Although many aspects are common in the proposals, some are different but of no great consequence in determining the appropriate mode of sale. For example, in the case of the Leggat interests, the proposed sale shall take place no later than March 21, 2014, whereas in the Jennings proposal, the sale shall take place on March 18, 2014.

[14] However, for purposes of this motion, it is not necessary to proceed on a point-by-point or topic-by-topic comparison of the terms in the proposed sales or even methodology for the sales. [page608]

[15] The real question to be decided here is whether the sale shall proceed by way of a sale of assets, including goodwill, or whether it shall proceed by the sale of the shares of each other's interests, directly or indirectly, in the PenFord and Fox Chrysler dealerships.

[16] The Jennings interests take the position that the most efficient and beneficial form of sales transaction in the circumstances would be transfer of the operating assets of each of the dealerships into two new companies and that the sale of the shares of the two new companies by either of the parties would be determined in accordance with its revised proposed sales process (February 24, 2013 (sic)). The Jennings interests, however, exclude from this sale the shares of 223361 Ontario Ltd. which are held by the PenFord dealership. Counsel for the Jennings interests contends this form of the sales transaction should be approved by the court on the basis it will minimize tax implications arising from any sales transaction and it will also minimize the need to obtain financing for any transaction and the concomitant obligation to retire the security held by BMO.

[17] The position of the Leggat interests is that the sales transaction should be a sale of assets, including goodwill, the assets being the core operating assets of each dealership. The core operating assets would include all vehicles, new and used, together with the parts inventory; all equipment both owned and leased; all signage and leaseholds; and the franchise agreements and the goodwill. Excluded from these core operating assets would be accounts receivable; loans from related parties; and any non-core operating assets, e.g., investments not related to the operation of the dealerships.

Analysis

[18] Counsel for both the Jennings and Leggat interests have effectively compared and contrasted their respective positions and cited case law in support of their positions. Each of them have made valid arguments in favour of their respective proposals and outlined the potential impediments or disadvantages of the other's proposal.

[19] There is one matter which must be taken into account here: that is, the simple fact that the sales process of either the Jennings proposal or the Leggat proposal will not dispose of the issues that are the subject of the underlying litigation and the oppression remedy application. For example, the true share ownership interests of the respective parties in the dealerships, both direct and indirect, and the question of the "shadow shares" [page609] held by the Jennings interests, namely, whether they are true equity share, or a mechanism for distribution of profits, will be decided in the following trial in the oppression remedy and related proceedings.

[20] I am not persuaded in the particular context of this case that the asset sale proposed by the Leggat interests is the best process to be followed at this time. Given the exigency of the timeline (April 30, 2014) created in the BMO standstill agreement, the shares sale proposed by the Jennings interest will be the most efficient and time-sensitive manner to proceed in the divorce of the dealership assets from the warring interests of the parties.

[21] There will doubtless be significant proceedings taken in the aftermath of either an asset sale or a share sale in relation to the sale proceeds after retiring the existing BMO indebtedness. These proceedings will include such issues as the equity interests of the Jennings interest share holdings in the dealerships, as well as the challenged or impugned transactions involving the funds of the dealerships.

[22] Further, these proceedings will take place regardless of the form of the divorce of the corporate interests from the operating dealerships. Notwithstanding the disputes between the parties and the concern expressed on behalf of the Leggat interests as to liabilities arising out of a share purchase transaction, the parties have been engaged in the dealerships for a considerable amount of time. I acknowledge the concern of the Leggat interests that a share purchase would be problematic in terms of a clear delineation of liabilities than would be in an asset purchase. However, I am not persuaded in these circumstances there are any contingent or unascertained liabilities of any significant nature that might be the case in a third party arm's-length purchaser of shares: the parties will have an ample opportunity to sort out and effect an accounting of any such liabilities upon the sales transaction being completed on or before April 30, 2014.

Ruling

[23] In light of the foregoing, I order that the revised proposed sale process (February 14, 2013 (sic)) propounded by the Jennings interests shall be the mechanism to be followed in effecting the divorce of the dealerships from the underlying dispute between the parties.

[24] In the event of issues arising in the course of the designated sales process, the parties shall be at liberty to seek the advice and direction of the court on short notice by teleconference [page610] at a mutually convenient time. The costs of the motion shall be reserved.

Order accordingly.

End of Document