ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-13-00480149-0000
DATE: 20140417

BETWEEN:

ST. ANDREW GOLDFIELDS LTD.

Applicant

– and –

TEDDY BEAR VALLEY MINES, LIMITED and PARKVIEW TRANSIT INC.

Respondents

Peter Wells and Joanna Vatavu, for the Applicant

John Longo, for the Respondents

HEARD: March 5, 2014

T. Mcewen J.

reasons for decision

introduction

[1] This application concerns mining royalties that were previously owned by Teddy Bear Valley Mines, Limited (“Teddy Bear”). The royalties related to certain mining claims owned by St. Andrew Goldfields Ltd. (“SAS”) located in northeastern Ontario. As a result of a number of corporate acquisitions, SAS now owns the lands that are subject to the royalties.

[2] In 2007, both Respondents underwent significant corporate changes. In May 2007, Teddy Bear’s shareholders approved of its dissolution and the distribution of its assets to its largest shareholder and principal creditor, Canadex Resources Limited (“Canadex”). After a number of amalgamations, Canadex continued under the name Parkview Transit Inc. (“Parkview”). Teddy Bear and Parkview are the named respondents (the “Respondents”) in this application.

[3] The two mining royalties at issue are found in two separate contracts, being the “1992 Agreement” and the “2005 Agreement” (collectively, the “Agreements”). The Agreements both contain rights of first refusal in favour of SAS should Teddy Bear seek to, in certain circumstances, divest itself of the royalties.

[4] The relevant portions of the Agreements with respect to the royalties and the rights of first refusal are set out below.

the Agreements

The 1992 Agreement

[5] On January 1, 1992, SAS’s predecessor and Teddy Bear entered into a joint venture agreement concerning the development of certain mining properties. As per the terms of the 1992 Agreement, Teddy Bear’s interest was to be converted into a 3 1/3 Net Profits Interest royalty (“NPI”). The conversion of Teddy Bear’s participating interest into a NPI royalty occurred on or about January 1, 2006. The 1992 Agreement provided for a right of first refusal pursuant to ss. 9.02 and 9.04, which stated as follows:

9.02

(a) If a party hereto (the “Vendor”) wishes or seeks to transfer directly or indirectly all or any portion of any net profits royalty to which it may have become entitled at any time during the currency of the agreement, the other Participating Parties (the “Purchasers”) shall be entitled to a right of first refusal in respect thereof as hereinafter provided. The Purchasers shall be entitled to acquire all but not part of the net profits royalty wished or sought to be transferred by electing to do so within 30 days (the “Acceptance Period”) after receiving written notice (the “Offering Notice”) of the consideration desired by the Vendor. No transfer of all or any portion of any net profits royalty may be made and no Offering Notice may be given by a Vendor without it prior thereto having obtained from an arm’s length offeror (or offerors) a bona fide offer to purchase the net profits royalty sought to be transferred on essentially the same terms as specified in the Offering Notice. The Offering Notice shall for all purposes be deemed to be an offer by the Vendor to the Purchasers (irrevocable by the Vendor within the Acceptance Period) to transfer such net profits royalty for the consideration and on essentially the same terms specified in the Offering Notice. The foregoing Offering Notice shall also contain a copy of the arm’s length offer, a statutory declaration that such offer is an arm’s length bona fide offer which the Vendor intends to accept. No Offering Notice may be given by a Vendor more than once in any 6 month period or for less than the entire net profits royalty of a Vendor. If the Purchasers do not within the Acceptance Period advise the Vendor that they are willing to purchase such net profits royalty at the same price and on essentially the same terms for the acquisition thereof as are specified in the Offering Notice, the Vendor may, at any time within 90 days (the “Second Period”) after the expiry of the Acceptance Period, transfer the same to the third party offeror (or offerors) for the consideration and upon terms no more favourable to the third party offeror (or offerors) than those referred to in the Offering Notice. In the event the Vendor does not so transfer such net profits royalty within the Second Period, the provisions of this section shall apply to any subsequent transfer or offer for transfer by the Vendor. The Purchasers shall be entitled to purchase the net profits royalty sought to be transferred by the Vendor in proportion to their respective Participating Interests or in such other proportions as they may mutually agree upon. If a Purchaser shall not wish to acquire a portion of a net profits royalty so offered, it shall forthwith (and in any event not less than 10 days before the expiry of the Acceptance Period) advise all other Purchaser(s) of its decision and such other Purchaser(s) shall be entitled, but not required, to acquire the whole of such net profits royalty in proportion to their respective Participating Interests or in such other proportions as they may mutually agree upon) [Emphasis added.]

(b) The purchase and sale of the net profits royalty being sold, if being sold to a Purchaser(s) pursuant to the provisions hereof, shall be completed on the 20th business day following the expiry of the Acceptance Period.

9.04

(a) There shall be no right of first refusal pursuant to Section 9.01 or 9.02 in the following cases:

(i) in which any party hereto wishes to transfer its entire Participating Interest and its interest in this Agreement or net profits royalty by amalgamation, merger, reorganization or sale of all or substantially all its assets, or

(ii) in which any party hereto wishes to transfer all or part of its Participating Interest or net profits to an affiliated body corporate.

provided the transferee shall assume the obligations of the transferor hereunder and become a party to this agreement. In addition, in the case of a transfer pursuant to item (ii), the transferor agrees to remain subject to and liable for the obligations of the transferee hereunder and the transferor and transferee shall covenant and agree that such affiliate shall remain an affiliate of the transferor for a period of 2 years from the completion of such transfer (unless such affiliate shall prior thereto retransfer to the transferor the transferred Participating Interest or net profits royalty).

The 2005 Agreement

[6] On December 15, 2005, another of SAS’s predecessors and Teddy Bear entered into the 2005 Agreement concerning certain lands and mineral rights associated with the lands. Pursuant to the terms of the 2005 Agreement, Teddy Bear was granted a 1.75 per cent Net Smelter Returns (“NSR”) royalty on certain mining claims.

[7] Like the 1992 Agreement, the 2005 Agreement also contained a right of refusal clause, which stated as follows:

Right of First Refusal. NEWMONT shall have a right of first refusal (‘ROFR”) with respect to any option, lease, sale, grant or other disposition by SELLER of any affiliate of SELLER to a non-affiliated third party of any or all or its reserved Net Smelter Returns in respect of the Property (“Disposition”), as follows: Prior to accepting any offer to effect a Disposition SELLER shall promptly notify NEWMONT of its desire to effect a Disposition. Such notice shall specifically identity the property and shall state the price and all other pertinent terms and conditions of Disposition that SELLER would be willing to accept, and shall include a copy of the offer or contract of sale received by SELLER (“Offered Interest”). Such notice shall constitute an offer to NEWMONT (or its designee) to effect a Disposition on those terms. The consideration for the Disposition shall be expressed solely in Canadian or United States currency. If the consideration specified in the offer or contract of sale for the Disposition from a non-affiliated third party is, in whole or in part, other than monetary, the notice shall describe such consideration and its monetary fair market value expressed in Canadian or United states currency. NEWMONT shall have 30 days from the date such notice is delivered to it to notify SELLER whether it elects to acquire the Offered Interest at the same price and on the same terms and conditions set forth in the notice. If NEWMONT does so elect to acquire the Offered Interest, the Disposition shall be consummated promptly, but in no event more than 60 days after notice of such election is delivered to SELLER. If Newmont fails to so elect within such 30 days to acquire the Offered Interest, such failure shall be deemed to be an election to not acquire the Offered Interest. If NEWMONT elects to not acquire the Offered Interest, SELLER shall have 120 days following the expiration of such period to consummate the Disposition of the Offered Interest to a non-affiliated third party at a price and on terms and conditions no less favourable to SELLER than those set forth in its notice to NEWMONT. If SELLER fails to consummate a Disposition of the Offered Interest to a third party within such 120 day period, then NEWMONT’s ROFR shall be deemed to be revived and shall continue in effect. Any subsequent offer by SELLER to transfer the Offered Interest, or any part thereof, shall be conducted in accordance with all of the procedures set forth in this paragraph. NEWMONT’s ROFR shall apply to SELLER and any successor or assign of SELLER (including affiliates or successor by merger). Furthermore, should SELLER seek to undertake a disposition after the consummation of an initial Disposition, NEWMONT’s ROFR shall continue to apply to such additional interests that SELLER may seek Disposition of. [Emphasis added.]

events leading up to teddy bear’s dissolution

[8] Teddy Bear’s own mine operations experienced difficulties throughout the 1990s, with Canadex supporting the mine financially. Canadex reported some positive expectations notwithstanding these ongoing difficulties. In November 2005, however, Canadex issued a news release and Material Change Report in which it concluded, amongst other things, that Teddy Bear’s joint ventures under the Agreements were unlikely to result in any future cash distributions. By 2007, Teddy Bear was experiencing significant financial difficulties. At that time, Canadex owned 48.76 per cent of Teddy Bear’s shares. Teddy Bear attempted to find a buyer, mainly in relation to its tax losses, but it was unable to do so. Canadex was not prepared to continue to fund Teddy Bear. The Board of Directors decided to dissolve Teddy Bear, since by then the corporation was not active and its liabilities exceeded its assets.

[9] The Dissolution Agreement stated that Teddy Bear “hereby grants, bargains, assigns, transfers, conveys and sets over unto [Canadex] all the right, title and interest of [Teddy Bear] in and to all its property, assets and business…”. This included the royalty interests from the Agreements. Neither Teddy Bear nor Canadex advised SAS of what had taken place. SAS was not offered rights of first refusal pursuant to the Agreements.

[10] Ultimately, even though Teddy Bear sought to wind up its operations, it failed to file Articles of Dissolution. This was likely due to inadvertence, since Teddy Bear was no longer operating. This failure has no impact on this application.

[11] Ultimately, in the fall of 2011, SAS was conducting mining operations that were affected by the Agreements in favour of Teddy Bear. SAS sought to locate Teddy Bear so that it could make royalty payments. In 2012, SAS learned that Teddy Bear had been acquired by Canadex. SAS took issue with the fact that it had never been given the right of first refusal as provided in the Agreements, and commenced this application.

the issue

[12] The issue in this application is whether the rights of first refusal contained in the Agreements were triggered by Teddy Bear’s dissolution, and the subsequent distribution of the royalty interests from Teddy Bear to its largest shareholder and creditor, Canadex.

SAS’s Position

[13] SAS submits that as a result of the Dissolution Agreement, Teddy Bear clearly transferred and granted its assets to Canadex. SAS argues that based on the wording of the 1992 Agreement, there was “a transfer” within the meaning of s. 9.02. Similarly, pursuant to the wording of the 2005 Agreement, there was “a grant” of a royalty interest. Accordingly, pursuant to the Agreements, SAS argues that Teddy Bear did not comply with the terms providing SAS with rights of first refusal. SAS submits that Canadex cannot be considered an “affiliate” of Teddy Bear so as to avoid the requirements of the Agreements. SAS further submits that it cannot be said that Teddy Bear amalgamated or merged with Canadex since the transaction between Teddy Bear and Canadex involved a dissolution, as opposed to a reorganization or sale.

The Respondents’ Position

[14] The Respondents submit that pursuant to the rights of first refusal found in the Agreements, Teddy Bear had essentially promised that if it received an offer from a third party to purchase the royalties that it was willing to accept, it had an obligation to notify SAS and provide it with an opportunity to purchase the royalties on the same terms and conditions. If SAS declined to do so, Teddy Bear could accept the third-party offer. Relying upon the decision of the Court of Appeal in Budget Car Rentals Toronto Ltd. v. Petro-Canada Inc. (1989), 1989 4148 (ON CA), 69 O.R. (2d) 289, the Respondents argue that five conditions precedent for the rights of first refusal are as follows:

(i) Teddy Bear was to receive a bona fide offer to purchase;

(ii) the offer had to relate to a royalty;

(iii) there had to be a price in the offer (as well as all other pertinent terms and conditions);

(iv) the offer had to be shown to SAS; and

(v) SAS was to be given 30 days to match the offer.

[15] The Respondents submit that none of the conditions precedent were met in this case since the dissolution did not result in Teddy Bear ever receiving an offer with respect to the two royalties in question. In this regard, the Respondents submit that the right of first refusal was not triggered by the distribution of Teddy Bear’s property to Canadex in the course of the dissolution. The Respondents submit that pursuant to ss. 237 and 238 of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.17 (the “OBCA”), Teddy Bear distributed assets to Canadex as required by law. Although there is not Canadian case law on point, the Respondents rely on the following two cases from the New York Supreme Court, Appellate Division: Midland Container Corp. v. Sophia Reality Corp., 65 A.D.2d 784, 410 N.Y.S.2d 638 (1978) and Kings Antiques Corp. v. Varsity Properties Inc., 121 A.D.2d 885, 503 N.Y.S.2d 575 (1986). In these cases, the court held that rights of first refusal were not triggered as part of a dissolution of a company or partnership.

analysis

[16] For the following reasons, I find that SAS’s rights of first refusal were violated when Teddy Bear failed to notify SAS of the proposed dissolution and provide it with the opportunity to purchase the royalties, as required by the Agreements.

[17] Blair J. (as he then was) provided the following useful synopsis in GATX Corp. v. Hawker Siddeley Canada Inc. (1997), 1996 8286 (ON SC), 27 B.L.R. (2d) 251, at paras. 38-39:

I find the following statement by Estey J., in Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co. (1979), 1979 10 (SCC), 112 D.L.R. (3d) 49 (S.C.C.) to be a useful guide in approaching the interpretation of the Right of First Refusal. Although made in the context of the interpretation of an insurance contract, the comments are of general application in the exercise of contractual interpretation, in my opinion, and I have taken the liberty of inserting – in square brackets – general contractual language where specific reference to the insurance context was made in the text. Estey J. said, at pp. 58-59:

… [T]he 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 [contract was made]. 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 [contract] 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 [one of the parties to obtain a benefit contracted for] nugatory, should be avoided.

The Supreme Court of Canada dealt with the nature of a right of first refusal in Canadian Long Island Petroleums Ltd. v. Irving Wire Products, 1974 190 (SCC), [1975] 2 S.C.R. 715. What was at issue in that case was a right of first refusal between two parties who each held a one-half interest in certain oil properties. In describing the substance of the right, Martland J. said, at p. 728:

This agreement was one which governed the joint operation and development of certain oil properties. Clause 13, which is the important clause under consideration in this case, was a part of that agreement. It was one of the conditions governing the joint ownership of the property. It was designed to protect the desire of each of the joint owners that it should not be forced into a joint ownership with another party against its will.

And at p. 735:

… As mentioned previously, the clause is a part of an agreement between joint owners of a property, governing the operation and development of it. In essence it is a negative covenant whereby each party agrees not to substitute a third party as a joint owner with the other, without permitting the other party the opportunity, by meeting the proposed terms of sale, to acquire full ownership.

[18] In my view, the dissolution of Teddy Bear and the transfer of its assets to Canadex triggered the right of first refusal clauses under the Agreements.

[19] The 1992 Agreement specifically provided that the right of first refusal would be triggered when Teddy Bear sought to “transfer” any portion of the NPI royalty. The 2005 Agreement triggered the right of first refusal when Teddy Bear sought to “grant” or otherwise dispose of the NSR royalty. This is what happened upon dissolution. There was clearly no amalgamation or merger between Teddy Bear and Canadex, which may have called into play the exception set out in s. 9.04 of the 1992 Agreement, and the Respondents did not advance any argument in this regard.

[20] I do not accept the Respondents’ submission that Teddy Bear had to receive an offer to purchase the royalties in order for its obligation to provide SAS with rights of first refusal to be triggered.

[21] I agree with SAS’s submission that the rights of first refusal clauses in the Agreements are broader than the clause in the Budget case (and for that matter the other case law relied on by the Respondents). Pursuant to the wording of the Agreements, an offer to Teddy Bear was not required for the right of first refusal to be triggered. Rather, there only needed to be a transfer (the 1992 Agreement) or a grant or other disposition (the 2005 Agreement). In order to transfer or grant the royalties, the Agreements required that Teddy Bear first provide SAS with the opportunity to purchase them. Teddy Bear failed to do so, and thus breached its obligations under the Agreements.

[22] To my mind, the construction that promotes the true intent of the parties in the broadly worded Agreements is that Teddy Bear could not seek to divest itself of the royalties without giving SAS the right of first refusal. The Respondents’ interpretation would bring about an unrealistic result that was not contemplated in the commercial atmosphere in which the contract was made, and would run afoul of the decision in Consolidated Bathurst. I agree with SAS that based on the wording of the Agreements, it was not when an offer to purchase was made, but rather when Teddy Bear sought to dispose of the royalties, that the obligation to provide SAS with a right of first refusal under both Agreements was triggered. Interpreting the clauses otherwise would artificially avoid the parties’ intentions, as derived from the Agreements’ wording.

[23] I also do not accept the Respondents’ argument that Teddy Bear’s dissolution under ss. 237 and 238 of the OBCA did not trigger the rights of first refusal. In order to dissolve Teddy Bear, s. 238 required that Teddy Bear discharge itself of all of its debts and assets, which would have included the royalties. Moreover, at the May 2007 meeting, Teddy Bear’s shareholders resolved that Teddy Bear’s assets would be distributed to Canadex. By distributing the royalties to Canadex, I find that Teddy Bear effectively “transferred” or “granted” those royalties within the meaning of the Agreements.

[24] Further, I agree with SAS that the New York case law relied on by the Respondents is not of assistance in this case since the New York legislation in those cases required a corporation to wind up its affairs after dissolution, and not before as required by the OBCA. In any event, the New York case law merely concluded that dissolution did not constitute a “sale”, which is not in debate in this case given that the wording of the Agreements concerns “transfers” and “grants or other disposition(s)”.

[25] Lastly, I accept, and the Applicant concedes, that neither Teddy Bear nor Parkview (or its predecessors) were engaged in any form of inappropriate conduct when Teddy Bear was dissolved. Rather, it seems that no one turned their minds to SAS’s rights of first refusal because no value was attached to the royalties in question. It was not until after it was determined that the royalties had some value that the issue was revisited.

disposition

[26] For the reasons above, I therefore grant SAS’s application. I find that its rights of first refusal were violated by Teddy Bear’s failure to notify SAS of the proposed dissolution in accordance with the provisions of the Agreements, and to provide it with an opportunity to acquire the royalty interests in accordance with the terms of the Agreements.

[27] Having made this finding, the issue of proper remedy arises. I agree with SAS that the most practical solution is a declaration that the royalty obligations under the Agreements are no longer enforceable against SAS or its successors, as well as an injunction restraining the Respondents from enforcing or attempting to enforce the royalties under the Agreements. This is a simpler and more expeditious remedy than ordering specific performance and requiring the conveyance of Teddy Bear’s former rights under the Agreements. The Respondents did not oppose these remedies in their submissions.

[28] As agreed by the parties there should be no order as to costs.

T. McEwen J.

Released: April 17, 2014