FlexITy Solutions Inc. v. Sotirakos, 2014 ONSC 2308

Court File and Parties

COURT FILE NO.: CV-13-10251-00CL

DATE: 20140606

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

FLEXITY SOLUTIONS INC.

Plaintiff

– and –

TOULA SOTIRAKOS

Defendant

AND BETWEEN:

TOULA SOTIRAKOS

Plaintiff by Counterclaim

– and –

FLEXITY SOLUTIONS INC., PETER STAVROPOOULOS, JOANNA STAVROPOULOS and RON STEWART

Defendants to the Counterclaim

Counsel:

Kelly Friedman, for the Plaintiff/Defendants to the Counterclaim

William Dunlop, for the Defendant/Plaintiff by Counterclaim

HEARD: April 1, 2014

REASONS FOR DECISION

T. MCEWEN J.

1The Defendant/Plaintiff by Counterclaim, Toula Sotirakos (“Sotirakos”), brings a motion seeking certain declarations with respect to her status as a shareholder and director of the Plaintiff/Defendant by Counterclaim, FlexITy Solutions Inc. (“FlexITy”).

2FlexITy brings a cross-motion seeking declarations to the effect that Sotirakos has ceased to be a director of FlexITy, and that Sotirakos and the Sotirakos-Benakis Family Trust (the “Trust”) have ceased to be shareholders of FlexITy.

3Sotirakos was the Chief Financial Officer of FlexITy until she was dismissed without cause on November 16, 2010. At the time of her dismissal, Sotirakos and the Trust owned 8% of the Class A Shares in FlexITy. The Amended and Restated Unanimous Shareholder Agreement (the “USA”), executed September 19, 2008, provided that Sotirakos could be dismissed without cause. It thereafter established a mechanism for FlexITy’s other shareholders to exercise an option to purchase the shares of Sotirakos and the Trust, and for the resignation of Sotirakos as a director of FlexITy.

4The remaining shareholders of FlexITy exercised the option on March 25, 2011. The closing for the sale of the shares as mandated by the USA had to occur within 60 days of the delivery of the Notice of Exercise of Option. The transaction, however, has not closed because of ongoing disputes between the parties. Sotirakos and the Trust have not received monies for their shares from FlexITy.

THE RELEVANT PROVISIONS OF THE USA

5There is no dispute that Sotirakos was FlexITy’s Chief Financial Officer, or that she and the Trust owned 8% of the Class A Common Shares. Those portions of the USA therefore need not be reproduced here.

6With respect to Sotirakos’ termination and the resulting exercise of the option to purchase the Class A shares, the following portions of the USA are relevant:

6.7 Purchase on Bankruptcy, Default, or Disability.

In the event that any Principal or Shareholder: …

(d) the Company terminates without cause the employment of Sotirakos;

(hereinafter referred to in this Section 6 as the “Selling Party”)

the other Class A Shareholders or, at the option of such Class A Shareholders, the Company (hereinafter referred to in this Section 6 as the “Purchasing Group”) shall for the period of one hundred eighty (180) days after actual knowledge of the occurrence of any of the above-mentioned events, have the irrevocable option to purchase all the Securities (hereinafter referred to in this Section 6 as the “Optioned Securities”) owned by the Selling Party. The purchase price (hereinafter referred to in this Section 6 as the “Purchase Price”) shall be determined pursuant to Section 6.8 and payable pursuant to Section 6.9 hereof in accordance with Schedule 6.7. If there is more than one Purchasing Group, then Sotirakos, Stewart and Stavropoulos or their respective Group shall have the right to purchase the Optioned Securities pro rata to their respective ownership of shares in the Company.

The said option shall be exercised by the Purchasing Group giving notice in writing to the Selling Party indicating their intention to exercise such option. The said option may be exercised only in respect of all but not less than all of the said Securities of the Company which are owned directly or indirectly by such Selling Party at the time of such exercise and shall be on a pro rata basis as set out in Schedule 6.7 hereto. Any option hereunder is subject to the condition that unless it is exercised by the Purchasing Group within the said period of one hundred eighty (180) days after actual knowledge of the occurrence of the relevant event, such option shall thereupon become null and void.

6.8 Valuation. Subject to this Section 6.8, the purchase price payable for Securities to be transferred at a price determined pursuant to this Section 6.8 shall be equal to the aggregate value of such Securities determined, as at the relevant time, in accordance with the principle of valuation set forth in Schedule 6.8. In the case of any event described in Sections 6.7(a) and 6.7(b) the Purchase Price shall be reduced by fifty per cent (50%).

(b) is dismissed by the Company without cause the purchase price payable for Securities to be transferred at a price determined pursuant to this Section 6.8 shall be equal to the aggregate value of such Securities determined, as at the relevant time, in accordance with the principles of valuation set forth in Schedule 6.8.

6.9 Payment of Purchase Price.

In the event of a sale of Securities pursuant to Section 6.7 hereof, unless other terms of sale are agreed to by the Shareholders, the Approved Lenders and the Company, the terms of any sale thereunder shall require that the purchase price shall be paid in sixty (60) equal monthly instalments, the first of which shall be payable one month following said closing and thereafter on a monthly basis until the purchase price has been paid in full. The instalments of the purchase price shall bear interest on the outstanding balance from time to time, at the rate equal to the Prime Rate plus one per cent (1%), from time to time, compounded annually, not in advance, both before and after default, and interest will be payable on the dates the principal instalments on the unpaid balance of the purchase price plus accrued interest may be prepaid at any time and from time to time without notice or bonus. Any outstanding balance of the purchase price must be paid in full in the event of a Liquidity Event.

7. Arrangements Relating to Dispositions

7.1 Closing. Any Transfer pursuant to the provisions of this Agreement shall be completed at the registered office of the Company at 11:00 o’clock a.m. (local time in Toronto) on the date determined for closing. Unless otherwise provided, closing shall be on a date which is the 60th day after the notice of Transfer, notice of sale or notice of election, as the case may be, is given, or at such other time and place as may be agreed by the parties to such transaction (but even if a different closing time is chosen, time shall remain of the essence). If a sale of Securities pursuant to this Agreement cannot be completed within the time limits specified in this Agreement in respect thereof only because some requisite regulatory approval has not been obtained, and if the parties are cooperating in good faith and using all reasonable efforts to obtain such approval as quickly as possible, the relevant time limit shall be extended for a reasonable period to permit such approval to be obtained.

7.2 Security. If pursuant to any of the provisions hereof an unpaid balance shall be owing to a seller of Securities (the “Seller”), the following provisions shall apply: …

(d) unless and until the security hereby constituted shall become enforceable, the Purchaser shall be entitled to exercise all voting rights with respect to the sold Securities; and,

7.4 Deliveries on Closing. For purposes of this Section 7.4, “transferor” shall include the Shareholder and applicable Approved Lender. At the closing time:

(a) The transferor shall deliver to the transferee, transferees or Escrow Agent, as the case may be, certificates or other documents of title evidencing ownership of the Securities being transferred duly endorsed in blank for Transfer, or accompanied by irrevocable powers of attorney duly executed in blank, in either case by the holders of record thereof. In addition the transferor shall deliver up to the transferee, transferees or Escrow Agent all accounts, records and other documents in its possession belonging to the Company and shall execute and deliver to the transferee, transferees or the escrow Agent, as the case may be, all such instruments as may reasonably be required to give effect to the Transfer.

(b) Subject to Section 7.5, the transferee or transferees shall pay to the transferor the purchase price in cash or by cheque or cheques certified by a Canadian chartered bank payable to the order of the transferor at par or, pursuant to Section 6.10, by delivery of promissory note representing all or part of the purchase price, as the case may be.

(c) The transferor shall deliver to the Company the resignation of its nominee as a director and, if applicable, officer of the Company, all to be effective no later than the time of delivery.

(d) Subject to Section 6.2, the transferor and the Company shall deliver mutual releases of all or any claims which the transferor may have against the Company and which the Company may have against the transferor.

(e) The transferor shall have either provided the transferee with evidence reasonably satisfactory to the transferee that the transferor is not then a “non-resident” of Canada within the meaning of the Tax Act or successor legislation then in force and effect or provide the transferee with a certificate pursuant to Section 116 of the Tax Act (or such substituted or amended provisions therefor); provided that if such evidence or certificate is not forthcoming, the transferee shall be entitled to make the payment of tax required under Section 116 of the Tax Act (or such substituted or amended provisions therefor) and to deduct the amount of such payment from the purchase price for the Securities, with the amount so deducted to reduce that part of the purchase price payable at the time of closing and, to the extent of any amount remaining thereafter, to reduce subsequent payments on account of the purchase price in order of maturity.

(f) Evidence that the transferee is not a non-Canadian for Investment Canada Act purposes or alternatively compliance with Section 7.9.

7.5 Default of Delivery. If the transferor is not present at the closing time at the place determined for closing, or is present but for any reason fails to produce and deliver to the transferee, transferees or Escrow Agent, in the manner prescribed by Section 7.4, the certificate or certificates representing any of the securities being transferred, then the cash purchase price or promissory note, as and when payable hereunder, shall be deposited by the transferee or transferees into a special account in the name of the Company at a branch of the Company’s bankers, and any promissory notes permitted or required to be delivered in satisfaction of the purchase price shall be deposited with the Company. Such deposits shall constitute valid and effective payment to the transferor of the purchase price of the Securities being transferred, even though the transferor may have voluntarily encumbered or purported to have disposed of any of the Securities being transferred and notwithstanding that one or more certificates or other evidence of ownership of the said Securities may have been delivered to any other person. From and after the date of such deposits (even though the certificates representing such Securities have not been delivered to the transferee or transferees), the Transfer of the Securities shall be deemed to have been fully completed and all right, title, benefit and interest of the transferor in and to all such Securities, subject to Section 7.2, both at law and in equity, shall be conclusively deemed to have been transferred and assigned to and become vested in the transferee or transferees.

ANALYSIS

7For the reasons below, I find that the delivery of the Notice of Exercise of Option to Sotirakos and the Trust did not cause them to cease to be shareholders of FlexITy, nor did it result in Sotirakos ceasing to be a director of FlexITy.

8Both sides accused the other of having ulterior motives and agendas with respect to whether Sotirakos and the Trust remain as shareholders and Sotirakos as director. In my view, however, the answer to these issues lies in the wording of the USA.

9The aforementioned sections establish a mechanism by which Class A shares are transferred and by which Sotirakos resigns as director. It commences at section 6.7 with respect to the exercise of the option. Section 6.8 sets forth the valuation and section 6.9 clarifies the payment of the purchase price, which is to be made over a 60-month period.

10Thereafter, in my view, the critical sections are 7.1 and 7.4, which deal with Arrangements Relating to Dispositions and Deliveries on Closing. Section 7.1 provides that the closing date shall be 60 days after the notice of the election (in this case, the closing date did not occur given the conflict between the parties). Section 7.4 stipulates that at the closing time, the following steps are to take place: (a) Sotirakos and the Trust shall deliver to the Class A shareholders the shares; (b) the Class A shareholders shall begin the stream of payments; (c) Sotirakos shall resign as director; and (d) mutual releases will be delivered. Clauses (e) and (f) refer to other administrative obligations that are of no import. Section 7.5 provides a mechanism to address any default with respect to closing or the subsequent required payments.

11A plain reading of the above sections leads to the conclusion that Sotirakos and the Trust remain as shareholders until closing, and that Sotirakos remains a director until closing.

12Nothing in the USA speaks of a beneficial transfer, or of any other transfer of the Class A shares, or that Sotirakos resigns as a director, prior to the closing date. In my view, this is reasonable since, if there was a transfer of shares upon delivery of the Notice of Exercise of Option, but then no monies were paid until closing, it would put Sotirakos and the Trust in the difficult and unenviable position of not having any participation in FlexITy’s operations so as to protect their investment. Furthermore, it would also expose Sotirakos, as a director, to various liabilities between the date of exercise of the option and the closing date, which liabilities are set out in various Acts, including the Income Tax Act, R.S.C. 1985, c. 1, Employment Insurance Act, S.C. 1996, c. 23 and Excise Tax Act, R.S.C. 1985, c. E-15.

13In its submissions, FlexITy agreed to indemnify Sotirakos for any liabilities she might incur as a director or shareholder. It further submitted that, in reality, there is nothing at risk given the current status of the company. In my view, the issues of indemnity and risk are immaterial. Such issues should not affect the analysis as to whether Sotirakos and the Trust remain shareholders and whether Sotirakos remains a director.

14Similarly, I do not find merit in FlexITy’s alternative submission that, should Sotirakos remain as a director and shareholder, she be denied access to corporate documentation since her motivation is to gain an upper hand in the ongoing litigation against FlexITy. As noted, both sides have made disparaging comments about the other’s motivations in pursuing the various proceedings and the within motion and cross-motion. While it may be that FlexITy is uncomfortable with Sotirakos having ongoing access to information, the plain wording of the USA allows her to remain a shareholder and director until closing. The USA also provides that FlexITy’s corporate make-up does not allow Sotirakos to engage in any mischief that could upset its usual business operations, nor have any concrete allegations been made by FlexITy in this regard. In fact, to date, Sotirakos continues to receive certain corporate documentation and attend at meetings.

15I further find that the case law relied upon by FlexITy is distinguishable. From my reading of the cases, Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada, 1995 CanLII 87 (SCC), [1995] 2 S.C.R. 187 and Sudbrook Trading Estate Ltd. v. Eggleton, [1983] 1 A.C. 444 (H.L.) essentially stand for the proposition that a Notice of Exercise of Option (or a similar type of document) results in an enforceable contract. There is no dispute in the within case that there is an enforceable contract, but rather the issue is at what point in time do the Class A shares transfer and Sotirakos cease to be a director. In my view, the plain wording of the USA, particularly sections 7.1 and 7.2, provide that this occurs upon closing. Since the steps required for closing were not fulfilled, the deal cannot be said to have closed. In any event, neither Mitsui nor Sudbrook involved a USA governing a transfer of shares from one party to the other.

16Although Somar v. Premier Corrosion Protection Services Inc., [2003] O.J. No. 17 (S.C.) is more analogous to the present case than Mitsui and Sudbrook, it can also be distinguished. In Somar, Herold J. found that Somar ceased to be a shareholder the day Premier exercised its option to purchase Somar’s shares. The terms of the share sale agreement in that case are not reproduced in the decision. As a result, it is unknown whether the agreement had provisions similar to sections 7.1 and 7.4 of the USA in this case. In any event, it appears from the decision that the agreement required Somar to indicate if he did not intend to sell his shares, which he failed to do. Moreover, Premier provided Somar with cheques in consideration for his shares. As noted, neither Sotirakos nor the Trust has received any compensation for the Class A shares, as required under the USA. Given that the terms of the agreement in Somar are unknown, and that Premier delivered monies to Somar, as it was required to do under their agreement, the decision in Somar is of limited assistance and distinguishable from this case.

DISPOSITION

17The parties agreed that the declaratory relief sought by each was the proper way to proceed. Since Sotirakos was successful at the motion, she is entitled to the following declarations:

1. A declaration that the Defendant and Plaintiff by Counterclaim, Toula Sotirakos, is a shareholder of FlexITy Solutions Inc. (“FlexITy”), holding at least three (3) percent of the Class A Shares;

2. A Declaration that the Sotirakos-Benakis Family Trust (the “Trust”) is a shareholder of FlexITy, holding at least five (5) percent of the Class A Shares;

3. A Declaration that the delivery on March 25, 2011, by FlexITy/the other Class A Shareholders, of a Notice of Exercise of Option to purchase the shares held by Ms. Sotirakos and the Trust (the “Notice”), did not result in Ms. Sotirakos losing her position as a shareholder in FlexITy;

4. A Declaration that the delivery on March 25, 2011, by FlexITy/the other Class A Shareholders, of the Notice, did not result in the Trust losing its position as a shareholder in FlexITy;

5. A Declaration that the Defendant and Plaintiff by Counterclaim, Toula Sotirakos, is a director of FlexITy; and

6. A Declaration that the delivery on March 25, 2011, by FlexITy/the other Class A Shareholders, of the Notice, did not result in Ms. Sotirakos losing her position as director in FlexITy.

18With respect to orders concerning production, FlexITy is ordered to comply with s. 20 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44. As a director, Sotirakos is entitled to inspect the records set out in s. 20.

19I further order that FlexITy provide Sotirakos with copies of the financial statements for the year 2012, financial statements for the year ends 2012-2013, corporate tax records for the year ends 2013-2013 and monthly and quarterly financial statements for 2014 as set out in her Notice of Motion.

20Sotirakos did not seek production of any other documentation in her Notice of Motion, but sought further production based on the decision of the Alberta Court of Queen’s Bench in Tyler v. Envacon Inc., 2012 ABQB 631. Since this documentation was not sought in the Notice of Motion, I do not grant it at this time. Sotirakos may renew her motion for further productions and I will hear any further motions in my capacity as the Case Management Judge. Sotirakos is entitled to her costs of the motion, which I fix at $15,000 inclusive.

T. McEwen J.