ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-14-10405-00CL
DATE: 20140630
BETWEEN:
NATALE REA, REA HOLDINGS INC. and EDWARD SORBARA
Plaintiffs
– and –
ROBERT WILDEBOER, NICK ORLANDO, FRED JAEKEL, ARMANDO PAGLIARI, SULEIMAN RASHID, R.A.M. CONTRACTING LIMITED, ROBERT MARZILLI, 1530309 ONTARIO LIMITED, MARTIN PATHAK and MARTINREA INTERNATIONAL INC.
Defendants
Jeremy Millard, for the Plaintiffs
Don Jack and Courtney Raphael, for the Defendants Martin Pathak and 1530309 Ontario Limited
HEARD: April 16, 2014
t. mcewen j
reasons for decision
introduction
[1] The Defendants, Martin Pathak and 1530309 Ontario Limited (the “Moving Parties”), bring this motion seeking an order striking out the Fresh as Amended Statement of Claim (the “Statement of Claim”) as against them only, without leave to amend. The Moving Parties submit that the Statement of Claim discloses no reasonable cause of action, or in the alternative, that it is scandalous, frivolous or vexatious and/or an abuse of process of this Court.
overview
[2] This action concerns alleged misconduct by directors and officers of Martinrea International Inc. (“Martinrea”) and their alleged accomplices. The Moving Parties are amongst the alleged accomplices. The allegations involve a number of transactions and other activities set out in the Statement of Claim and the Reply delivered by the Plaintiffs. Insofar as the Moving Parties are concerned, the allegations, amongst other things, involve claims that the Moving Parties knowingly participated, and aided and abetted directors and fiduciaries of Martinrea, in carrying out improper transactions involving several million dollars paid by Martinrea to the Defendant, 1530309 Ontario Limited.
[3] In order to understand the dispute between the parties it is important to understand the historical nature of the relationship between the Plaintiffs and Martinrea. Martinrea is a Canadian car parts manufacturer. The Plaintiff, Natale Rea (“Rea”), had previously developed a company, Rea International Inc. (“Rea International”), which was involved in a similar business. In 2002, Rea and the Defendant, Fred Jaekel (“Jaekel”), a principal of a company called Royal Laser Tech Corporation, merged their companies and certain affiliates and formed Martinrea.
[4] As part of the transaction, Rea and Rea International received over nine million shares in Martinrea. Rea also became a Board member of Martinrea and continued to participate in the business. Between 2002 and 2012, Rea’s shares constituted anywhere between approximately 12% and 17% of Martinrea’s outstanding shares. According to the Statement of Claim, in 2011 Rea became aware of alleged improper transactions. Martinrea’s Board was advised and an investigation was carried out, which Rea claims was a “white wash”. Disputes arose between Rea and other members of the board and certain fiduciaries. Ultimately, it progressed to the stage where, in June 2012, Rea left as Vice-Chairman and a director of Martinrea and sold all of his shares in Martinrea.
[5] The record does not disclose how many shares the Plaintiff Edward Sorbara (“Sorbara”) owned or continues to own in Martinrea. On April 2, 2014, Rea and Rea International subsequently acquired, and currently hold, 100,000 common shares in Martinrea. This represents approximately 0.1% of Martinrea’s total shares.
[6] The Plaintiffs seek certain orders and declaratory relief in the Statement of Claim. Insofar as damages are concerned, the Plaintiffs do not seek any monies on their own behalf but rather seek that the monies be disgorged and paid to Martinrea. The Plaintiffs also claim that the business affairs of Martinrea have been carried out in a manner that is oppressive, unfairly prejudicial to and which unfairly disregards their interests and the interests of other shareholders. They rely upon s. 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”).
position of the parties
Position of the Moving Parties
[7] The Moving Parties seek to strike out the Statement of Claim for the following three reasons:
(i) shareholders do not have a personal cause of action for wrongs done to Martinrea;
(ii) the within action is a derivative action that requires leave of the Court pursuant to s. 246 of the OBCA; and
(iii) the Statement of Claim contains bald allegations of fraudulent conduct, amongst other allegations, that do not meet the required standard of material fact disclosure.
Position of the Plaintiffs
[8] With respect to issues (i) and (ii), the Plaintiffs submit that an oppression claim can be made in the circumstances of this case where shareholders allege that directors have misappropriated corporate property. In this regard, the Plaintiffs primarily rely upon the Court of Appeal’s decision in Malata Group (HK) Ltd. v. Jung, 2008 ONCA 111, 89 O.R. (3d) 36.
[9] With respect to issue (iii), the Plaintiffs submit that the Statement of Claim contains sufficient particulars and, in any event, the Reply that they delivered with the Statement of Defence and Counterclaim against certain co-defendants provides sufficient particularity. Furthermore, the Plaintiffs point out that the Moving Parties have not sought any particulars by way of a Demand for Particulars, that none of the other Defendants have brought a motion to strike, and that all Defendants have delivered pleadings except for two, who have delivered a Demand for Particulars.
analysis
Issues (i) and (ii): Does the Statement of Claim Disclose a Reasonable Cause of Action?
[10] The Moving Parties submit that the Plaintiffs seek relief not for themselves, but rather for Martinrea. The Moving Parties claim that this is therefore an improper oppression claim against them since they were never officers, directors or insiders of Martinrea, nor did they direct its affairs. The Moving Parties submit that the Statement of Claim therefore seeks to avoid the necessity of obtaining leave to commence a derivative action against them pursuant to s. 246 of the OBCA. The Moving Parties rely upon a string of cases commencing with the well-known English decision of Foss v. Harbottle (1843), 67 E.R. 189. In Hercules Management Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, the Supreme Court of Canada explained the rule in Foss v. Harbottle as follows, at para. 59:
The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action.
[11] The Moving Parties submit that the rule in Foss v. Harbottle highlights an important distinction between oppression claims brought pursuant to s. 248 of the OBCA and derivative actions brought pursuant to s. 246 of the OBCA. In this regard, the Moving Parties stress that an oppression claim is a personal claim while a derivative action is one brought on behalf of the company for damages sustained by the company. They further submit that the rule in Foss v. Harbottle aims to avoid multiple lawsuits suits by shareholders suing for losses suffered by the corporation: Meditrust Healthcare Inc. v. Shoppers Drug Mart, 2002 41710 (ON CA), 61 O.R. (3d) 786 (C.A.).
[12] The Moving Parties also rely upon a number of other cases that have made similar findings: Goldex Mines Ltd. v. Revill, 1974 433 (ON CA), 7 O.R. (2d) 216 (C.A.); and Hoet v. Vogel, [1995] B.C.J. No. 621 (S.C.). They also rely upon an article prepared by Jeffrey G. McIntosh, “The Oppression Remedy: Personal or Derivative?” (1991) 70 Can. Bar. Rev. 29.
[13] The Moving Parties concede that there has been some relaxation for the leave requirement when oppression remedies are also sought, but submit that this only applies with respect to closely-held corporations. They rely upon the following observations of Armstrong J.A. in Malata, at paras. 38-39:
It is important in my view that in this case, we have a closely held corporation … In disputes involving closely held companies with relatively few shareholders … there is less reason to require the plaintiff to seek leave of the court. The small number of shareholders minimizes the risk of frivolous lawsuits against the corporation, thus weakening the main rationale for requiring a claim to proceed as a derivative action.
[14] The Moving Parties submit that the Malata decision therefore has no application in this case since Martinrea is a large, publicly traded corporation, and because the Statement of Claim raises the prospect of a multiplicity of proceedings. Accordingly, it should be struck and the action dismissed.
[15] The Plaintiffs, on the other hand, submit that Malata is in fact a watershed decision with respect to the issue of the overlap between oppression claims and derivative actions. They rightfully point out that the Moving Parties rely on cases that do not involve oppression, including Royal Bank of Canada v. Batra, 2004 26625 (Ont. S.C.) and Meditrust.
[16] The Plaintiffs further submit that Malata does not stand for the proposition that there must be a closely-held corporation for the claims advanced by the Plaintiffs to be brought under the oppression remedy section of the OBCA. In this regard, the Plaintiffs rely upon Buccilli v. Pillitteri, 2012 ONSC 6624, aff’d 2014 ONCA 432, wherein Newbould J. considered Malata and stated, at para. 190, that “[i]t is accepted that s. 248 is broad enough to support an action by an aggrieved shareholder which amounts a derivative action.”
[17] The Plaintiffs also point to Icahn Partners LP v. Lions Gate Entertainment Corp., 2011 BCCA 228, 333 D.L.R. (4th) 257, in which the British Columbia Court of Appeal questioned, at para. 72, whether derivative and oppression claims might be “collapsed into one category.”
[18] Based on the above, the Plaintiffs submit that although the within case does not involve a closely-held corporation, but rather a large publicly traded company, the rationale from Malata applies and the case ought to be allowed to proceed as an oppression claim. The Plaintiffs point to the fact that Rea had very close ties to the company as a Vice-Chairman, a director and a significant shareholder. They say he was integral in the creation of the company and its growth before leaving the company. As a result, they submit that the Plaintiffs are the appropriate persons to bring the claim. They further submit that the facts of this case, and the fact that the Plaintiffs are bringing the within action, do not suggest that there will be any threat of a multiplicity of proceedings and indeed, to-date, there has not been.
[19] For the reasons below, it is my view that an order ought to be granted striking the Statement of Claim without prejudice to the Plaintiffs’ right to apply to the Court for leave to bring an action pursuant to s. 246 of the OBCA.
[20] First, I do accept that where oppression is found, and other defendants have knowingly received benefits as a result of the oppression, a remedy against that party for accepting the benefits rectifies the oppressive actions: Holden v. Infolink Technologies Ltd., [2006] O.J. No. 638 (S.C.), aff’d [2007] O.J. No. 272 (Div. Ct.).
[21] On the other hand, it is my view that the Court of Appeal’s decision in Malata is distinguishable from the within case. As noted, in Malata, Justice Armstrong stated that in his view, it was important that the corporation at issue was closely-held. This statement, the latest appellate guidance on the issue of derivative actions versus oppression claims, cannot be ignored. I further note that the corporation in Buccilli was closely-held. Moreover, the British Columbia Court of Appeal’s comments in Icahn were in obiter, and in any event, only stated that whether derivative actions and oppression claims have been collapsed “remains to be seen”: see para. 72.
[22] Martinrea is not a closely-held private company with relatively few shareholders, as was the situation in Malata. Instead, Martinrea is a large, publicly-held company in which the Plaintiffs currently own few shares. This being the case, it cannot be argued, as it was in Malata, that the risk of frivolous lawsuits or a multiplicity of proceedings is minimal. Accordingly, the rationale requiring this claim to proceed as a derivative action remains intact.
[23] Further, the Plaintiffs’ argument that no other lawsuits have been commenced to date, in my view, is of little significance and would be of little comfort to the Moving Parties going forward. This is particularly so in light of the fact that the Statement of Claim alleges that all Martinrea shareholders have suffered significant damage. There is no way of determining whether other actions may or may not be commenced if leave is not required.
[24] The Plaintiffs also stress the fact that only the Moving Parties seek to strike the claim on the basis that leave is required. It is my view that this too, is of little significance. It is unknown whether the co-Defendants, Robert Marzilli or R.A.M. Contracting Limited, may bring a similar motion, or whether the Defendants who have already delivered Statements of Defence could attempt to pursue such a requirement pursuant to rule 21.01. In any event, the fact that the co-Defendants have not and may not pursue the same relief does not affect the analysis above, nor should it prejudice the Moving Parties’ position.
Issue (iii): Does the Statement of Claim Lack Sufficient Particularity?
[25] In the event that I am in error with respect to the above analysis, I will go on to consider whether the Statement of Claim lacks sufficient particularity.
[26] In the Statement of Claim the Plaintiffs allege that the improper transaction involving the Moving Parties are as follows:
(a) the sale of used equipment by Pathak through IM[1] to Martinrea, during the period from in or about 2002 to the present time, at prices substantially in excess of fair market value, on terms that were not reasonable and fair to Martinrea, and for which the Participating Fiduciaries received improper and/or secret commissions and payments or other benefits.
[27] Thereafter, the Statement of Claim contains further general allegations concerning the used equipment.
[28] In the Plaintiffs’ Reply and Defence to Counterclaim to the Statement of Defence and Counterclaim of the co-Defendants, Robert Wildeboer, Armando Pagliari, Suleiman Rashid and Martinrea (the “Reply”), the Plaintiffs provide much greater detail concerning their claims against the Defendants, including the Moving Parties. In this regard, the Reply provides as follows:
Rashid Report
In their Statement of Defence, the Wildeboer Defendants allege that the Board has dealt with prior serious allegations of impropriety, which were received by it starting in at least 2011 separately both from one of Martinrea’s then largest institutional shareholders and from Rea, “with the appropriate seriousness”. This is not true. The self-described “preliminary review” conducted by Rashid into these allegations, and the written report dated September 26, 2011 prepared by Rashid and delivered to Wildeboer summarizing this preliminary review (the “Rashid Report”), were a whitewash.
Rashid’s “preliminary review” arose out of “serious allegations against high ranked executives with respect to transactions conducted” by Martinrea with the defendant RAM, the defendant 1530309 Ontario Limited c.o.b. as International Machinery (“IM”) and with Steelmatic Wire Inc. (“Steelmatic”). The essence of these allegations was that at least Jaekel and Orlando, and potentially other executives at Martinrea, were receiving secret personal benefits from RAM, at Martinrea’s expense, and secret kickbacks and other benefits, directly or indirectly, from IM and Steelmatic.
The Rashid Report summarizes the enquiries conducted by Rashid in respect of IM, which the Rashid Report states is owned by the defendant Martin Pathak (“Pathak”). As described in the Rashid Report, between 2006 and 2011, IM was paid approximately $47 million by Martinrea, primarily for used automotive equipment. There is no indication in the Rashid Report of the percentage of IM’s business that Martinrea represented during this period.
The central allegation that had been made regarding IM related to secret payments or kickbacks paid to Martinrea’s senior management. Nevertheless, Rashid did not conduct any examination or assessment into whether Jaekel, Orlando and/or other Martinrea executive received any secret or other payments or benefits, directly or indirectly, from IM or Pathak, or whether Martinrea received fair value for the $47 million it paid to IM.
The Rashid Report states that Pathak “shared with us his analysis of $22,000,000 worth of business he concluded with Martinrea. The analysis indicated that [IM] direct cost (material and labour) is 84% and the contribution margin is only 16%”. There is no mention in the Rashid Report of the other $25 million of business conducted by IM with Martinrea. Rashid appears to have relied upon Pathak’s statements alone, including Pathak’s own analysis as to his cost and contribution margin in relation to $22 million of the $47 million of business provided by Martinrea to IM.
Rashid did not conduct any investigation into how IM came to become a “preferred supplier” of Martinrea, or who at Martinrea directed approximately $47 million of business to IM between 2006 and 2011.
Significantly, although the Rashid Report states that Pathak offered to provide Martinrea with access to his books and records, there is no indication that Rashid ever obtained or reviewed those books and records.
[29] Although certainly not determinative of the issue, it is noteworthy that the Moving Parties are the only Defendants to have brought a motion to strike out the Statement of Claim on the basis that it lacks particularity. As noted, all other Defendants have delivered a Statement of Defence with the exception of co-Defendants Robert Marzilli and R.A.M. Contracting Limited, who have demanded particulars. The aforementioned Reply was delivered before this motion was brought by the Moving Parties.
[30] The pleadings form the foundation of any action. The purpose of pleadings is to define, with clarity and precision, the issues in dispute; to provide fair and proper notice to the other side of the case it has to meet; and to inform the Court as to what the precise matters are in issue. The opposing party has to be able to properly draft responsive materials. Furthermore, it is clear that rule 25.06(8) provides that where fraud, misrepresentation, breach of trust, malice or intent is alleged, the pleadings shall contain full particulars. I agree with the Moving Parties that the claim against them is akin to fraud and requires sufficient particularity. Such particularity is lacking in the Statement of Claim.
[31] I also agree with the Plaintiffs that particularity has been provided in the aforementioned Reply. The Plaintiffs admit, however, that the Reply does not form part of the pleadings as between the Plaintiffs and the Moving Parties. In the circumstances, it would be reasonable, to strike the Statement of Claim and grant leave to amend
[32] Lastly, although it was not in their factum, I should note that the Moving Parties argued in oral submissions that the claim ought to fail by virtue of the fact that in paragraph 1(f) of the Statement of Claim, it was alleged that the Moving Parties aided and abetted Participating Fiduciaries as defined in the claim. In my view, this submission does not have merit in light of the fact that the named Participating Fiduciaries also included some Directors of Martinrea and therefore were the proper basis for an oppression claim.
disposition
[33] For the reasons above, the motion is granted striking the Statement of Claim against the Moving Parties on a without prejudice basis to the Plaintiffs applying to the Court for leave to bring an action pursuant to s. 246 of the OBCA. Costs are payable by the Plaintiffs to the Moving Parties in the amount of $10,000 inclusive.
T. McEwen J.
Released: June 30, 2014
COURT FILE NO.: CV-14-10405-00CL
DATE: 20140630
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
NATALE REA, REA HOLDINGS INC. and EDWARD SORBARA
Plaintiffs
– and –
ROBERT WILDEBOER, NICK ORLANDO, FRED JAEKEL, ARMANDO PAGLIARI, SULEIMAN RASHID, R.A.M. CONTRACTING LIMITED, ROBERT MARZILLI, 1530309 ONTARIO LIMITED, MARTIN PATHAK and MARTINREA INTERNATIONAL INC.
Defendants
REASONS FOR DECISION
T. McEwen J.
Released: June 30, 2014
[1] IM is the moving party 1530309 Ontario Inc.