CITATION: Infinity v. Wega, 2015 ONSC 607
COURT FILE NO.: CV-10-9034-00CL
DATE: 20150202
ONTARIO
SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
BETWEEN:
Infinity Gold Mining Inc. and Shaloha Trading Corporation
Plaintiffs
– and –
Wega Mining AS and Avocet Mining PLC
Defendants
Peter W. G. Carey, for the Plaintiffs
Luis Sarabia and Bryan McLeese, for the Defendants
HEARD: January 12-16 and 19-22, 2015
REASONS FOR JUDGMENT
Conway J.
[1] The plaintiffs seek repayment of the $1 million they paid to Wega Mining AS (“Wega”) in connection with the proposed takeover of Merit Mining Corp. (“Merit”).
[2] The plaintiffs claim that the $1 million is an unenforceable penalty or, alternatively, that they are entitled to relief from forfeiture or, alternatively, that they are entitled to $1 million in damages for breach of contract.[^1]
[3] For the reasons that follow, the plaintiffs’ action is dismissed.
Background
[4] In 2009, Infinity Gold Mining Inc. (“Infinity”) was looking to invest in an “end stage” Canadian gold mining company – one that could be put into production relatively quickly. Mr. Heimowitz, the principal of Infinity, saw a good opportunity in Merit.
[5] Merit was a publicly traded mining company (on the TSX Venture Exchange) based in Vancouver. It had several mining sites and a modern mill, all in British Columbia.
[6] Merit’s financial situation was weak at the time. It had filed a proposal in bankruptcy in the fall of 2008. Its share trading volume was low. Its mill was not operating. However, Mr. Heimowitz thought the company had excellent potential and was significantly undervalued.
[7] In the summer of 2009, Mr. Heimowitz met with Fred Sveinson, the President and Chief Executive Officer of Merit, about a potential investment in Merit. By the end of the summer, Mr. Heimowitz was dealing directly with Wega, the largest shareholder of Merit.
[8] Wega is a Norwegian company that owned 58% of the shares of Merit, as well as a $3 million convertible debenture (the “Debenture”). Wega had acquired its interest in Merit in 2007 and originally had two directors on the board of Merit. By 2008, both of its directors had resigned as a result of disagreements between Wega and Merit management. Thereafter, Wega regarded Merit strictly as a financial investment.
[9] In mid-2009, Wega was acquired by Avocet Mining PLC (“Avocet”), an English mining company. Hans-Arne L’orange was the Chief Executive Officer of Wega. After the Avocet acquisition, he joined the management of Avocet as the Executive Vice-President of Business Development and Investor Relation.
[10] Following the acquisition, Avocet sought to divest itself of its non-core assets, including Wega’s investment in Merit. Mr. L’orange was the person at Avocet/Wega with primary responsibility for the Merit divestiture. By the end of the summer 2009, Mr. L'orange had met with a number of interested parties. He met with Mr. Heimowitz and started negotiating a potential acquisition by Infinity.
[11] Both Mr. L'orange and Mr. Heimowitz received advice from counsel that the deal had to be structured as a takeover bid.[^2] However, while Infinity had been trying to raise funds for the Merit deal, it did not yet have the financing in place to acquire the Wega shares or make a takeover bid.
[12] The deal was therefore structured to afford Infinity time to raise funds and to conduct due diligence. Mr. Heimowitz’s evidence is that he was not concerned with his ability to finance the deal and was confident that he could raise the money through his existing network of investors.
[13] After much negotiation, and involvement of counsel on both sides,[^3] Infinity, Avocet and Wega entered into a Share and Debt Purchase and Lock Up Agreement dated November 11, 2009 (the “Agreement”).
The Agreement
[14] The key terms of the Agreement are as follows:
(a) Infinity agreed to initially purchase 19.95% of the outstanding shares of Merit from Wega, in three tranches. This was structured to avoid triggering the takeover rules until Infinity had its financing;
(b) The price per share was $1.5871 ($0.4627 on a fully diluted basis);[^4]
(c) Payment for the initial shares was to be made in three installments:
• $250,000 on execution of the Agreement;
• $750,000 within 50 days of execution of the Agreement (December 31, 2009). However, Infinity was not required to pay the second and third instalments if it was not satisfied with the results of its due diligence; and
• $375,641 within 80 days of execution of the Agreement (February 1, 2010);
(d) On payment of each instalment, Avocet/Wega agreed to cause share certificates to be transferred to Infinity for the purchased shares in question;
(e) Subject to various conditions (including financing), Infinity agreed to make a takeover bid (the “Bid”) for all of the shares of Merit within 120 days of the Agreement (by March 11, 2010) and to acquire the Debenture from Wega. Wega agreed to tender its shares on the Bid;
(f) Wega’s shares in Merit were subject to a “hard lockup”. During the 120 day period, Avocet and Wega were prevented from dealing with Wega's shares without Infinity's consent. Further, if a higher offer for the Merit shares came along during the lockup period, the benefit of that higher offer belonged to Infinity, not Wega;
(g) If Infinity did not make any of the installment payments or did not start the Bid within the 120 day period, Wega had the option (the “Wega Option”) to repurchase the Wega shares that Infinity had already acquired, for the greater of (i) the consideration received by Wega, minus $1,000,000; and (ii) $1.00; and
(h) Avocet and Wega provided various covenants to protect Infinity’s interest during the lockup period. I will address those under the heading “Breach of Contract” below.
[15] The total sale price to Wega under the Agreement was $7 million – $4 million for its shares and $3 million for the Debenture.
[16] Infinity paid the first installment of $250,000 shortly after November 11, 2009. Mr. L'orange directed Merit to deliver a share certificate to Infinity. Merit directed Mr. L’orange to the transfer agent, Computershare Investor Services Inc. (“Computershare”). Mr. L'orange instructed Computershare to issue the certificate to Infinity. As explained below, no share certificates were ever delivered to the plaintiffs.
[17] On November 13, 2009, Mr. L'orange advised the board and management of Merit that Avocet and Wega had entered into the Agreement and asked them to work with Infinity during the due diligence period. On November 18, 2009, Mr. Sveinson sent an email to Mr. L'orange stating that while he was pleased that there was an offer, the board needed to review all aspects of it and to “consider other proposals that could be better for all stake holders than that proposed by Infinity”. Mr. L'orange explained that the Infinity offer was beneficial to all shareholders and recommended that the board and management work diligently with Infinity.
[18] Infinity continued its efforts to raise money from investors. The initial investor reactions, according to Mr. Heimowitz, were positive. However, by December 21, 2009, Infinity did not have a firm financing commitment for the Merit deal.
The Tianjin MOU
[19] On December 22, 2009, Merit announced that it had entered into a memorandum of understanding (the “Tianjin MOU”) with Tianjin Huakan Group Co. Ltd. (“Tianjin”) in which Tianjin would subscribe for 28 million shares of Merit at a subscription price of $15,500,000, in two tranches, at a share price of 50 cents per share for the first tranche and 67 cents per share for the second. The Tianjin deal was subject to Merit shareholder approval.
[20] Mr. L'orange testified that the Tianjin announcement came as a surprise to him. Mr. Heimowitz had sent him the press release and asked whether Avocet had agreed to the deal, since it would dilute Wega’s shareholding. Mr. L'orange responded that Avocet had not agreed to the deal and that under the Agreement, Avocet/Wega could not vote for the Tianjin MOU unless Infinity approved it. He noted that “it looks like you have already made money”, as the price per share under the Tianjin deal ($0.5658) was higher than that under the Infinity deal ($0.4627) (on a fully diluted basis). Mr. L'orange asked Mr. Heimowitz to tell him as soon as possible “how you want us to act”.
[21] Mr. Heimowitz called Mr. L'orange on December 23, 2009. Mr. Heimowitz testified that he requested Mr. L’orange to immediately shut down the Tianjin deal and issue a press release stating that Wega would not support the deal. Mr. L'orange denies that Mr. Heimowitz made this request. I will return to this phone call under “Factual Findings” below.
[22] On December 23, 2009, Mr. Heimowitz wrote to Li Kunpeng of Tianjin and proposed that Tianjin invest in Infinity’s deal to take over Merit pursuant to the Agreement, rather than subscribing for shares of Merit – he sought to convince Tianjin that Infinity’s deal was the better one. He told Mr. Kunpeng that if Tianjin was interested in moving forward, Infinity would need a non-refundable deposit of $750,000 paid to Avocet before December 30, 2009.
[23] Mr. Heimowitz also contacted his potential investors. He told them that the Tianjin deal valued Merit at 50% higher than Infinity’s valuation and that Infinity (or any partner he brought in) could benefit from the higher Tianjin offer, if he chose to accept it. All he needed was $750,000 by the end of December. He offered to contribute $180,000 worth of his own gold and silver so their net investment would be $570,000.
The Second Instalment and the Participation of Shaloha
[24] One of those investors was Albert Levy of Shaloha Trading Corp. (“Shaloha”), with whom Mr. Heimowitz had previously done business. Mr. Heimowitz wrote to Mr. Levy and told him about Infinity’s deal to acquire Merit and the Tianjin offer. He told Mr. Levy that if Shaloha invested $750,000 in the Infinity deal (with Mr. Heimowitz contributing $180,000), “I can take the higher offer (if I choose) and make an immediate $2 million for Infinity Gold, or any partner I choose to bring in”.
[25] Mr. Levy immediately agreed to partner in Infinity’s deal. He gave Mr. Heimowitz his lawyer’s contact information to review the documents.
[26] On December 30, 2009, Infinity and Shaloha entered into a share purchase agreement in which Infinity sold Shaloha 50% of the shares already acquired or to be acquired by Infinity under the Agreement (the “Share Purchase Agreement”). Infinity represented and warranted, among other things, that it owned the first tranche of shares and that, to the best of its knowledge, Avocet and Wega were not in breach of the Agreement.[^5]
[27] On December 30, 2009, Infinity, Avocet, Wega and Shaloha also signed a Share Restriction and Acknowledgment Agreement (the “Shaloha Restriction”), in which Avocet/Wega agreed to transfer the second tranche of shares directly into Shaloha’s name on payment of the $750,000. Shaloha agreed that it was familiar with the terms of the Agreement, specifically the Wega Option. It agreed to be bound by the Wega Option and to re-transfer its shares to Wega, on the terms set out in the Agreement, if that option was exercised. There was no reference to the Tianjin MOU in the Shaloha Restriction.
[28] Shaloha paid the second instalment of $750,000 to Wega on December 31, 2009 and Mr. Heimowitz contributed his $180,000 to Shaloha. Wega instructed Computershare to have a share certificate issued in Shaloha’s name.
The January 31st Email and the Extension Agreement
[29] Infinity continued its financing efforts in January 2010, both with its investor network and with Tianjin. Mr. Heimowitz knew that he needed to come up with the third instalment by February 1, 2010 but he had not been able to raise the money for that payment, either from his investors or Tianjin.
[30] On January 31, 2010, Mr. Heimowitz wrote a long and pleading email to Mr. L'orange. Mr. Heimowitz explained that he had not expected it would be so difficult to raise the financing for the Merit deal. He stated that investors saw that the takeover would be “hostile at best” and that the main reason he had been given was that investors were unwilling to pay $1.58 a share when Merit management only believed the stock to be worth 50 to 67 cents.[^6]
[31] Mr. Heimowitz told Mr. L'orange that he had been negotiating with Tianjin to finance the Infinity deal. He was trying to structure a deal in which everyone would win – Avocet/Wega would get the remaining $6 million under the Agreement, Tianjin would get its 50-67 cent price under the Tianjin MOU, and Infinity would get 20% of the Tianjin deal.
[32] Mr. Heimowitz told Mr. L'orange that he had convinced Tianjin and “they have agreed” to finance the remaining $6 million but that he needed more time to get Tianjin to sign a contract. He “humbly and respectfully” requested an extension to April 30, 2010 to pay the third instalment and start the Bid.
[33] Avocet/Wega agreed to grant the extension. According to Mr. L'orange, Avocet thought the Infinity deal was still in Avocet’s best interests and wanted it to proceed. He instructed his counsel to prepare the extension documents.
[34] On February 2, 2010, Mr. Heimowitz wrote to Tianjin and said that he had received the agreement of Avocet/Wega to support the Tianjin MOU. He asked Tianjin to confirm that the 80/20 partnership would proceed.
[35] On February 2, 2010, Avocet’s counsel sent draft extension documents to Infinity’s counsel, who then sent the documents to Mr. Levy. It appears that Mr. Levy consulted with his own counsel about the extension. Mr. L'orange wanted the documents signed and returned quickly as Infinity/Shaloha were already in default at that point.
[36] On February 3, 2010, Infinity, Shaloha, Avocet and Wega entered into the extension agreement (the “Extension Agreement”), in which Avocet/Wega granted the extension to April 30, 2010. All parties agreed to support the Tianjin deal on the terms set out in the Tianjin MOU and Infinity/Shaloha waived any breach of a covenant under the Agreement with respect to Avocet/Wega’s support of the Tianjin deal (the “Release”). Wega, Infinity and Shaloha also signed a letter to Merit expressing their support of the Tianjin deal and stating that they would vote in favour of it when Merit sought shareholder approval.
The Third Instalment and Exercise of the Wega Option
[37] It is not entirely clear what transpired after the Extension Agreement but Infinity never concluded a deal with Tianjin nor obtained any other financing.
[38] Infinity failed to make the third instalment or start the Bid by April 30, 2010.
[39] In May 2010, Merit repaid the Debenture. Wega subsequently sold its Merit shares for a total of $2 million.
[40] On July 27, 2010, Wega gave notice to Infinity and Shaloha that it intended to exercise the Wega Option and repurchase the first and second tranche shares for $1.00. Pursuant to the Agreement, Wega retained the $1 million that Infinity/Shaloha had paid in the first and second instalments.
Factual Findings
[41] There are two factual issues to be addressed.
The December 23rd Phone Call
[42] The plaintiffs seek to rely on an alleged promise by Mr. L'orange in the December 23rd phone call. Mr. Heimowitz testified that he asked Mr. L'orange to shut down the Tianjin deal and immediately issue a press release disavowing the deal. Mr. L'orange denied that he was asked to do so or that he ever gave any assurance to that effect.
[43] I prefer Mr. L'orange’s evidence. Mr. Heimowitz testified that this promise was critical to him, yet there is no reference to it in any of the emails he sent in December or January to anyone – in particular, to Mr. L'orange, to his investors or to Mr. Levy.
[44] Mr. Levy testified that he would not have invested $750,000 without this promise (relayed to him orally by Mr. Heimowitz), yet it appears nowhere in the two agreements signed on December 30th, after the Tianjin MOU had been announced. Given how critical both Mr. Heimowitz and Mr. Levy said this promise was to them, the size of the investment they were making, and the involvement of counsel, it is difficult to accept that if there had been a promise, the documents would not have referred to it (for example, as a representation or warranty, or a covenant, on the part of Avocet/Wega).
[45] Further, the alleged request and promise to shut down the Tianjin deal is inconsistent with Mr. Heimowitz’s emails to investors in December, including Mr. Levy, in which he sought to raise the $750,000 and stated that Infinity could make money from the higher Tianjin deal if Infinity chose to accept it. It is also inconsistent with Avocet’s internal documents showing that Mr. L'orange was waiting for instructions from Mr. Heimowitz with respect to the Tianjin deal.
[46] I find that there was no request made by Mr. Heimowitz to Mr. L'orange to shut down the Tianjin deal and issue a press release, nor any promise by Mr. L'orange to do so.
The Extension Agreement
[47] The plaintiffs testified that by the time the third instalment was due, their financing efforts had been “torpedoed” by Avocet’s failure to shut down the Tianjin deal. They requested the extension. They testified that they signed the Extension Agreement on the terms presented by Avocet (including the support of the Tianjin MOU and the Release) under duress, knowing that Avocet already had their $1 million and that they had no other choice.
[48] I reject the plaintiffs’ evidence. I find that Avocet granted the Extension Agreement directly in response to Mr. Heimowitz’s plea for more time in the January 31st email. The Extension Agreement included a clause supporting the Tianjin MOU because Mr. Heimowitz represented to Mr. L'orange that Tianjin had agreed in principle to finance the Infinity deal at the price set out in the Tianjin MOU. Mr. Heimowitz was clearly supportive of the Tianjin MOU at this point, as can be seen from his email to Tianjin on February 2, 2010, in which he wrote:
I believe I have received the agreement of Avocet/Wega to your MOU announced with Merit Mining. What this means is that Avocet/Wega will agree and give shareholder approval to Tianjin Huakan investing into Merit Mining Corp. at 50 cents and 67 cents [the price in the MOU].”[^7]
[49] I also find that the Extension Agreement included the Release to enable Avocet/Wega to vote in support of the Tianjin deal, as they otherwise would have been restricted from doing so under the terms of the Agreement. I reject the plaintiffs’ submission that Avocet/Wega were seeking a release to absolve themselves of any prior breach of the Agreement.
[50] Further, by the time the Extension Agreement was signed, the plaintiffs were in default. If Avocet/Wega had wanted the Tianjin deal to go ahead, they did not need the plaintiffs’ support. Wega was in a position to buy back the plaintiffs’ shares under the Wega Option and vote all of the Wega shares in favour of the Tianjin deal, without the plaintiffs. I reject the plaintiffs’ submission that Avocet/Wega coerced or pressured the plaintiffs into signing the Extension Agreement to obtain support for the Tianjin deal.[^8]
Breach of Contract
[51] The plaintiffs allege that Avocet/Wega fundamentally breached the Agreement when they (a) failed to issue the shares certificates as required under the Agreement; (b) failed to enclose the $1.00 payment on exercise of the Wega Option; and (c) failed to shut down the Tianjin deal after the Tianjin MOU was announced.
Share Certificates
[52] It is not disputed that Infinity and Shaloha never received share certificates for the first and second tranches of shares.
[53] After each of those purchases, Avocet/Wega initiated the process of transferring the share certificates. The delays were caused by logistical issues and requests from Computershare, all of which were attended to promptly by Avocet/Wega. I find that Avocet/Wega made reasonable commercial efforts to have the share certificates delivered to Infinity and Shaloha.
[54] Even if the failure to deliver the share certificates was a breach of the Agreement, it was a technical one at best, not a fundamental breach as alleged. At all times, the parties conducted themselves in a manner consistent with the plaintiffs having ownership of the shares. Indeed, Infinity sold the first tranche of shares to Shaloha and represented that Infinity owned the shares, even though it had not received the physical share certificates at that point. Infinity also issued press releases announcing its purchase of the first and second tranches.
[55] Further, if the failure to deliver the share certificates was a breach, the plaintiffs have not tendered any evidence that they suffered any damages as a result.
Payment of the $1.00
[56] It is unclear whether the $1.00 was sent with the letter exercising the Wega Option. Mr. L'orange sent the letter by email and facsimile and then gave it to his office for mailing. He did not know whether the $1.00 was included with the physical copy of the letter.
[57] This allegation was raised for the first time during discoveries, over two years after the action was commenced. When it was raised, Avocet/Wega, through their counsel, wrote to the plaintiffs’ counsel stating that Avocet/Wega believed that the $1.00 had been enclosed with the July 27, 2010 letter but that out of an abundance of caution and to account for the possibility that the funds did not make their way to Infinity, they were enclosing $1.00. The plaintiffs’ counsel immediately rejected and returned the payment.
[58] This allegation does not assist the plaintiffs. Even if the $1.00 was never enclosed with the original letter and was a breach of the Agreement, it does not invalidate the Wega Option. The plaintiffs’ claim would be for damages only. They have not tendered any evidence that they suffered damages as a result of the late payment of the $1.00.
Compliance with s. 4.1 Covenants
[59] The relevant portions of s. 4.1 of the Agreement are as follows:
Covenants of the Vendor and Avocet
Avocet and the Vendor [Wega] covenant and agree that from the date of this Agreement until the First Take Up Date [under the Bid] and, if applicable, the closing of the purchase by the Purchaser [Infinity] of the Debt, the Vendor:
(c) will take all reasonable actions within its power and control and use commercially reasonable efforts...so as to ensure compliance with all covenants…applicable to the Vendor and Avocet in respect of the consummation of the transactions contemplated hereby…;
(d) immediately advise the Purchaser of any Material Adverse Change in respect of Merit which it becomes aware of;
(e) it will issue all press releases and file all notices and other documents as may be required by applicable securities law or the TSX Venture Exchange in connection with its sale of the Purchased Assets and Lock Up Shares;
(f) in its capacity as a shareholder of Merit, it will not consent to, or vote in favour of any shareholders resolution approving, any transaction by which Merit issues any new convertible securities, shares, options for shares of Merit or warrants for shares of Merit…and it will inform the Purchaser of any proposal by Merit to do any of the foregoing that it may become aware of;
(g) in its capacity as a shareholder of Merit, it will not consent to, or vote in favour of any shareholders resolution approving, or enter into any agreement relating to, any Superior Bid or Superior Arrangement [a takeover bid or plan of arrangement that was more favourable than the Infinity Bid]…and will inform the Purchaser of any proposal by Merit to do same….; and
(h) they will not directly or indirectly solicit or encourage any other person to make or propose a Superior Bid or Superior Arrangement.
[60] The plaintiffs allege that Avocet/Wega breached these covenants by not shutting down the Tianjin MOU and issuing a press release disavowing it immediately after the announcement on December 22, 2009.
[61] There was no obligation on Avocet/Wega to do so.
[62] Section 4.1(f) required Avocet/Wega, in its capacity as a shareholder, not to vote in favour of any transaction that could dilute the Merit shareholders. It did not require Avocet/Wega to “shut down” the Tianjin MOU before the transaction was put to shareholders for approval, or to take any other action prior to that time (other than notify Infinity).[^9]
[63] Mr. L'orange immediately notified Infinity when he found out about the Tianjin MOU. He was well aware of Avocet/Wega’s contractual obligation not to vote in favour of the Tianjin share subscription, unless Infinity instructed otherwise. Wega only agreed that it would vote in favour of the Tianjin deal in February 2010, after Infinity/Shaloha had agreed to support it in the Extension Agreement. There was no breach of s. 4.1(f).
[64] The plaintiffs submit that Avocet and Wega were required to issue a press release denouncing the Tianjin MOU under s. 4.1(e). I disagree. Section 4.1(e) required Avocet/Wega to issue press releases required by securities laws with respect to their sale of the Merit shares (which they did). It did not require Avocet/Wega to issue a press release with respect to management’s announcement of the Tianjin MOU.
[65] In my view, none of the other covenants required Avocet/Wega to shut down the Tianjin MOU or issue a press release. Section 4.1(c) required that Avocet/Wega comply with the existing covenants in the Agreement and did not impose any additional covenants. Section 4.1(d) required that Avocet/Wega immediately advise Infinity of an Material Adverse Change – even if the Tianjin MOU can be regarded as such (which the plaintiffs did not argue), Avocet/Wega immediately advised Infinity when it was announced. Section 4.1(g) required that Avocet/Wega not vote in favour of a Superior Bid or Arrangement – the plaintiffs did not establish that the Tianjin MOU met that definition but in any event, Avocet/Wega did not vote in favour of the Tianjin MOU until they had the plaintiffs’ approval. Finally, there is no evidence that Avocet/Wega solicited or encouraged any other person to make a Superior Bid or Superior Arrangement.
[66] When Infinity entered into the Agreement, Mr. Heimowitz was aware that Avocet had no directors on the board of Merit.[^10] He also knew that Mr. Sveinson might take defensive action that could potentially dilute existing shareholders.[^11] Infinity protected against this risk by negotiating the specific covenants in the Agreement, primarily that Avocet/Wega, in its capacity as a shareholder, would not vote in favour of any transaction that could dilute the shareholders. If Mr. Heimowitz had wanted additional protection with respect to the board or management of Merit, he could have negotiated it at the time.
[67] Infinity now seeks to expand the scope of this protection beyond what was negotiated. There is no basis on which to re-write the terms agreed to by the parties.[^12]
Enforceability of the Wega Option
[68] The plaintiffs argue that the Wega Option is an unenforceable penalty or, in the alternative, that they are entitled to relief from forfeiture.
[69] The governing law is set out in the case of Peachtree II Associates – Dallas L.P. v. 857486 Ontario Ltd., 2005 CanLII 23216 (ON CA), [2005] O.J. No. 2749 (C.A.), as refined in Birch v. Union of Taxation Employees, Local 70030, 2008 ONCA 809, and can be summarized as follows (my emphasis added):
• the prohibition on the enforcement of penalty clauses is a common law rule whereas relief from forfeiture is rooted in equity (Peachtree, para. 22). While both doctrines have the effect of relieving the breaching party of the penal consequences of stipulated remedy clauses, in their traditional formulations they bear significant differences (Peachtree, para. 24);
• a stipulated damages clause is assessed at the time of formation to determine whether it is an unenforceable penalty, but a request for relief from forfeiture is considered at the time of breach (Peachtree, para. 24-25);
• the court first must determine whether the clause should be assessed from the perspective of the common law rule against penalty clauses or whether the plaintiff’s case amounts to a relief from forfeiture . If at all possible, a clause that could be considered either a forfeiture clause or a penalty clause should be treated as a forfeiture clause (Peachtree, para. 31);
• the essence of a penalty is a payment of money stipulated as in terrorem of the offending party. A forfeiture is the loss, by reason of some specified conduct, of a right, property, or money, often held as security or part payment of the obligation being enforced under the threat of forfeiture (Peachtree, para. 22);[^13]
• two things are necessary as prerequisites before a court may grant relief from forfeiture: the forfeiture clause must be of a penal nature, in the sense that the sum forfeited must be out of all proportion to the damage; and it must be unconscionable for the seller to retain the money (Peachtree, para. 25). The determination of unconscionability involves a two-part analysis – a finding of inequality of bargaining power and a finding that the terms of an agreement have a high degree of unfairness (Birch, para. 45);
• if the clause is not a forfeiture clause, it is still enforceable as a genuine pre-estimate of liquidated damages if the sum payable upon breach is not extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach of contract (Peachtree, para. 24).
[70] In my view, the Wega Option is properly characterized as a forfeiture clause and the plaintiffs’ claim as a request for relief from forfeiture. Infinity purchased an option to buy Wega’s interest in Merit. Infinity agreed to make the first two instalments ($1 million in total), on a non-refundable basis, in order to lock up Wega’s control block of shares while conducting its due diligence and raising its financing. If Infinity proceeded with the deal, it retained the Wega shares that it had paid for with the instalments. If Infinity did not proceed with the deal, Wega could repurchase the shares for $1.00 and Infinity would forfeit the $1 million. Infinity was not required to pay a sum of money if it defaulted under the Agreement. Rather, it forfeited the two instalments it had already paid.
[71] The Wega Option, characterized as a forfeiture clause, must be considered at the time of breach (April 30, 2010), to determine whether it was penal and unconscionable. I conclude that neither of those elements is present.
[72] With respect to the penal nature of the clause, the sum forfeited was not “out of all proportion to the damage”. Under the Agreement, Wega bore all of the risk of share price fluctuations during the lockup period. When Infinity defaulted, Wega sold its shares for an aggregate price of $2 million, one half of what Infinity had agreed to pay for the shares in the Agreement. Even with the retained $1 million, Wega received $1 million less than if Infinity had complied with the Agreement. There is nothing penal about the forfeiture under those circumstances. That alone is sufficient to defeat the plaintiffs’ claim for equitable relief.
[73] Even if I had found that the forfeiture clause was penal, I would not have considered it unconscionable for Wega to retain the $1 million. There was no inequality of bargaining power between the parties to the Agreement. Both Mr. Heimowitz and Mr. Levy are highly sophisticated and experienced businessmen. They were represented by counsel at all times. The Agreement was heavily negotiated. The Wega Option was specifically agreed to in both the Agreement and the Shaloha Restriction.
[74] There is also no unfairness in the Wega Option. The parties negotiated the allocation of risk during the lockup period. Wega was prevented from dealing with its control block while Infinity sought financing. It assumed the risk of any price fluctuations in a highly volatile market. The Wega Option permitted Avocet/Wega, on default, to reacquire Infinity’s shares so that it could keep its control block intact and remarket the shares at that time. If the price of the shares fell during the lockup period, Avocet/Wega bore that loss.
[75] Infinity, on the other hand, knew that it had a hard lockup on the Wega shares. It had a fixed price for the shares. It had the time to conduct its due diligence and raise its financing. It received the benefit of any higher offer for the Merit shares during that period. Infinity agreed to pay a price for this hard lockup – two non-refundable instalments totaling $1 million. Mr. Heimowitz took this calculated risk (initially for $250,000) because he thought he had found an undervalued company and was confident that he could obtain financing. He and Mr. Levy continued to assume this risk when they paid the $750,000 before their financing was in place (after Infinity had done its due diligence and after the Tianjin deal had been announced).
[76] As it turns out, their risk materialized and they were unable to raise the financing. In the end, Avocet/Wega reacquired the shares and suffered a loss that was only partially offset by the $1 million.
[77] Looking at the circumstances at the time of the breach, the plaintiffs have failed to prove that there was anything unfair in enforcing the deal they made.
[78] The plaintiffs are not entitled to relief from forfeiture.
Decision
[79] The plaintiffs’ claim is dismissed.
[80] If the parties are unable to agree on costs, I will receive brief submissions (no longer than 3 pages double spaced, exclusive of bill of costs). The defendants’ submissions shall be received within 15 days and the plaintiffs’ within 15 days thereafter.
Conway J.
Released: February 2, 2015
CITATION: Infinity v. Wega, 2015 ONSC 607
COURT FILE NO.: CV-10-9034-00CL
DATE: 20150202
ONTARIO
SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
BETWEEN:
Infinity Gold Mining Inc. and Shaloha Trading Corporation
Plaintiffs
– and –
Wega Mining AS and Avocet Mining PLC
Defendants
REASONS FOR JUDGMENT
Conway J.
Released: February 2, 2015
[^1]: The plaintiffs advised at trial that they were not pursuing their claims for unjust enrichment or specific performance.
[^2]: The reason was that the agreed price per share ($1.58) for the Wega shares was more than 115% of the trading price of Merit at the time (24ȼ).
[^3]: Infinity was represented by the law firm of Balfour Ross LLP. Avocet and Wega were represented by the firm Davies Ward Phillips & Vineberg LLP.
[^4]: There was a proposed restructuring of Merit at that time, in which the Merit debenture holders would convert their debt to equity. The Agreement therefore contemplated two alternatives – one in which the debt was converted and one in which the debt was not converted. In the former case, the number of outstanding shares of Merit would have been increased to 26,114,649 and the adjusted share price for the Merit shares would have been $0.4627. In the latter case, the number of outstanding shares of Merit remained at 4,344,729 (of which Wega owned 2,520,781) and the share price was $1.5871. It is undisputed that the debt conversion never took place.
[^5]: This is inconsistent with Infinity’s position at trial that Avocet and Wega were in breach of the Agreement at that time as they had not taken steps to immediately shut down the Tianjin deal.
[^6]: There was no evidence from potential investors as to the reasons they did not want to finance the deal. Mr. Heimowitz’s email suggests that there might have been other reasons – he mentions, for example, a rumour circulating that there was no gold in the project. He notes that investors in Canada did not want to touch it with a ten foot pole.
[^7]: Counsel for the plaintiffs also submits that the Extension Agreement was a sham because under s. 8, Infinity still had to pay $1.58 for Wega’s shares following the Tianjin deal even though it would be severely diluted at that point. I reject this submission. It is clear from the Extension Agreement that the $1.58 price ($3 million for the remaining Wega shares) was intended to give Wega its price pursuant to the Agreement as part of the deal Mr. Heimowitz was negotiating with Tianjin to make everyone happy – all consistent with what Mr. Heimowitz described to both Avocet/Wega and Tianjin in his emails of January 31st and February 2nd, respectively.
[^8]: The plaintiffs seek to invalidate the Release sections of the Extension Agreement on the basis of duress and unconscionability. Given my factual findings, there is no basis for any such claim.
[^9]: I reject the plaintiffs’ submission that Avocet/Wega were required to immediately call a shareholders meeting or to replace the board of Merit. Avocet/Wega were not required to take that action. What they were required to do was to vote against any such transaction when it was put to the shareholders for approval.
[^10]: Mr. Heimowitz seeks to rely on alleged assurances provided by Mr. L’orange during their negotiations with respect to Avocet’s ability to control the board of Merit. Mr. L’orange denies making any such assurances. None of this is relevant as the only protections negotiated by Infinity were the covenants in the Agreement (none of which impose any obligations on Avocet/Wega to take steps with respect to the board of Merit). Further, there is an entire agreement clause in the Agreement that supersedes any pre-contractual discussions.
[^11]: On November 3, 2009, Mr. Heimowitz wrote to Mr. L'orange “If Fred becomes aggresive [sic] and issues new shares, institutes a poison pill, or takes on more debt, you cannot legally stop it.”
[^12]: The plaintiffs alleged at trial (but did not plead) that Avocet/Wega acted in bad faith and/or failed to meet the duty of honesty in the performance of their contractual obligations. Mr. Heimowitz testified, among other things, that he believed Mr. L’orange had secretly colluded with Mr. Sveinson and/or Tianjin to support the Tianjin deal. In argument, plaintiffs’ counsel conceded that there was no basis for this allegation. I agree. Plaintiffs’ counsel did submit, however, that Avocet/Wega breached the duty of honesty (and misrepresented by omission, also not pleaded) by not forwarding to Mr. Heimowitz the November 18th email from Mr. Sveinson in which he told Mr. L’orange that if another proposal came along that could be better for all stake holders, the board would have to consider it. There was no breach of a duty by not disclosing this very general and basic statement to Mr. Heimowitz. This was also not a “proposal” that would trigger the disclosure obligation in s. 4.1(f).
The plaintiffs further submit that Avocet/Wega breached these duties when it did not forward an email from Mr. Sveinson to Mr. L'orange dated February 2nd that asked for Avocet’s support for the Tianjin MOU and referred to a meeting between Mr. Anderson and Mr. L'orange the previous week. I reject this submission. Mr. L'orange testified that Mr. Anderson, a broker he knew in the mining industry, had come to Mr. L'orange’s office on January 26, 2010 seeking support for the Tianjin MOU. Mr. L'orange testified that he had not known that Mr. Anderson represented Tianjin and once he discovered this, he told Mr. Anderson that Avocet/Wega was bound by the Agreement and would not support the Tianjin MOU without Infinity’s approval. Mr. L’orange likewise told Mr. Sveinson that Avocet would not approve the Tianjin MOU without Infinity’s approval. There was no breach of any duty in not forwarding Mr. Sveinson’s email to Mr. Heimowitz. Finally, I note that the duty of honesty does not impose a duty of disclosure on contracting parties: Bhasin v. Hrynew, 2014 SCC 71, at para. 73.
[^13]: These principles were recently applied by the Divisional Court in Jan Wong v. The Globe and Mail Inc., 2014 ONSC 6372, at para. 41-56.