CITATION: Locke v. Quast, 2016 ONSC 1873
COURT FILE NO.: CV-14-0520
DATE: 2016-03-16
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
ANDREW LOCKE and 1833340 ONTARIO LTD.
Applicants
- and -
UWE QUAST and LAKEHEAD IRONWORKS INC.
Respondents
Evan Juurakko, for the Applicants
Daniel Matson, for the Respondents
HEARD: December 11, 2015, at Thunder Bay, Ontario
Madam Justice H.M. Pierce
Reasons on Application for Oppression Remedy
Introduction
[1] The applicants move for an oppression remedy pursuant to the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16 for orders:
(a) requiring a licensed business valuator to determine the fair market value of Lakehead Ironworks Inc. (“Lakehead”) with the costs to be paid by Lakehead;
(b) that the court approve the fair market value as determined by the licensed business valuator;
(c) pursuant to s. 248(3)(f) of the Ontario Business Corporations Act, that one or all of the respondents purchase the shares of Lakehead held by 1833340 Ontario Ltd., at fair market value, without a minority shareholder discount;
(d) alternatively, pursuant to s. 207(2) of the Ontario Business Corporations Act, that one or all of the respondents purchase the shares of Lakehead held by 1833340 Ontario Ltd. at fair market value, without a minority shareholder discount; or
(e) alternatively, pursuant to s. 207(1) of the Ontario Business Corporations Act, winding up Lakehead, with assets to be distributed proportionally with their shareholdings.
[2] The applicant, Andrew Locke, is the sole shareholder and director of 1833340 Ontario Ltd., which in turn holds 20% of the shares of Lakehead Iron Works Inc., a closely-held corporation. For convenience in these reasons, I will refer to the applicants collectively as Mr. Locke.
[3] The respondent, Mr. Quast, through his corporation 1833339 Ontario Ltd., holds 80% of the shares of Lakehead. Mr. Quast’s numbered corporation is not named as a respondent in this application.
[4] Mr. Locke and Mr. Uwe Quast worked together at Lakehead over a period of years, until it expanded into the successful business that it is today. Along the way, the two men disagreed about business decisions. Mr. Locke lost confidence in Mr. Quast and their working relationship broke down. By this application, Mr. Locke seeks to recover his interest in Lakehead, alleging that the respondents have engaged in oppressive conduct towards him.
Preliminary Objection
[5] The respondent makes a preliminary objection. Mr. Locke served two affidavits as part of his application, the first sworn December 22, 2014, and the second sworn March 31, 2015. Mr. Quast served his affidavit in response sworn May 1, 2015.
[6] On May 21, 2015, Mr. Locke was cross-examined on his two affidavits. Some evidence on this application also comes from his cross-examination. After he was cross-examined, Mr. Locke served and filed a third affidavit sworn December 2, 2015, purporting to respond to Mr. Quast’s affidavit sworn May 1, 2015. The allegations contained in the third affidavit were known to Mr. Locke when he commenced his application. No leave was sought to file the third affidavit.
[7] The respondents who cross-examined Mr. Locke on his first two affidavits submit that no weight should be given to the third affidavit delivered after Mr. Locke’s cross-examination. I agree. The intention of Rule 39.02 is that all affidavits to be relied on at the hearing will be served before cross-examination unless leave of the court or consent is given. No leave has been sought and no consent has been given here. Permitting an applicant to patch up holes in his evidence after cross-examination has been completed results in the applicant splitting his case. Accordingly, no weight will be given to Mr. Locke’s third affidavit.
The Facts
[8] In order to appreciate the issues in this application, it is necessary to understand the history of the company.
[9] In 1976, Mr. Quast’s father, Josef Quast, incorporated Lakehead Ornamental Ironworks Inc., a company that specialized in producing residential iron work such as hand rails, steel stairs and gates. The company also provided maintenance and repair work to residential customers.
[10] Josef planned to retire. In 1990, his son, Uwe, incorporated Lakehead which purchased the assets, inventory, customer lists, contracts and goodwill from his father’s company. From 1990 until May 1, 2008, Uwe Quast was the sole shareholder and directing mind of Lakehead. He shifted the focus of Lakehead’s work from residential ironworks to the fabrication of structural steel for commercial buildings. In addition, Lakehead expanded to the industrial sector where the company supplied steel and steel repair for mining equipment.
[11] In 2008, Mr. Quast invited Mr. Locke, a journeyman machinist, to run the day-to-day operations. At the time, Quast was issued 400,000 preferential shares in Lakehead worth $400,000, representing the equity that he brought to the company. These shares entitled him to dividends. In addition, he was issued 80% of the common shares and was designated president of the corporation. Mr. Locke was appointed vice-president and secretary-treasurer, and was issued 20% of the shares. Although two shareholder agreements were drafted, neither was executed.
[12] Mr. Quast maintains that when Mr. Locke began to work for the company, he asked for a larger salary than the company could afford. He says that in return for a lower salary, the parties agreed that the share transfer would be implemented for no consideration, as a deferred compensation plan. It was his intention that “the shares were meant to off-set his lower salary over the lifetime of our ownership.”
[13] Mr. Locke does not know what a deferred incentive plan is. However, he disputes that there was any such agreement; he maintains that he acquired the shares by bringing his skills to the table and that he was not required to work a certain number of hours for them. He says there was no agreement as to the duration of time he was required to work for Lakehead.
[14] Mr. Locke maintains that when he joined Lakehead, he and Mr. Quast planned to create enough value in the business that they could retire by selling it. He testified that when he joined Lakehead in 2008, he didn’t have any expectation as to how long he would work for Lakehead as he didn’t know how long it would take to build the business. He stated that by 2014, he expected to be there another year or two before retirement.
[15] The parties agreed that Mr. Locke would be subordinate to Mr. Quast in running the company although both men would share in its management.
[16] Under the stewardship of the parties, the company expanded and thrived. Mr. Quast became the manager of the structural steel division. Mr. Locke created the company’s heavy industry division which needed an expanded work force and expanded premises. A second shop was leased to accommodate demand. In 2011, as a result of a corporate reorganization, each man’s shares were transferred to their respective holding companies and Mr. Quast redeemed his 400,000 shares.
[17] Mr. Locke expressed that he and Mr. Quast intended to be partners, employees and active managers of Lakehead, with the objective of expanding the business so that they could sell the shares to a third party for a profit and retire.
[18] Mr. Locke testified that he did not know whether Mr. Quast was required to buy his shares but agreed that he had no expectation that Mr. Quast would buy him out. He said that was never mentioned.
[19] Mr. Quast alleges that the parties agreed that as president and majority shareholder, he would have final decision-making power. He disputes that the parties ever agreed that Mr. Locke would be an equal partner. In cross-examination, Mr. Locke agreed that the majority shareholder has more control and can make decisions. However, he expected that they would respect each other and consult on major purchases.
[20] On a working basis, they consulted one another about major decisions. Mr. Locke felt the relationship began to deteriorate within a year of him coming on board. Mr. Quast began to criticize Mr. Locke’s detailed quotations.
[21] Mr. Locke felt they were partners and Mr. Quast did not. This difference of understanding seems to be at the heart of the conflict between the parties, particularly with respect to expansion of the business. Ultimately, this difference in understanding led to friction when Mr. Quast decided to expand.
[22] In 2011, Mr. Quast decided to build a new shop on 16 acres of land, costing about two million dollars. It was necessary to finance the expansion. Mr. Locke testified that Mr. Quast made the decision to expand unilaterally. However, in cross-examination, Mr. Locke stated that he discussed the proposal with Mr. Quast in advance and didn’t object to the new building. He told Mr. Quast that he preferred to delay the expansion until the company could fund it out of retained earnings. Mr. Locke stated that he preferred to stay out of debt. Mr. Quast estimated that it would take 10 – 12 years until they could afford to expand without borrowing. He told Mr. Locke that the cost of borrowing at 3.9 per cent would be less than the cost of maintaining two facilities.
[23] Mr. Locke agreed that the cost of maintaining two shops was too high. Nevertheless, he believed that the expansion should be delayed until the company had enough retained earnings to finance it. In cross-examination, he agreed, however, that the company was getting busier whereas the floor space remained the same. He also conceded that the cost of borrowing could be lower than the cost of operating two shops, resulting in better cash flow when the new building opened. Further, he agreed that the new premises and 16 acres of property added value to Lakehead and increased his share value. Mr. Locke agreed that he was excited to move into the company’s new facility.
[24] Mr. Quast proceeded with the plan, which had the effect of bringing the two divisions that were then operating at two different rented locations under the same roof, wholly owned by Lakehead.
[25] The expansion was financed by a non-revolving mortgage from the Royal Bank in the amount of $1.4 million. Subsequently, Lakehead received a loan of $907,638 from the Northern Ontario Heritage Fund which was used to pay down the Royal Bank mortgage, leaving a balance of about $500,000 owing. About $453,684 of the Heritage Fund loan was forgiven, leaving a balance of $867,000 owing on the two mortgages.
[26] In cross-examination, Mr. Locke agreed that he and Mr. Quast discussed the Heritage funding and he supported using the Heritage Fund loan with its grant component. He also stated that while the need for space wasn’t immediately there, the potential to do more work in the expanded space was there. He also agreed that the potential to do more work fit into the retirement plan in that the business would expand and then they would sell the business.
[27] The mortgage was refinanced in 2013; the current balance is about $580,000.
[28] Lakehead’s welding truck was 15 years old. In 2012, Mr. Quast decided to purchase a new welding truck out of retained earnings to generate more income for Lakehead. The vehicle is charged out at $105 per hour and is an income-earning asset, valued on the balance sheet at $75,000.
[29] Mr. Locke did not know whether the truck was purchased out of retained earnings and therefore couldn’t say whether its acquisition increased or decreased his share value. When Mr. Locke was asked in cross-examination whether the welding truck probably increased his share value he answered, “Possibly.” His chief objection to the acquisition of the welding truck was that he and Mr. Quast had agreed to discuss company management but there was no discussion about the truck. Still, he agreed that Mr. Quast, by virtue of being president of the company and majority shareholder, was “the boss.”
[30] In 2013, Lakehead needed additional shop space. A new addition was constructed at a cost of $275,000. This new space housed equipment for cleaning the steel with abrasives as well as a “pre centre” to take the place of manual work and consumables costing Lakehead about $200,000 annually. Locke and Quast discussed this proposal in advance.
[31] Lakehead had sufficient retained funds for this construction. Mr. Locke did not believe the addition was necessary; Mr. Quast disagreed. He states that the new facility has fewer capital costs each year.
[32] In cross-examination, Mr. Locke agreed that this further expansion and the equipment it contained for cleaning steel raised the property value and hence the share value. He conceded that the equipment in the addition could generate income and estimated that the value of the addition plus equipment was about $350,000.
[33] In August 2014, the two men had a heated argument and Mr. Locke left. Mr. Locke indicated that he returned to work a couple of days later, after he calmed down, and wanted to come back to work. He had no plans to retire at that point. He says that by the time he returned to work, Mr. Quast had made arrangements to replace him.
[34] In his affidavit, Mr. Locke alleged that the unilateral decisions were made by Mr. Quast without his consent and were “unfairly prejudicial and oppressive towards myself as a director and shareholder of [Lakehead]”. In argument, Mr. Locke’s counsel submitted that the oppressive conduct began on August 20, 2014, when Mr. Locke was excluded from Lakehead’s employment, management, and corporate governance. If so, then Mr. Locke’s objection to Mr. Quast expanding the business without his consent is irrelevant. However, out of an abundance of caution, Mr. Locke’s expectations prior to August 20, 2014, will be reviewed in order to assess whether the subsequent conduct was oppressive.
[35] Mr. Locke states that he has been completely shut out of Lakehead’s corporate governance. He does not receive income from the company. He complains that Mr. Quast continues to make expensive purchases without notifying him although he does not describe what these are.
[36] Mr. Locke submits that Mr. Quast is using his position as a majority shareholder to force him out of Lakehead. He alleges that Quast has taken his shares hostage as Mr. Locke has no other means to dispose of the shares unless Quast agrees, as provided in the corporate by-laws.
[37] Mr. Quast states that it was his intention that Mr. Locke would own 20 per cent of the Lakehead shares and receive the equity from them while he was employed by and contributing to Lakehead but he never intended to gift the shares to him for no consideration. He indicated that he did not intend that Mr. Locke would be entitled to the full value of the shares after only 6 ½ years of ownership. Rather, he expected Locke to return the shares when he resigned.
[38] As well, Mr. Quast states that it was always his expectation that he would retain the ability to make financial decisions with respect to Lakehead. He maintains that all the decisions he has made have increased the value of the company, not decreased it. He submits that since Mr. Locke has no automatic right to sell or redeem his shares, that Lakehead’s failure to redeem or purchase Mr. Locke’s shares is not oppressive, in and of itself.
[39] Mr. Locke submits that, in view of the breakdown in the relationship between himself and Mr. Quast, it is reasonable to expect that his shares be purchased by Lakehead or Quast or Quast’s holding company, at fair market value with no minority shareholder discount because Lakehead’s growth is attributable to his hard work and dedication.
[40] Alternatively, Mr. Locke submits that such a result is just and equitable in the circumstances.
Legal Principles
The Oppression Remedy
[41] An oppression remedy is an equitable remedy that deals with the governance of a corporation. It is available to regulate the affairs of a corporation by granting sweeping relief when a court finds that conduct towards a security holder, creditor, director, or officer of the corporation is unlawful or unfair. In the Act, a shareholder is included in the term, “complainant.”
Section 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 is the basis of an oppression remedy. It provides:
248(1) A complainant and, in the case of an offering corporation, the Commission may apply to the court for an order under this section.
(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,
(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;
(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner, or
(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.
(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,
(a) an order restraining the conduct complained of;
(b) an order appointing a receiver or receiver-manager;
(c) an order to regulate the corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;
(d) an order directing an issue or exchange of securities;
(e) an order appointing directors in place of or in addition to all or any of the directors then in office;
(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;
(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the money paid by the security holder for securities;
(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;
(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by s. 154 or an accounting in such other form as the court may determine;
(j) an order compensating an aggrieved person;
(k) an order directing rectification of the registers or other records of a corporation under section 250;
(l) an order winding up the corporation under section 207;
(m) an order directing an investigation under Part XIII be made; and
(n) an order requiring the trial of any issue.
[42] The Supreme Court of Canada summarized the test for oppression in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, at para. 68, as follows:
(1) Does the evidence support the reasonable expectation asserted by the claimant? and
(2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?
[43] It has been said that the reasonable expectations of specified stakeholders is the cornerstone of the oppression remedy. The onus is on the complainant to identify the expectations breached leading to oppression and to satisfy the court that these expectations were reasonably held. See: Ebrahim v. Continental Precious Metals Inc. 2012 ONSC 2918, 111 O.R. (3d) 110 at paras. 51-52. In addition, the onus is on the complainant to prove that the oppressive conduct caused him harm: Chan v. 160466 Ontario Inc., 2011 ONSC 5654, [2011] O.J. No 4689 at para. 38.
[44] In Rea v. Wildeboer, 2015 ONCA 373, 126 O.R. (3d) 178, at para. 19, the Court of Appeal described the oppression remedy as a personal claim that permits a claimant:
…with the right to apply to the court, without obtaining leave, in order to recover for wrongs done to the individual complainant by the company or as a result of the affairs of the company being conducted in a manner that is oppressive or unfairly prejudicial to or that unfairly restricts the interests of the complainant.
[45] Not all breaches of a claimant’s reasonable expectations lead to an oppression remedy. In BCE, at para. 90, the Supreme Court of Canada cautioned that the claimant must also establish that wrongful conduct has occurred, caused by the corporation, producing compensable injury.
[46] In assessing whether oppression has occurred, the court must consider business realities. Factors to be considered in determining whether a reasonable expectation exists include: “general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting agreements between corporate stakeholders.” See: BCE, para. 72.
[47] In some cases, the courts have determined that the dismissal of a shareholder from employment or exclusion of him from management, having regard for his expectations, has been oppressive. See, for example, Goft v. 1206468 Ontario Ltd., [2001] O.J. No. 126 (Sup. Ct., Commercial List), para. 31; Naneff v. Con-Crete Holdings Ltd. [1993] O.J. No. 1811 (Gen. Div., Commercial List), para. 108.
[48] In other instances, the courts have refused an oppression remedy where an employee who is also a shareholder, leaves or is terminated from employment, or excluded from management. In Luebke v. Manluk Industries Inc., 2013 ABQB 264, 560 A.R. 362 at para. 28, the court held:
The case law demonstrates that generally wrongful dismissal or exclusion from management is not “oppressive” because the conduct targets the applicant’s interest as an employee, and not as one of the protected categories of security holder, creditor, director or officer: Chan v. 160466 Ontario Inc., 2011 ONSC 5654 ( Ont. S.C.J., Commercial List) at para. 33. However, exceptions have been made in cases regarding private companies where the relation between service and investment may be closer and gives rise to expectations beyond those of a regular employee.
[49] In Luebke, para. 29 (citing Naneff), the court held that oppression will only be found in cases where the end of employment is part of an overall pattern of oppression.
[50] The court held in Deluce Holdings Inc. v. Air Canada (1992), 1992 CanLII 7654 (ON SC), 12 O.R. (3d) 131 (Gen. Div., Commercial List) that dismissal of a shareholder from paid employment and/or exclusion from management for a collateral purpose may constitute oppression; however, there is no evidence in the case at bar of a collateral purpose.
Winding Up
[51] Even if the court does not find oppression, it may grant relief if it is persuaded that it is “just and equitable” to do so.
[52] By virtue of s. 208 of the Act, a shareholder or others specified may apply to have a corporation wound up or order a remedy available under s. 248.
[53] The jurisdiction of the court to issue a winding up order is described in s. 207 of the Act which provides:
207(1) A corporation may be wound up by order of the court,
(a) where the court is satisfied that in respect of the corporation or any of its affiliates,
(i) any act or omission of the corporation or any of its affiliates effects a result,
(ii) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or
(iii) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer; or
(b) where the court is satisfied that,
(i) a unanimous shareholder agreement entitled a complaining shareholder to demand dissolution of the corporation after the occurrence of a specified event and that event has occurred,
(ii) proceedings have been begun to wind up voluntarily and it is in the interest of contributories and creditors that the proceedings should be continued under the supervision of the court,
(iii) the corporation, though it may not be insolvent, cannot by reason of its liabilities continue its business and it is advisable to wind it up, or
(iv) it is just and equitable for some reason, other than the bankruptcy or insolvency of the corporation, that it should be wound up; or
(c) where the shareholders by special resolution authorize an application to be made to the court to wind up the corporation.
(2) Upon an application under this section, the court may make such order under this section or section 248 as it thinks fit.
[54] The term, “just and equitable” is to be given a broad interpretation. In Falus v. Martap Developments 87 Ltd., 2012 ONSC 2301, [2012] O.J. No. 1622, para. 43, the court considered the “just and equitable” principle in the context of an application to wind up a corporation pursuant to s. 207 as follows:
Often the “just and equitable” principle has been used to wind up a company in circumstances where a dominating or more powerful shareholder attempts to exclude another or to force another out of the relationship. But the concept goes further, applying where the relationship between the parties has broken down because of incompatibility or quarrelling: “continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly cooperation is sufficient to justify the order.” Consequently, the case law indicates that where in essence a corporation resembles a partnership, if the relationship of trust and confidence between the partners in corporate guise has broken down and the continuation of the business between them operating as equal partners is not possible, judicial intervention under OBCA s. 207 is appropriate. [Footnotes omitted.]
[55] As with a remedy under s. 248, the complainant’s expectations are the cornerstone to deciding whether to grant a s. 207 remedy. In order to satisfy the court that it would be just and equitable to grant the remedy, the complainant must prove:
(a) that there are rights, expectations and obligations not “submerged” in the corporate structure;
(b) such rights, expectations and obligations must not have been satisfied or discharged, whether as a result of a breach by one party, a dispute among the parties, or otherwise;
(c) the resulting circumstances must generate unfairness or prejudice to one or more shareholders; and
(d) the unfairness must be sufficiently serious that it can only be rectified by a winding-up or by s. 248(3) relief.
See: Animal House Investments Inc. v. Lisgar Development Inc. (2007), 2007 CanLII 82794 (ON SC), 87 O.R. (3d) 529, para. 50 (Sup. Ct.).
[56] At paras. 56 and 59 of Animal House, the court held that incompatibility and quarrels among the shareholders of a private corporation – even to the point of a breakdown in personal relationships between shareholders – are not sufficient to warrant an equitable winding up of the corporation. It is only when the acrimony rises to the point that the parties can no longer run the business as originally contemplated that unfairness will be demonstrated. The court gives the example of two equal shareholders who are prevented from making joint decisions because of the ill-will between them.
[57] At paras. 102 and 103 of Animal House, the court held that the expulsion of a shareholder from a management role or position of director does not defeat the expectations of the parties unless the unfairness results from the breakdown of the business operations, in which case a s. 207 remedy may be considered.
Positions of the Parties
[58] Mr. Locke says that oppressive conduct grew out of a toxic workplace where his consent to expansion was disregarded. He submits that termination of his employment is part of oppressive conduct that ended his role in management and as an officer of the company. He argues that a loss in share values is not a prerequisite to imposing an oppression remedy.
[59] Alternatively, if no oppression is found, Mr. Locke seeks an order that his shares be purchased at fair market value without a minority discount on the grounds that it is just and equitable to do so. In the further alternative, he asks that the company be wound up.
[60] Mr. Quast argues that there is no evidence of Mr. Locke’s reasonable expectations and no evidence of the breach of those expectations. Accordingly, he denies that Locke has been treated oppressively. Mr. Quast also contends that Mr. Locke admits that he has suffered no harm.
Has Mr. Locke been Treated Oppressively?
[61] As the Supreme Court of Canada stated in BCE, the first consideration is whether the evidence supports the reasonable expectations asserted by the claimant. The onus is on the claimant to prove them on a balance of probabilities.
[62] Mr. Locke makes contradictory submissions in his application: he contends that during his employment with the company, Mr. Quast’s unilateral decisions about expansion were unfairly prejudicial and oppressive towards him in his role as a director and shareholder. However in oral submissions, Mr. Locke asserted that oppression began on August 20, 2014, when he was ejected from the company and from his role as an employee, manager and director.
[63] I will first consider the evidence of Mr. Locke’s expectations when he went to work for Lakehead.
[64] Mr. Locke stated that he and Mr. Quast planned to create enough value in the business that they could retire by selling it. No fixed equity was suggested. When Locke joined Lakehead in 2008, he didn’t have any expectation as to how long he would work for Lakehead as he didn’t know how long it would take to build the business. He stated that by 2014, he expected to be there another year or two before retirement.
[65] Mr. Locke’s expectation about retirement seems to be a moving target. The duration of his work at Lakehead was never specified. On August 29, 2014, Mr. Locke’s e-mail to Mr. Quast stated that he loved his job. He proposed sorting out the differences both men had. Apparently he had no intention to retire as of this date. There is no evidence as to the present ages of Mr. Locke or Mr. Quast to suggest that either is on the cusp of a conventional retirement age.
[66] Mr. Locke submits that Mr. Quast ignored his views on expansion and proceeded unilaterally. However, during cross-examination, he agreed that Mr. Quast, as the majority shareholder and president of Lakehead, controlled the company. In cross-examination, Mr. Locke admitted that the only expansion initiative he wasn’t consulted about was the purchase of the welding truck. He agreed that the truck was an income-producing asset. In the scope of the company’s expansion, this was a small purchase made out of retained earnings. Therefore, it did not increase the company’s indebtedness.
[67] Mr. Locke was consulted about the move to the new premises and the further expansion at that location. Indeed, he personally guaranteed the indebtedness involved with the expansion, implying that he acceded to the plan. There is no evidence that Mr. Locke has been called on to pay on his personal guarantee.
[68] It appears that Mr. Locke’s advice was sought and considered; it simply wasn’t adopted. He agreed that these initiatives likely increased his share values.
[69] Mr. Locke contends that he expects Mr. Quast to buy out his shares. The evidence does not support that this was a reasonable expectation. Mr. Locke agreed that there is no shareholder agreement. In cross-examination, Mr. Locke testified that he did not know whether Mr. Quast was required to buy his shares; he agreed that he had no expectation that Mr. Quast would buy him out. He said that was never mentioned. Apparently the two men did not address how they would disentangle their working relationship if they disagreed.
[70] I conclude that the evidence does not support oppression based on the reasonable expectations asserted by Mr. Locke prior to August 20, 2014. Furthermore, there is no evidence that Mr. Quast breached those expectations.
[71] Even if the evidence supported a breach of Mr. Locke’s reasonable expectations prior to August 20, 2014, did Mr. Locke suffer any harm? I conclude there is no evidence that his shares were reduced in value as a result of his advice about expansion being ignored. Rather the evidence suggests that the value of Locke’s shares may have been enhanced by expansion. The company appears to be growing and thriving. It has received the benefit of a forgivable loan and it is paying down its indebtedness while increasing its equity for both the shareholders.
[72] Was Mr. Locke treated oppressively as of August 20, 2014? The focus of Mr. Locke’s application is on conduct before this date. Paragraph (p) of the application recites that as a result of the toxic relationship that had developed between Locke and Quast, the two men agreed that Locke would no longer be employed by Lakehead. Mr. Locke states in his affidavit that after the quarrel, he “left the shop and took some time to cool down and re-evaluate the situation.” He does not say that Mr. Quast demanded that he leave. It appears that Mr. Locke took the unilateral step of withdrawing from Lakehead. There is no evidence that Mr. Locke was “ousted” or excluded from management for a collateral purpose, giving rise to an inference of oppressive conduct. In the circumstances, it does not lie in his mouth to argue that he has been treated oppressively because he is not receiving employment income.
[73] Subsequently, the parties disagreed over the value of the shares. Apart from the dispute over the value of the shares, there is no allegation of oppression that post-dates August 20, 2014.
[74] In these circumstances, I do not find that there was an oppressive termination of Mr. Locke’s employment. It is unfortunate that the two men did not see fit to reconcile their differences in their working relationship, by mediation or other means.
[75] For the reasons set out above, the application for a declaration of oppression pursuant to s. 248(2) of the Ontario Business Corporations Act is dismissed.
Is it Just and Equitable to Order Relief under s. 207 of the Ontario Business Corporations Act?
[76] Even if the court does not find oppression, it may grant relief under s. 207 of the Act if it is persuaded that it is “just and equitable” to do so. Is this such a case? I have concluded that it is. I have also concluded that relief pursuant to s. 248 of the Act is warranted.
[77] The winding up of the corporation is an extreme measure and should be reserved for extreme cases. In this case, there is no evidence that Lakehead cannot afford to redeem the shares or that Mr. Quast would not be prepared to buy them. Lakehead is a going concern with a productive work force and demand for its services. In these circumstances, a winding up order would not be reasonable. Indeed, the applicant does not press for a winding up order. The real issues in this litigation are:
(1) what is the value of Mr. Locke’s shares; and
(2) how does he recover it?
[78] It is unfortunate that Messrs. Locke and Quast cannot reconcile their differences; however it seems obvious a rapprochement is no longer possible. The relationship of trust and confidence between them has broken down such that they can no longer work cooperatively together in the governance of the corporation. In these circumstances, Mr. Locke’s expectation that he be paid for his shares is a reasonable one. Otherwise there is no finite time specified for the sale or redemption of his shares. It is, on the other hand, unreasonable for Mr. Quast to expect Mr. Locke to have returned his shares on resignation, if, as Mr. Quast contends, the shares represent part of a deferred compensation scheme. They could not be a gift if they are part of Locke’s compensation package. It is not reasonable that the shares be tied up indefinitely as a result of the dispute between the parties. To refuse relief authorized by s. 248(3) would result in unfairness or prejudice to Mr. Locke. Mr. Quast recognized the necessity of resolving the share problem when he attempted to negotiate a purchase price. Unfortunately, no value was agreed upon.
[79] Mr. Locke contends that his shares should be sold at fair market value without a minority shareholder discount. This position assumes that no minority discount should apply. The court is unable to determine the proper value of the shares without supporting evidence, which is not contained in this application. A trial of an issue will be required to assess the value of the applicants’ shares in Lakehead and to determine the terms for the purchase of their securities, whether by Lakehead or any other person, as provided in s. 248(3)(f) of the Act.
[80] Orders will issue as follows:
(1) the parties shall agree on a licensed business valuator who shall determine the fair market value of Mr. Locke’s shares with and without a minority shareholder discount;
(2) without prejudice to either party’s argument that the costs of the business valuator be borne by another party, and subject to further order of the court, Lakehead Ironworks Inc. shall pay the reasonable costs of the business valuator;
(3) a trial of an issue shall take place to determine the proper value of the applicants’ shares in Lakehead Ironworks Inc. and to determine the terms and conditions for purchase of the applicants’ shares, whether by Lakehead Ironworks Inc. or any other person, pursuant to the provisions of s. 248(3)(f) of the Ontario Business Corporations Act, and.
(4) for such other directions as may be required;
[81] Costs of this application are reserved to the disposing judge.
_______“original signed by”
The Hon. Madam Justice H.M. Pierce
Released: March 16, 2016
CITATION: Locke v. Quast, 2016 ONSC 1873
COURT FILE NO.: CV-14-0520
DATE: 2016-03-16
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
ANDREW LOCKE and 183340 ONTARIO LTD.
Applicants
- and -
UWE QUAST and LAKEHEAD IRONWORKS INC.
Respondents
REASONS ON APPLICATION FOR OPPRESSION REMEDY
Pierce J.
Released: March 16, 2016
/cs