Levine et al. v. 1751060 Ontario Inc. et al.

[Indexed as: Levine v. 1751060 Ontario Inc.]

Ontario Reports Ontario Superior Court of Justice, Swinton J. June 29, 2016 132 O.R. (3d) 269 | 2016 ONSC 3691

Counsel: John J. Adair, for applicants. Ronald B. Moldaver, Q.C., for respondents.

SWINTON J.: —

Overview

[1] This proceeding began as an application brought by Jay Levine, Mark Levine and Sara Levine Petroff (the "applicants") seeking an order that their shares in the respondent 1751060 Ontario Inc. ("175") be purchased by their uncle, Irving Kumer ("Irv"), and that 175 be required to pay them outstanding dividends. At issue in the trial was their entitlement to seek payment for the shares, the valuation of those shares and their entitlement to dividends.

[2] For the reasons that follow, I conclude that the applicants are shareholders. Accordingly, they are entitled to an order that Irv purchase their shares at a price determined in accordance with these reasons and that 175 pay them dividends from December 2013 to June 2016.

Background

[3] In dispute in this proceeding is the applicants' one-third share interest in 175. Until February 1, 2013, 175 owned a one-quarter interest in an apartment building located at 2548 Kipling Avenue in Toronto known as Tedford Gardens (the "property"). That was 175's only asset.

[4] Ted and Doris Kumer, the parents of Irv and the grandparents of the applicants, acquired a one-quarter interest in the property in the 1960s through Tedford Development Corporation ("Tedford"). When Ted died in 1982, Doris acquired his shares in Tedford.

[5] Ted and Doris had three children: Irv, Rebecca (Moses) and Rochelle (Levine). Rochelle, the mother of the applicants, died in 1994.

[6] Doris died in 1996. In accordance with her will, one-third of her shares in Tedford went to Irv, one-third to Rebecca and one-third to the applicants as children of Rochelle. Jay testified that since his mother's death, each of the applicants received monthly dividend cheques from the corporation. The cheques were in the amount of $1,000 to $1,200, signed by Rebecca and generally accompanied by a handwritten note showing distribution and expenses. One-third of the distribution went to the applicants, one-third to Rebecca and one-third to Irv.

[7] Around 2007, there was a butterfly agreement to separate the Kumer holdings from their partner, the Grosberg family. 175 was created to hold the Kumer family interest in the property, and share certificates were issued. In evidence was a share certificate for 12 shares of 175 dated 2007 that was issued to Jay, signed by Irv as president and by Rebecca as secretary of 175. Mark and Sara each received 12 shares, and Irv and Rebecca each received 36 shares.

[8] The applicants were never involved in the management of 175 or the property. For many years, the property was managed by Rebecca and a member of the Grosberg family. Irv became actively engaged in the management of the property in late 2009.

[9] In 2010 or 2011, Irv commenced an application for partition and sale of the property because of ongoing disputes with the other owners (the holders of the 75 per cent interest) about issues that included his management fees. A sale through a public marketing process was ordered by the court in July 2011.

[10] Irv wished to buy the 75 per cent interest of the other owners. In order to do so, he needed to obtain financing. He approached Jay around November 2012, asking Jay to transfer his shares so that Irv could assure a prospective lender that Irv owned all the shares of 175. Jay testified that he told Irv he would not stand in the way of the purchase, but he did not want to participate, and he wanted to be bought out as well. Jay testified that Irv explained the signed transfer was for the bank and would not change Jay's shareholding. According to Jay, he told Irv that he wanted to be treated the same way as the other vendor partners in terms of payment for the investment.

[11] Jay testified that he signed a share transfer dated November 27, 2012. However, he became concerned that he had no documentation to support his understanding of the arrangement with Irv, so he called his brother Mark and cautioned him to get a written record of the understanding regarding the transfer of the shares before signing.

[12] Mark met with Irv the next day and requested a written agreement regarding the terms of the transfer. Both Mark and Jay testified that Irv was angry about this request, but Irv did agree to document the arrangement. He handwrote a memorandum of agreement (the "MOU") addressed to the three applicants. That document contains a number of important provisions. After referring to the process for the sale of the property, it stated: "You (the 3 of you) own 36 shares out of 108 common shares." The MOU recorded Irv's need to provide a personal guarantee in order to obtain financing to buy the 75 per cent interest backed up by his ownership of 100 per cent of the shares "free and clear of encumbrance".

[13] The key parts of the MOU follow. I quote from the transcribed version of the handwritten document provided in court.

You have transferred all of your shares to me so that I am in a position to satisfy the lender.

However, our understanding is as follows:

1. If I am not successful in buying this property, the transfer is null & void and the document will be destroyed. The property will be sold in the market and your position will be unchanged as if the transfer never occurred.

2. If I am successful in purchasing the 75% of the property, 1751060 will continue to own its 25% free of encumbrance and its draw from the building will continue as it has in the past in the normal course of operations. As between you and me, you will continue to receive your draws as shareholders and enjoy all the attributes of share ownership in the same way as you always have. As soon as possible, after the purchase of the building, I will use my best efforts to re-arrange the financing in order to pay your fair value for your shares -- if you wish.

[14] Mark and Sara signed the share transfer agreement. All the applicants continued to receive monthly dividends from 175 as they had in the past.

[15] The closing date for the purchase of the property was February 1, 2013. Irv paid $12 million for the 75 per cent interest.

[16] As early as March 2013, Jay began to inquire about the purchase of the applicants' shares. There were various discussions and e-mail communications about valuation between Irv and Jay.

[17] In December 2013, 175 ceased to pay the applicants any further dividends. In January 2014, the applicants launched the present application, alleging oppression in the operation of 175 and seeking an order for the purchase of their shares at fair value.

[18] Newbould J. ordered that the application proceed by way of a trial, with the affidavits filed in the application record and responding record to serve as pleadings and the cross-examinations to serve as discoveries.

The Preliminary Issue

[19] As a preliminary issue, the respondents argue that the relief sought in this application is misguided and not supported by the pleadings. While the applicants allege oppression in the notice of application, the respondents characterize the relief sought as specific performance of the MOU and submit that this relief was not properly pled.

[20] The applicants began this application relying on the oppression provision in s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16, which provides a remedy to shareholders if the affairs of the corporation have been conducted in a manner that is "oppressive or unfairly prejudicial to or that unfairly disregards" their interests. It is evident that the applicants' claim has evolved over the course of the proceeding. Nevertheless, they still rely on the oppression remedy.

[21] The applicants submit that Irv's cutting off of the dividends and his conduct during negotiations with respect to the purchase of the shares amount to conduct that is oppressive or prejudicial or that unfairly disregards their interests. They also rely on the MOU, arguing that it is a binding contract which creates an obligation on Irv to purchase their shares at fair value.

[22] I am satisfied that the applicants' claim is properly framed as a claim for an oppression remedy and enforcement of the MOU. Indeed, Irv's responding affidavit states that the only issue between the parties was the valuation of the applicants' shares "in accordance with the agreement of purchase and sale between us" (at para. 26). Accordingly, I reject the respondents' argument that the relief sought by the applicants is not properly before the court.

The Issues

[23] With respect to the merits of the application, the following issues must be determined:

(1) Are the applicants shareholders of 175?

(2) What is the significance of the Muskoka lot transfer in 1994?

(3) Should the applicants be required to repay dividends paid to them?

(4) What is the proper interpretation of the MOU?

(5) Did Irv conduct the affairs of 175 in an oppressive manner?

(6) Are the applicants entitled to dividends from December 2013 on?

(7) What is the value of the applicants' shares? To answer this question, the court must resolve disputes about a number of issues:

(i) whether there should be a deduction of $300,000 from the value of 175 for compensation claimed by Irv;

(ii) what is the appropriate corporate tax rate on a notional disposition of the corporate asset;

(iii) whether legal fees should be deducted;

(iv) whether there should be a minority discount;

(v) whether there should be a present value discount.

Are the Applicants Shareholders of 175?

[24] In May 2015, Irv first took the position, in a letter sent by his lawyer, that the applicants were not shareholders of 175 because of events in 1994 surrounding the transfer of a vacant lot in Muskoka from him to the applicants. Accordingly, he asserted that they have no right to compensation for the shares in 175 or to the dividends paid to them over the years.

[25] Not surprisingly, the parties' memories of what occurred in 1994 are fuzzy. In 1994, shortly after Rochelle's death, Jay and Irv had discussions about the transfer of a vacant lot in Muskoka owned by Irv. It was one of four contiguous lots that Ted and Doris had acquired. Ted and Doris had built a cottage on one lot. This cottage was owned by Doris in 1994. Rebecca used to have a cottage on a second lot, which she lost after a divorce. Irv had the vacant lot, and the applicants' family had built a cottage on the fourth lot.

[26] Jay filed an affidavit in this proceeding in which he had described how the applicants had acquired their shares. In the affidavit, he stated that they had acquired their shares from their mother's estate when she died in 1994. Shortly after their mother's death, Irv approached him suggesting a rearrangement of family property in anticipation of what would occur when Doris died. Jay stated that the applicants agreed to accept a transfer of Irv's vacant lot in exchange for releasing their interest in Doris' estate. He understood that Rebecca would get Doris' cottage as a result. He also stated that the applicants received nothing from Doris' estate on her death.

[27] In his testimony at trial, Jay explained that he had been mistaken with respect to the share acquisition: the applicants actually received their shares in 175 as a result of a bequest in Doris' will. He testified that the arrangement respecting the vacant lot was to dispose of the remaining property held by Doris: her cottage, a Toronto condominium and a Florida condominium. He has no memory of receiving anything from Doris' estate.

[28] Irv did transfer the Muskoka lot to the applicants in May 1994. Irv is a lawyer, and he prepared the deed of transfer and arranged its registration. He also signed the transfer document, stating that he was acting as solicitor for the applicants. The consideration was "natural love and affection from Uncle to Niece and Nephews" and $2.00. Irv sent a handwritten note to Jay, along with a copy of the deed, informing Jay that the deed had been registered in favour of the three applicants and asking Jay to tell Sara and Mark.

[29] Irv testified at trial that he had regarded this transfer as a conditional gift. He made the transfer with the intention that the applicants would either extend their existing cottage or build on this lot. Irv said that the arrangement occurred because his mother wished to transfer her cottage to Rebecca. Doris did so around the time that the vacant lot was transferred.

[30] The applicants subsequently sold the vacant lot in 1997 for $113,000. Irv was very angry about this, because he considered the transfer to have been only for the purposes of building another family cottage.

[31] Irv has taken three different positions with respect to the significance of the Muskoka lot transfer during the course of this proceeding. First, he has argued that the transfer was in consideration for the applicants' release of any interest in Doris' estate, including the shares. Therefore, he asserts that they had no entitlement to receive one-third of the shares in Tedford when Doris died, and they are not entitled to be paid for the shares of 175 now. Second, he testified that the transfer was a conditional gift. As the applicants breached the condition, he has claimed that the amount they received for the land, plus interest, should be set off against the purchase price of the shares, an amount that has ranged between $113,000 (the sale price) and $344,929 ($130,000 plus interest at 5 per cent for 20 years). Third, he has argued that if the transfer of the Muskoka lot was only related to a settlement of the real estate assets in Doris' estate, and the applicants are the lawful owners of the 175 shares, they have been overcompensated, since the three were paid $51,951 from the estate. Irv argues that there should be a set-off of that amount against the purchase price of the shares.

[32] I find no merit in any of these arguments. There is no doubt in my mind that the applicants became shareholders in Tedford and later 175 because of the bequest in Doris' will. They have been treated as shareholders since her death, and they received dividends from the corporation until December 2013.

[33] Irv's evidence that he recollected a so-called "settlement" in 1994 with respect to the applicants' interest in the estate is not credible. One would have expected some documentation of this settlement, if there was one, given that Irv is legally trained. There is no documentation anywhere to support a settlement arrangement.

[34] Moreover, it is not believable that Irv would have forgotten this settlement in 1996 when he was acting as executor of Doris' estate. The fact that he paid the applicants the cash they received and arranged the transfer of the shares to them suggests there was no settlement affecting the shares.

[35] His conduct after this distribution also demonstrates that he believed the applicants were shareholders. In 2007, at the time of the butterfly agreement, Irv signed the share certificates in 175 that the applicants received. Irv then sought the transfer of these shares to himself in November 2012 so that he could obtain financing. He said they were shareholders in the MOU that he drafted, and he accepted the signed document transferring their shares to him.

[36] It was not until late in this litigation that Irv suggested the applicants are not shareholders of 175 because they agreed to settle their claim to a share in Doris' estate in exchange for the Muskoka lot. Irv testified that he forgot the arrangement with Jay respecting the surrender of the applicants' interest in Doris' estate until he read Jay's affidavit in these proceedings. Jay's affidavit was dated May 2, 2014. However, Irv's reply affidavit does not deny that the applicants were shareholders in 175. Rather, he corrects Jay's version of events, and sets out the distribution of Doris' estate made by Irv, acting as her executor -- namely, an equal distribution between Irv, Rebecca and the applicants. Irv does not raise this issue of share ownership until May 2015, when he "remembered" the settlement respecting the estate. I do not believe his evidence on this point.

[37] In my view, Jay mistakenly believed the applicants' shares had come to them from their mother when this application was commenced. It appears that the arrangement for the transfer of the Muskoka lot in 1994 arose out of Doris' wish to transfer her cottage to Rebecca before Doris' death. There is no persuasive evidence that any of the parties intended that the applicants would surrender their interest in Doris' estate -- in particular, with respect to the shares.

[38] Accordingly, I find that the applicants became shareholders of 175 as a result of the distribution in accordance with Doris' will. They continued to own those shares at the time of the MOU in November, 2012.

What is the Significance of the Muskoka Land Transfer in 1994?

[39] In the alternative, Irv argues that there was a settlement of the applicants' claim to an interest in the three properties in Doris' estate as a result of the transfer of the Muskoka lot in 1994. He submits that the applicants should pay back the cash they received from the estate, and this should be set off against the purchase price of the shares.

[40] I reject this submission. First, I find that there was no settlement of any claims against the estate. Indeed, Irv's subsequent actions as executor belie there was such a settlement. As executor, he was required to act in accordance with the will. He made the distribution of cash and shares in accordance with the instructions in the will, as he was legally required to do. I find that the applicants were entitled to the cash distribution made to them in accordance with Doris' will, and there should be no set-off with respect to that amount.

[41] However, even if I am wrong with respect to the alleged settlement, one of the key elements in the test for an equitable set-off has not been met. The claim by Irv is really a claim for reimbursement to the estate. This claim is not closely connected to the applicants' claim for the purchase of their shares, as required in Holt v. Telford, [1987] 2 S.C.R. 193, [1987] S.C.J. No. 53, at p. 212 S.C.R..

[42] In the alternative, Irv testified that prior to recalling the settlement, he had regarded the transfer of the Muskoka property as a conditional gift. Given the sale of the property, he claimed there should be a set-off of the sale proceeds against the share price. While his counsel did not press this claim in argument, I shall deal with it for purposes of completeness.

[43] I reject Irv's position that the gift of the Muskoka property was conditional. There is nothing in writing to indicate that the gift was conditional on the applicants building a cottage on the lot. Irv was a practising lawyer at the time he made the transfer. If the gift were to be conditional, one would expect there would be documentation to that effect. There is nothing in the deed or the handwritten note that accompanied it stipulating any condition.

[44] Moreover, there is no evidence that Irv made any demand for the return of the purchase price received by the applicants at any time contemporaneous with the sale of that land in 1997 -- for example, at the family meeting held around 1998 or 1999 that was described by Jay in his testimony. One would have expected Irv to make such a claim around the time of the sale if the applicants had acted in breach of a condition.

[45] Moreover, there was no mention of a credit for the Muskoka property at the time of the share transfer and the giving of the MOU in November 2012. The fact that the claim arises only after the applicants asked for the purchase of their shares suggests that Irv is trying to change the characterization of the Muskoka transaction in order to reduce what he will have to pay for the shares.

[46] While the aspiration was that the applicants would build a cottage on the lot, I find that there was no legal obligation to do so. I accept Jay's evidence that the applicants considered whether to build and ultimately made an economic decision that it was not possible to build and that it made economic sense to sell.

[47] I find that the Muskoka property was a gift from Irv to the applicants, and the gift was not conditional. As the Court of Appeal noted in Berdette v. Berdette (1991), 3 O.R. (3d) 513, [1991] O.J. No. 788 (C.A.) [at para. 18], "in the absence of the retention of an express right of revocation, once a valid gift is made it cannot be revoked or retracted". Therefore, the applicants are not obliged to account for the sale price of the Muskoka lot.

[48] In the alternative, I reject any claim that Irv might have for a set-off, as Irv has filed to show there is a close connection between the gift of the Muskoka property in 1994 and the claim for purchase of the shares.

Should the Applicants be Required to Repay Dividends Paid to Them?

[49] As the applicants are shareholders of 175 as a result of the bequest from Doris, they were entitled to receive the dividends paid to them over the years. There is no merit to Irv's argument that they should repay those dividends.

What is the Proper Interpretation of the MOU?

[50] The MOU is a contract between the parties. Pursuant to the terms of the MOU, Irv promised to make best efforts to pay the applicants fair value for their shares as soon as possible after closing. Significantly, the applicants were given the choice whether to have their shares bought, as the MOU ended with the words "if you wish" after the promise to purchase.

[51] Irv also promised that the applicants would "continue to receive your draws as shareholders and enjoy all the attributes of share ownership in the same way as you always have". Irv has taken the position in this proceeding that the applicants ceased to be shareholders when they transferred their shares to him in November 2012, and this provision of the MOU only required him to pay dividends up until the purchase of the 75 per cent interest in the property in February 2013.

[52] Irv's interpretation makes no commercial sense, nor is it consistent with the words of the MOU. There is no time limit on the obligation to pay dividends. Knowing that there could be some delay before the purchase of the shares, given the wording of the MOU and the necessity to obtain financing, the reasonable interpretation of the MOU is that the applicants were entitled to receive dividends and to enjoy the benefits of share ownership until the shares were purchased.

[53] I note that Irv promised to purchase their shares as soon as possible if the applicants wished. The wording he chose in the MOU implies that the applicants continued to hold rights associated with the shares until they were paid for the shares. Even if the legal title had been transferred to Irv in November 2012, I find that they held the beneficial title to the shares until the shares were purchased. Accordingly, until Irv purchased the shares, they were entitled to the continued payment of dividends in accordance with past practice. Irv improperly cut off those payments in December 2013, contrary to their rights under the MOU and their rights as shareholders.

[54] Again, I do not find Irv's evidence credible on this issue. He has taken contradictory positions -- that the applicants were entitled to payment until the transfer of their shares in November (see his e-mail of September 3, 2013) or until the closing on February 1, 2013. However, the corporation continued to pay those dividends for many months after the closing, suggesting that the applicants' interpretation -- that they should be paid dividends until their shares were actually paid for -- is the better one, and that Irv agreed with it for some time.

Was there Oppressive Conduct?

[55] I find that Irv conducted the operations of 175 in a manner that unfairly disregarded the interests of the applicants for two reasons. First, he cut off the payment of dividends in December 2013, despite his obligation to pay them in accordance with the MOU.

[56] Second, Irv's conduct during negotiations over the purchase price of the shares has been unfair. In particular, he took a position that the applicants were not shareholders when they were clearly shareholders as a result of the bequest in Doris' will. Irv knew that they held the shares because of that bequest, and he treated them as shareholders, soliciting the transfer of their shares and promising to purchase those shares, until he took the position that they were not shareholders in May 2015.

Are the Applicants Entitled to Dividends from December 2013 through to June 2016?

[57] Given my interpretation of the MOU, I find that 175 is obligated to pay each of the applicants dividends from December 2013 to June 2016. I fix the amount of compensation at $1,100 per month for each applicant (the midpoint in the range they received over the years).

The Valuation of the Shares

[58] The applicants asked Irv to purchase their shares, in accordance with the MOU, shortly after the closing with respect to the 75 per cent interest in February 2013. Irv's promise was to purchase the shares at "fair value". The valuation of the shares has been a contentious issue ever since.

The evidence on the value of the shares

[59] All parties agree that the starting point for the valuation of the shares is $4 million, the value of 175's one-quarter interest in the property based on the notional sale price of $16 million for the whole property. All agree that the valuation date is January 31, 2013, the day before Irv's acquisition of the 75 per cent interest. All agree on certain adjustments, such as a deduction for real estate commission and taxes arising on a notional disposition of the asset.

[60] Steven Hacker, a chartered accountant and chartered business valuator, appeared as a witness on behalf of the applicants to give expert opinion evidence on the value of the shares. The respondents put forth no expert evidence on valuation, although Irv conceded that they had obtained an expert's report.

[61] Mr. Hacker made his calculation starting with a fair market valuation of the shares of 175. He applied the test in the International Glossary of Business Valuation:

The highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

[62] Although the term "fair value", used in the MOU, is not in the International Glossary, Mr. Hacker took it to mean, in the context of this litigation, a pro rata fair market valuation -- that is, one without consideration of a minority discount.

[63] He assumed that 175 was a going concern, and then he used an asset-based approach to come up with an adjusted net asset value. Included in the valuation are deductions from the sale price of $4 million for notional liabilities that will be incurred at the time the corporate asset -- the interest in the property -- is sold. This would include potential tax liabilities in the future for the corporate shareholder, as well as notional disposition costs such as real estate commission.

[64] Mr. Hacker also made assumptions about the length of time the corporation might hold the asset. If the asset were held for a lengthy period of time after the shares were purchased, the tax obligations relating to disposition would be delayed. In his view, the calculation should take into account the present value of those costs.

[65] He considered scenario A, an immediate disposition, where the taxes and disposition costs are triggered immediately; scenario B, where the disposition is delayed ten to 15 years, causing him to reduce the liabilities by 50 per cent; and scenario C, where there is low or nominal impact from the taxes and disposition costs because of indefinite holding. He chose scenario B for his valuation, taking into account 50 per cent of the taxes and disposition costs, because he concluded that a willing buyer and seller might negotiate to a midpoint. He then valued the applicants' shares at $1,170,000.

[66] That brings me to the contested adjustments. Irv took issue with a number of the deductions made by Mr. Hacker and with his failure to take account of Irv's claim for compensation of $300,000 and the application of a minority discount. Irv valued the shares at $549,450 before applying further deductions for the Muskoka transfer and other payments made (see ex. 10).

Irv's claim for $300,000 in deferred compensation

[67] In making his calculation of the net value of the assets, Irv deducted $300,000 from the $4 million value of the asset. He explained that this was a bonus arising as a result of his success in increasing the value of the property in the period from 2010 to 2012, when he was actively managing it. Irv also testified that he had an agreement with 175 that this amount would be paid on the disposition of the asset.

[68] Irv provided a calculation to explain the compensation sought through his counsel, in June 2015, and he explained the calculation at trial. He averaged the income of Tedford Gardens JV for the last three years under previous management (2007-2009) at $602,973 and for the three years after he took over management (2010-2012) at $810,741. The difference was $207,768. Using a cap rate of 5.94 per cent, he determined a value creation of about $3.5 million. 175's quarter share was $874,444. He claimed deferred compensation of one-third ($291,481), which he rounded up to $300,000.

[69] This claim for compensation was not mentioned to the applicants at the time of the share transfer or the provision of the MOU in November 2012. There was no indication that 175 had such a liability in the financial statements provided to the applicants over the years. Irv testified that this was because the item was not bookable.

[70] Again, Irv's evidence is not credible. On cross-examination on his affidavit, Irv said that he had made the number up, and there was no formalized agreement for payment. At trial, he admitted that the answer was true at the time, but he changed his evidence at trial, claiming there was an agreement and providing the formula for the calculation.

[71] Once again, there is no documentation to support this significant claim he makes. Rebecca did not testify as to her knowledge of the claim or any agreement. Irv has given contradictory evidence on the basis for the claim on cross-examination and at trial.

[72] His calculation is also suspect. While he claimed in the footnote to his calculation that he obtained his figures from the financial statements (see ex. 13), it is clear that this is not exactly the case. With respect to rent revenue in 2012, he adjusted the rent figure upwards from $900,036 in the financial statements to $950,036 because he disagreed with the financial statements prepared by the accountants.

[73] I find that the $300,000 for compensation is not an appropriate deduction from the value of the corporate asset. I am not satisfied that there was an obligation on the part of the corporation to pay that amount. Indeed, if the corporation were required to pay this amount to Irv over a three-year period, it would have put the corporation into a deficit position in those years of operation.

[74] While Irv may feel it would be fair to him to make the applicants pay for the increased value of the asset, he never disclosed this claim to them prior to the share transfer and raises it now in an effort to reduce the amount he should pay. However, he has not satisfied me that this is a valid obligation of the corporation.

Legal fees

[75] Mr. Hacker did not include legal fees of $38,000 as a corporate liability that should be deducted. He did so because he had no documentation indicating these were legal costs related to 175's operations, and he queried whether the legal fees were incurred for the benefit of 175. Irv took issue with this conclusion.

[76] Irv admitted in his testimony that the accounts for Miller Thompson, which he seeks to deduct, have not been paid and that he has no intention to pay them. They are outstanding from 2012.

[77] I find that the legal fees for the Moldaver accounts should be deducted from the asset value of the property, as they have been paid through 175. However, the fees of Miller Thompson (roughly $17,000) should not be deducted, as they have not been paid, and it does not appear that they will be paid.

The applicable tax rate

[78] Mr. Hacker used a corporate tax rate of 26.5 per cent in his valuation. While the actual rate paid by 175 was 46.16 per cent, 175 could create a refundable dividend tax pool ("RDTOH"). By paying dividends to shareholders, it would receive a tax credit or refund of 26.67 per cent of taxes. Accordingly, Mr. Hacker used a corporate tax rate net of refundable dividends of 26.5 per cent. While he acknowledged that there is a tax cost personally to the shareholders when dividends are paid, he was of the opinion that a willing buyer would consider the effective tax rate in negotiating the price of the shares.

[79] Irv argues that the corporate tax rate used in the valuation should be the 46.16 per cent actually paid by the corporation because the government would ultimately end up with an amount equivalent to the 46.16 per cent tax rate through a combination of the taxes paid by the corporation and the individual shareholders.

[80] Irv is not an expert on taxation or valuation. Mr. Hacker gave his expert opinion that a hypothetical buyer and seller would consider the effective tax rate of the corporation, because the RDTOH pool should be considered as a contingent or hidden asset of the corporation.

[81] I accept Mr. Hacker's expert opinion that the RDTOH pool should be considered in determining the effective tax rate of the corporation. The respondents have provided no expert evidence on valuation that calls into question the calculation Mr. Hacker has made. Accordingly, I accept Mr. Hacker's evidence that a notional corporate tax rate of 26.5 per cent is appropriate for purposes of the valuation.

Should there be a minority discount?

[82] In Kreitzman Estate v. Kreitzman, [2003] O.J. No. 3762, 38 B.L.R. (3d) 218 (S.C.J.), at para. 4:

Fair value is calculated without regard to minority discount. Fair market value, in contrast, may include a minority discount component.

[83] The rationale for a minority discount is to recognize that a purchaser of a minority position in a corporation will lack control over decision making in the corporation (Kummen v. Kummen-Shipman Ltd., [1983] M.J. No. 110, 19 Man. R. (2d) 92 (C.A.), at paras. 11 and 14). However, there are cases where the courts have refused to apply a minority discount: first, where a party has proved oppression, and the court orders a buyout of the minority's shares (Mason v. Intercity Properties Ltd. (1987), 59 O.R. (2d) 631, [1987] O.J. No. 448 (C.A.), at para. 40); and second, where the purchaser will be consolidating his position and buying control (Kummen, at para. 16; Pilch v. TemboSocial Inc. (2014), 122 O.R. (3d) 270, [2014] O.J. No. 4535, 2014 ONSC 5590 (S.C.J.), at para. 50).

[84] Mr. Hacker did not include a minority discount in his valuation, as he was instructed by applicants' counsel to determine a pro rata fair market value for the shares. However, he gave the opinion that 20 per cent would be an appropriate minority discount, if one were applicable.

[85] Irv argues that his obligation is to pay fair market value for the shares. Given the minority position of the applicants -- holders of one-third of the shares of a private company that holds one-quarter of a property -- the value of the shares should be subject to a minority discount of 30 per cent.

[86] In the present case, I do not find it appropriate to apply a minority discount. The MOU states that Irv will make best efforts to purchase the applicants' shares for "fair value", not fair market value. That document was drafted by Irv.

[87] Irv testified that, in his view, fair value and fair market value meant the same thing, and his counsel submits that the parties did not use the term "fair value" as a term of art. E-mails exchanged between Jay and Irv suggest this to be the case, as the parties sometimes referred to "fair market value" in their discussions despite the reference to "fair value" in the MOU. Nevertheless, it is significant that Irv, a lawyer and an experienced businessman, used the words "fair value" in the MOU.

[88] I accept Jay's evidence that Irv made no mention of a minority discount before the share transfer occurred. There is no reason why the applicants would have expected that their shares in the corporation, which essentially existed to hold 175's interests in the property, would be valued less than those of Irv or Rebecca.

[89] Irv obtained a benefit from the applicants' transfer of their shares, as it allowed him to proceed with the financing for the purchase of the 75 per cent interest in the property. While he stated in court that he could have sought a different financing arrangement if he had not obtained the applicants' shares, he did not have to do so, and thus he benefitted from the transfer of their shares.

[90] This is also a case where Irv benefits from a consolidation of his position in 175, as he becomes the holder of two-thirds of the shares in 175. This was a factor that influenced the decision in Pilch above not to award a minority discount, even though oppression had not been found (at paras. 50 and 54).

[91] In the circumstances of this case, I conclude that it is neither equitable nor consistent with the terms of the MOU and the parties' reasonable expectations to apply a minority discount. However, if I am in error, I accept Mr. Hacker's suggestion that 20 per cent would be a reasonable minority discount.

Should there be a present value discount?

[92] Mr. Hacker adopted scenario B, which adjusted the share price to reflect the fact that the disposition of the corporate asset might not occur for some years. As the taxes and disposition costs would be delayed, he reasonably concluded that there should be a discount to reflect the present value of these costs. Again, there was no expert evidence to challenge his methodology or the soundness of his analysis.

[93] I find that Mr. Hacker's scenario B is a reasonable one. I reject Irv's argument that scenario A should be adopted. That scenario is based on an immediate disposition of the asset. However, the more likely scenario is one where the asset would be held in the future for some indefinite period of time, since it had been held by the Kumer family and their partners since the late 1960s. Therefore, I accept Mr. Hacker's scenario B as the reasonable one on which to base the valuation.

Conclusion on valuation

[94] In summary, I accept Mr. Hacker's valuation of the applicants' shares using scenario B, subject to the following adjustments that must be made:

(1) the legal fees of the Moldaver firm shall be deducted as a corporate liability;

(2) the cash on hand of $50,423 (disclosed a few days before trial) shall be added as an asset of the corporation;

(3) the taxes shall then be recalculated and the share value determined without a minority discount;

(4) the amount already paid by Irv in the amount of approximately $178,521 shall be deducted from the amount payable using the revised calculation.

[95] The applicants are not seeking prejudgment interest on the amount calculated for the share purchase, as they were entitled to continue to be treated as shareholders until their shares were purchased. Accordingly, they were entitled to receive dividends, as I have found.

Conclusion

[96] The applicants shall have judgment in accordance with these reasons. More particularly, I order that

(1) Irv Kumer purchase their shares for the price calculated in accordance with para. 94 of my reasons;

(2) 175 pay each of the applicants dividends of $1,100 per month from December 2013 to June 2016, which I calculate as $102,300.

[97] I remain seized to deal with issues arising out of the implementation of this decision, in particular with respect to the calculations. If the parties cannot agree on costs, the applicants shall provide brief written submissions within 21 days of the release of these reasons, and the respondents shall provide a brief response within 21 days of the receipt of the applicants' submissions.

Application allowed.

End of Document