COURT FILE NO.: CV-16-908-00 DATE: 20160707
Superior Court of Justice – Ontario
RE: 2066977 ONTARIO INC. v. MANINDER SINGH KALKAT, SUKHWINDER SINGH KALKAT, SARBJIT SINGH KALKAT and K & K BROTHERS INC.
BEFORE: Sproat, J.
COUNSEL: A. Sidhu for the Applicant L. Kumar, for the Respondents
HEARD: 20160628
Endorsement
Introduction
[1] This is a minority shareholder application brought under sections 207 and 248 of the Business Corporations Act seeking an order that the minority interest be purchased by the majority. The principal of the Applicant is Gurjinder Singh (“Gurjinder”) who acquired 200 shares in K & K Brothers Inc. (“K & K”). The individual Respondents, who belong to the same family, hold the remaining 400 shares in K & K. K & K owns a property in Kingston, Ontario which includes a Petro-Canada gas station, A & W restaurant and an Oil Changers store. There has been a breakdown in the relationship between Gurjinder and the Kalkats. Gurjinder wants to exit K & K and be paid for his shares.
Is the Applicant a Shareholder?
[2] Gurjinder purported to transfer his shares in K & K to the Applicant. The Articles of Incorporation of K & K, however, provide that no shares can be transferred without the consent of a majority of the Board or the consent of 51 percent of the common shareholders.
[3] The Canada Revenue Agency information returns for K & K in both 2014 and 2015 were signed on behalf of K & K by the Respondent Sarbjit Singh Kalkat (“Sarbjit”) and both contain a balance sheet which list the Applicant as the shareholder. The shareholder dividend payments have been made by cheque payable to the Applicant. I am satisfied that the Respondents are estopped from now taking issue with the fact that the Applicant is the owner of 200 shares in K & K.
[4] In any event, Ms. Kumar confirmed that there would be no prejudice to the Respondents if Gurjinder was added as an Applicant. If it had been necessary I would have made an order adding Gurjinder as an Applicant.
Is the Applicant Entitled to a Remedy?
[5] Gurjinder’s evidence is that the parties agreed in principle to sell the Property for $3,700,000 but that the Respondents have failed or we refused to act on offers received. Gurjinder further states that on May 12, 2013, there was an agreement in principle among the shareholders to enter into a Unanimous Shareholders Agreement (“USA”). A lawyer was retained and drafted a USA, which, as is typically the case, contained a buy-sell mechanism that could be invoked by any party wishing to sell shares. The Respondents failed to agree to enter a USA. Gurjinder has advised the Respondents by letter that stress and tension in relation to K & K is adversely affecting not only the business but his health.
[6] Gurjinder’s evidence is that the relationship of trust and confidence with the Kalkats has broken down. The Kalkats allege that Gurjinder mismanaged matters resulting in the Kosah lawsuit, discussed below, and that he has acted in bad faith.
[7] Gurjinder’s evidence is that the lease between K & K and the tenant of the Petro-Canada station was signed by Maninder Kalkat on behalf of the tenant and on behalf of K & K as landlord. Gurjinder’s evidence is that payments due to K & K under the lease have been in default since December, 2013 and the arrears total approximately $73,000. Despite this no action has been taken. The Kalkats made a bald denial of allegations related to the lease, taking the position matters pertaining to the lease are unrelated to the Application. I disagree and find that on the evidence before me failing to enforce the lease prefers the interest of a member of the Kalkat family to be legitimate interests of K & K and constitutes an act of oppression by the Kalkats.
[8] In Muscillo v. Bulk Transfer Systems Inc., [2009] O.J. No. 3061 (Ont. S.C.J), Newbould J. noted at paragraphs 22-26, that it is not necessary to find oppression to grant relief under s. 207 of the BCA. A breakdown in the relationship among shareholders is enough.
[9] The evidence before me does not establish, as in Muscillo, a partnership relationship. It is, however, clear that there has been a breakdown in a relation of trust and confidence among a small shareholder group and there has been some oppression. As such I conclude that it is just and equitable that a remedy be granted which will allow the minority and majority to terminate their business relationship.
What is the Appropriate Remedy
[10] The principal factor complicating matters is that in 2013 an action was commenced by Jaswinder Kosah against Gurjinder, his brother Parvinder, Parvinder’s real estate brokerage and K & K. The Respondents are understandably concerned about a possible scenario in which the Kalkats purchase Gurjinder’s shares in K & K only to later find that Kosah obtains a judgment which it enforces against K & K. That scenario could then see K & K having to assert rights of indemnity against Gurjinder. I am not saying that this scenario is probable or even likely but it is a source of concern. A related concern seems to be that if K & K is found to have any liability in the lawsuit Gurjinder should, in effect, be bearing one third of the cost and this might not occur if his shares in K & K had already been purchased.
[11] The parties are not, however, all that far apart in terms of their positions. Both sides are content with a court ordered process to value K & K. They differ, however, as to what amount should be held in trust pending the resolution of the Kosah lawsuit. The position of Gurjinder is that he should be paid for the value of his shares less one third of the potential liability to Kosah being held in trust. The Respondents blame Gurjinder for the Kosah lawsuit and, therefore, take the position that 100 per cent of the potential liability to Kosah should be held back to Gurjinder for his shares.
[12] It was raised by counsel during the course of argument that business valuations can be very expensive to obtain. I then observed that you see many cases in which there are competing business valuations which come to very different results. Going down the path of a valuation would result in a lot of money being spent on the business valuation and, assuming a difference in opinion, in litigating the fair value of the shares.
[13] A possible alternative is to determine the fair value of the shares in K & K by offering the assets of K & K for sale. In fact, there is evidence that a third party is prepared to pay $3,825,000 to purchase the assets. The majority shareholders should not, however, be forced to sell the assets of K & K if they are otherwise prepared to pay the Applicant the fair value of its shares. So it is up to the Respondents. If they wish to pursue the offer that now appears to be available or they wish to pursue a sale process, then Ms. Kumar should discuss that with Mr. Sidhu and if need be an application can be made to me for directions as to how the sale process should proceed. The features of a sale process should certainly include the retainer of an independent and experienced real estate lawyer with instructions to keep both sides apprised of all relevant information and advice.
[14] If the Respondents do not want to pursue a sale process, and instead wish to purchase the shares of Gurjinder, I will order valuation process. The process shall track the process outlined by Newbould J. in Muscillo v. Bulk Transfer Systems Inc., [2009] O.J. No. 3061 (Ont. S.C.J) at paragraphs 91 – 94. I am also in agreement with the valuation process suggested at paragraphs 103 – 104. The parties may agree to extend certain of the timeframes such as the time period to retain a valuator or a time frame within which the valuation is to be completed.
[15] The parties did not address the valuation date. If the parties wish to make submissions in that regard, they may do so in writing, failing which the valuation date will be February 24, 2016 being the date the Application was commenced which, as indicated in Muscillo at paragraph 98, is commonly used as the valuation date. There shall be no minority discount as per paragraphs 91-94 of Muscillo. The fair market value of the shares shall be determined without reference to the Kosah lawsuit. I agree the Respondents have a legitimate interest in not being prejudiced by the Kosah lawsuit. I will later determine what, if any, holdback is required to protect the legitimate interests of the Respondents based upon further and better evidence related to the status and merits of the Kosah lawsuit.
[16] Counsel should, therefore, discuss matters and get back to me. If the Respondents opt for a sale process counsel should attempt to agree on a draft order and provide me with written submissions as to any points of disagreement. Counsel may also request to address this issue in court. If the Respondents do not want a sale process, there shall be a valuation process. In accordance with these reasons, counsel should attempt to agree on an order failing which they should make written submissions as to the form of the order. Counsel may also request to address this in court.
Costs
[17] Costs of the application need to be addressed, however, it makes sense to defer the consideration of costs until we know whether the parties are proceeding down the path of sale or the path of valuation. There may be further orders required to implement either a sale process or a valuation process and it would make sense to finalize those orders before addressing the issue of costs. I will, therefore, make a later determination of when costs submissions are required.
Sproat, J DATE: July 7, 2016