COURT FILE NO.: 16-69413 DATE: 2016/09/20 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Jean-Phillipe Ayotte, Rene Tougas and Patrick Page, Applicants and Responding parties on the cross-motion AND Roger Beaulne, Anne Beaulne, Roger Lebel, Yves Richard, Marc-Andre Lalande, Eric Leclair, Kristopher Ross, Curtis Coulbourne, Julie Bell, ATG Industries Inc. and 2200124 Ontario Limited, Responding parties on the motion and Moving parties on the cross-motion

BEFORE: Mr. Justice Robert J. Smith

COUNSEL: Andre Claude, for the Applicants and Responding Party Pierre Champagne, for the Responding parties Louis Racine, for the Secured creditors, Roger and Anne Beaulne

HEARD: In writing

COSTS ENDORSEMENT

Overview

[1] The applicants brought a motion for a mandatory interlocutory injunction to re-establish the status quo until the application for an oppression remedy was heard. The unanimous shareholders agreement, signed by all 10 shareholders and by the secured creditor, required that eight of the 10 shareholders agree before any major changes were made in the management of ATG Industries Inc (“ATG”).

[2] The secured creditor (the “Beaulnes”) entered into an agreement with seven of the respondent shareholders to seize all of the shares based on an alleged default, and vote all of the shares at a meeting where Mr. Ayotte, the president of ATG, was fired and Mr. Tougas was demoted. The respondent shareholders signed an agreement with the secured creditor that they would not challenge the alleged default and in return, the secured creditor would return their shares within two months after Mr. Ayotte had been terminated. The assistance of the secured creditor was required because the consent of eight shareholders was required to make the above changes, and the respondents only had the consent of seven shareholders to fire Mr. Ayotte and demote Mr. Tougas.

Positions of the Parties

[3] The applicants seek costs on a substantial indemnity basis in the amount of $40,402, which includes $773 in disbursements and applicable taxes. The applicants seek costs at the substantial indemnity level based on what they alleged was bad faith and reprehensible conduct on the part of the seven respondent shareholders, who the applicants submit that they conspired with the secured creditor and agreed that the secured creditor would allege that a default had occurred (even though all payments owing were up to date), they would not contest the alleged default and would allow the secured shareholder to seize all of their shares, vote the shares at a shareholder meeting to remove Mr. Ayotte as a director of ATG, appoint new directors and fire Mr. Ayotte. In return, the secured creditors agreed to return the shares they had seized based on an alleged default to the respondent shareholders about two months later. The applicants submit that the alleged default was a sham concocted in order to allow the seven respondent shareholders to take steps in contravention of the unanimous shareholders’ agreement, which required the approval of 80% of the shareholders to approve and they only had 70% in agreement.

[4] In addition to signing a secret agreement with the secured creditor, the respondent shareholders also proceeded to change the locks, block the computer, block Mr. Ayotte’s email account and his access to the company’s server, and arranged to have the police escort Mr. Ayotte from ATG after his employment was terminated. These actions were taken notwithstanding that the unanimous shareholders agreement required eight of the 10 shareholders to be in agreement before any of the above steps could be taken and only 7 shareholders were in agreement.

[5] The secured creditors and the seven respondent shareholders submit that the matter of costs for the July 29, 2016 motion should be left to the hearing judge. Alternatively they submit that any award of costs should be made in any event of the cause and they submit that the costs sought are excessive.

Factors

[6] The factors to be considered when fixing costs are set out in Rule 57 of the Rules of Civil Procedure and include in addition to success, the amount claimed and recovered, the complexity and importance of the matter and the principle of proportionality, the conduct of any party which unduly lengthened the proceeding, whether any step was improper, vexatious or unnecessary, or taken through negligence mistake or excessive caution, a party’s denial or refusal to admit anything, any offer to settle, the principle of indemnity, scale of costs, hourly rate claimed in relation to the partial indemnity rate set out in the Information to the Profession effective July 1, 2005, the time spent, and the amount that a losing party would reasonably expect to pay.

Success

[7] In this case, the applicants were completely successful on the motion and obtained a mandatory interlocutory injunction re-establishing the status quo by allowing Mr. Ayotte and Mr. Tougas to return to their positions in the company until the application can be heard.

Amount Involved

[8] The parties are all shareholders in a company that was purchased about six years for between $2 million and $3 million and employs approximately 38 individuals. Each shareholder owns 10% of the shares in the company and all are currently employed in the company. As a result, each of the parties has a substantial financial interest at stake.

Complexity and Importance

[9] The issues are very important to the parties as all 10 of the parties are shareholders in the company and are also employees of the company. The issues involving injunctions are of above average complexity.

Unreasonable and Reprehensible Conduct of Any Party

[10] I find that the seven respondent shareholders have acted unreasonably, reprehensibly and in bad faith by initially threatening one of the other three shareholders in an attempt to obtain the consent of eight of the ten shareholders as required by the unanimous shareholders agreement to make any major change. When they were unable to get the eighth shareholder to join with them to vote their shares to fire Mr. Ayotte and to demote Mr. Tougas they entered into a secret agreement with the secured creditors to allege that a default had occurred, to allow the secured creditor to seize all of the shares based on the alleged default, to vote those shares at a meeting to elect new directors and to fire Mr. Ayotte as president. The secured creditors agreed to return the seized shares to the respondent shareholders approximately two months later in return for their agreement not to challenge the alleged default.

[11] All payments owing to the secured creditors were up to date and the company had $250,000 in a GIC at the bank at the time the default was alleged. The loan to the secured creditors had also been paid down to approximately $650,000 from an initial amount of over $2 million during the six years since all of the shares were sold. The respondent shareholders attempted to avoid complying with the terms of their unanimous shareholders agreement, which required eight of the 10 shareholders to consent to any major change in the corporation.

[12] While the secured creditors were not directly affected by the dispute between the shareholders Mr. Beaulne entered into a secret side agreement with the seven respondent shareholders to proceed to seize their shares, based on an alleged default which they agreed not to contest, and then agreed to return the shares to them about two months later, after Mr. Ayotte was fired. The secured creditors knowingly assisted the seven respondent shareholders to end run the requirements of the unanimous shareholders’ agreement that Mr. Beaulne had insisted they all sign in order to purchase the company.

[13] The respondent shareholders also acted in a very high-handed and reprehensible way by changing the locks on the door and by blocking Mr. Ayotte’s access to his email and servers before the shareholders’ meeting was held electing new directors and terminating his employment. They also had Mr. Ayotte escorted from the building by the police, which was unnecessary and calculated to embarrass Mr. Ayotte.

Scale of Costs

[14] The applicants seek costs on a substantial indemnity basis based on the unreasonable, reprehensible and bad faith actions of the respondents outlined above. The respondents submit that costs should be left to the trial judge and only be fixed on a partial indemnity basis.

[15] The Ontario Court of Appeal has held that an award of substantial indemnity costs is only to be made where there is “reprehensible, scandalous or outrageous” conduct by a party. When the seven respondent shareholders were unable to obtain the consent of eight of the 10 shareholders as required by their shareholders’ agreement, they either had to respect the terms of their unanimous shareholders’ agreement or to seek a remedy from the court. Instead, they entered into a secret side agreement with the secured creditors to attempt to avoid the contractual terms of their shareholders agreement as outlined above. I find that this was bad faith and reprehensible conduct which should be censured by the court. The actions of the seven respondent shareholders were reprehensible and very unfair to the remaining three shareholders and as a result, I find that costs, on a substantial indemnity basis, are appropriate in these circumstances.

Hourly Rates and Time Spent and Proportionality

[16] The respondent shareholders submit that the costs claimed are excessive. The respondents did not dispute the hourly rate charged by the senior lawyers involved, however, submit that a partial indemnity rate of $157 per hour for a junior lawyer called in 2015 was excessive. In addition, the respondents allege that the complexity of the case did not require two senior lawyers to spend almost 30 hours each preparing the motion, affidavits and the factum. The respondents submit that the amount of time spent by senior counsel was not proportionate to the complexity of the issues involved.

[17] I agree and the amount allowed for some of the time spent by senior counsel will be reduced in the circumstances.

Amount the Unsuccessful Party Would Reasonably Expect to Pay

[18] Both of the secured creditors and the seven responding shareholders submit that the costs in the range of $10,000 to $13,500 on a partial indemnity basis would be an amount that they would reasonably expect to pay. The respondents did not provide me with Cost Outlines and therefore it is difficult to estimate the costs that they have incurred and that they would reasonably have expected to pay. If the above amounts are multiplied by 1.5, the amount they submit is appropriate on a substantial indemnity basis is in the $15,000 to $20,000 range.

Disposition

[19] Having considered all of the above factors and the submissions of the parties, I fix the costs payable by the respondents to the applicants in the amount of $30,000 inclusive of disbursements and the applicable HST. The costs are to be shared equally between the seven respondent shareholders and the secured creditors, on a joint and several basis, as they were essentially the two separate parties to the motion and to the secret side agreement.

R. Smith J. Date: September 20, 2016