Court File and Parties
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: John Mozas, Dan Pawliw and Kristina Pearce, Plaintiffs/Responding Parties
AND:
Medcan Health Management Inc., Dr. Robert Francis and Shaun Francis, Defendants/Moving Parties
BEFORE: Mr. Justice H.J. Wilton-Siegel
COUNSEL: James Renihan, for the Defendants/Moving Parties
Gordon Capern and Michael Fenrick, for the Plaintiffs/Responding Parties
HEARD: February 21, 2017
ENDORSEMENT
Overview
1The defendants, Dr. Robert Francis and Shaun Francis (collectively, the “individual defendants”) and Medcan Health Management Inc. (“Medcan”), seek an order striking certain paragraphs in the Amended Statement of Claim (amended January 26, 2017) (the “Amended Statement of Claim”).
2The pleadings at issue deal broadly with two issues: (1) alleged financial improprieties by the individual defendants as directors and officers of Medcan; and (2) the failure of Medcan to hold annual shareholder meetings and to deliver financial statements to shareholders. For present purposes, the principal issues pertain to the alleged financial improprieties, which fall into three classes: (1) the provision of improper compensation to the individual defendants and their families; (2) the use of the personal consulting corporation of the defendant Dr. Robert Francis to appropriate corporate opportunities of Medcan and improperly charge personal expenditures; and (3) the appropriation by the individual defendants of other corporate opportunities of Medcan using other corporate entities bearing the “Medcan” name.
3The defendants rely on the decision in Rea v. Wildeboer, 2015 ONCA 373, 126 O.R. (3d) 178. The ratio in that case is stated at para. 27 as follows:
… claims must be pursued by way of a derivative action after obtaining leave of the court where, as here, the claim asserted seeks to recover solely for wrongs done to a public corporation, the thrust of the relief sought is solely for the benefit of that corporation, and there is no allegation that the complainant’s individualized personal interests have been affected by the wrongful conduct.
4The defendants say that Rea v. Wildeboer draws a strict distinction between derivative claims and personal claims and requires that claims that cannot be characterized as “individualized claims” must be pursued by way of a derivative action with leave of the court. For this purpose, I understand the concept of “individualized claims” to be claims in respect of alleged wrongful acts that “directly affected the complainant in a manner that was different from the indirect effect of the conduct on similarly placed complainants”: see Rea v. Wildeboer, at para. 29. The defendants say that, after Rea v. Wildeboer, while it is still possible for derivative claims and oppression claims to overlap, a shareholder must demonstrate that he or she was personally affected by a wrong done to the corporation in order to address such claim by an oppression action.
5The defendants say that the pleadings that are the subject of this motion assert claims that are not “individualized claims”. The defendants say that, in this case, any damage arising from the impugned actions of the individual defendants was suffered by the corporate defendant and did not give rise to any claims that were particular to the plaintiffs. Given this characterization of the plaintiffs’ claims, the defendants say that the plaintiffs assert solely derivative claims that cannot be pursued in this action.
Preliminary Observations
6Before addressing the issue on this motion, I have the following four preliminary observations regarding the context in which the pleadings at issue are being analyzed.
7First, the pleadings at issue are, in a sense, secondary to the principal claims asserted in this action regarding the wrongful termination of the plaintiffs John Mozas and Dan Pawliw. The defendants do not suggest that these claims for wrongful termination are not “individualized claims”.
8Second, the principal purpose of the pleadings at issue is to permit a determination of whether the net income of Medcan should be adjusted for purposes of the valuation of the fair value of the shares of the corporate defendant if the defendants are required to purchase the plaintiffs’ shares. The plaintiffs plead, in effect, that they had a reasonable expectation that Medcan would purchase their shares in the event of the termination of their employment at a price that reflected the earnings of the corporation that it would have received if there had been no breach of the directors’ fiduciary duties. This is discussed further below.
9Third, with respect to the valuation of the Medcan shares, it is important to note that any valuation of the shares would rely heavily on a multiple of earnings approach. For such purpose, it is necessary for a valuator to determine the “normalized” earnings of Medcan against which to apply an appropriate multiple. The plaintiffs argue that the earnings of Medcan, as reflected in its financial statements, have been reduced by improper compensation and other payments to the individual directors made in breach of their fiduciary duties to Medcan. They argue that these payments should be added back to the reported earnings of Medcan in determining the “normalized” earnings of Medcan. They also say that additional income, in the amount that would have been received by Medcan if the individual defendants had not appropriated certain corporate opportunities of Medcan for their personal benefit or for the benefit of their personal holding corporations, should be included in Medcan’s “normalized” income. As discussed further below, the defendants say, in effect, that these issues cannot be addressed in this proceeding and that, for valuation purposes, the plaintiffs must accept the financial statements of Medcan as they currently exist.
10Fourth, it is also important to note for present purposes that the plaintiffs do not seek any payments by the individual defendants or their personal corporations to Medcan to the extent that any of the impugned actions are found to have been in breach of the fiduciary duties owed by the individual defendants to Medcan. Nor do the plaintiffs seek a payment by any of these parties directly to themselves in compensation for any losses suffered by them as a result of the alleged breaches of fiduciary duty in the event that any such determination is made. As mentioned, they seek such a determination for the purpose of a further finding that the “normalized” income of Medcan for valuation purposes should take into account the effect of such actions on the net income of Medcan. The plaintiffs also assert that such actions provide further support for a reasonable expectation that their shares would be repurchased in the present circumstances.
11I note, however, that to the extent that the plaintiffs seek an order requiring that all of the defendants, rather than Medcan alone, repurchase their shares, the pleadings depart from the principle otherwise applied in the Amended Statement of Claim. While I do not think that this claim for relief is sufficient to exclude the determination otherwise reached in this Endorsement, it may be that the pleadings should be further amended to strike this element of the relief sought in line with such determination.
Analysis
12Turning to the issue on this motion, I do not think that Rea v. Wildeboer precludes the plaintiffs from pursuing the impugned claims for the following two alternative reasons.
Individualized Claims
13First, I think the plaintiffs’ pleadings at issue on this motion assert “individualized claims”, as that term is described above, rather than derivative claims. In the present circumstances, the wrongful acts alleged by the plaintiffs directly affected them in a manner that is different from the indirect effect of such acts on similarly placed parties, being the remaining shareholders of Medcan. The plaintiffs argue that the alleged breaches of fiduciary duties on the part of the individual defendants gave rise to a reasonable expectation that their shares would be reacquired because of the specific circumstances applicable to them, namely their earlier acquisition of shares in the context of an employment relationship followed by the alleged wrongful termination. The plaintiffs submit that their shares must be valued taking into consideration the impugned actions on the financial results of Medcan. There is no evidence that any other shareholder is in a position to have its shares acquired on a fair value basis on these grounds and therefore valued taking into consideration the impugned actions.
14As a related matter, the plaintiffs assert that they are entitled to have their shares repurchased and, accordingly, they stand in the position of departing shareholders if they are successful. The remaining shareholders are continuing shareholders. As such, the effect of the determinations sought by the plaintiffs is very different as between the plaintiffs and the remaining shareholders. The plaintiffs do not seek any recovery by Medcan if they are successful in their assertions. They seek an adjustment to the stated historical earnings of Medcan for use in the calculation of a “normalized” income for the corporation for valuation purposes. The remaining shareholders would have a very different interest in any determination of a court that the individual defendants breached their fiduciary duties to Medcan. They may wish to seek recovery of some amount by Medcan. They might also wish to address the future relationship between the individual defendants and Medcan.
Overlap of Derivative and Personal Claims
15Second, even if it were held that the pleadings do not assert “individualized claims”, I am not persuaded that Rea v. Wildeboer prevents the assertion of the plaintiffs’ claims in the present action for the following reasons.
16First, Rea v. Wildeboer leaves open the possibility of an overlap between derivative claims and personal claims in particular situations, typically involving small closely-held corporations. This is clear from the statement in para. 29 in which Blair J.A. states that he is not resolving the more general question of whether the distinction between derivative claims and personal claims should be maintained. Moreover, Blair J.A. refers without disapproval to the fact that there is the potential for overlap, particularly in the case of claims involving small, closely held corporations, where the same wrongful acts can directly affect a complainant in a manner that is different from the indirect effect of the conduct of similarly placed complainants. In this case, the evidence indicates that, while there may be other shareholders in Medcan, it remains a small, closely held corporation. Whether the plaintiff can assert its claims should depend upon whether there is a defensible basis for these claims. In my view there is such a basis, as set out below.
17In addition, a principal reason for the approach in Rea v. Wildeboer is, as the defendants argue, to avoid a multiplicity of proceedings. I am not persuaded that the plaintiffs’ pleadings raise such a concern in this case.
18On the one hand, if the plaintiffs’ assertions are accepted by a court, it is quite possible that the judicial determination would constitute a res judicata determination between the individual defendants and Medcan in any future action that might be commenced by the remaining shareholders. To the extent that is the case, the plaintiffs’ action would have simplified any future proceedings and may even reduce the prospect of future proceedings. Even if that is not the case, the remaining shareholders stand in a different relationship to Medcan than do the plaintiffs, as discussed above. Nothing in this action would open the door to a multiplicity of proceedings by such shareholders in respect of the actions that are raised in this action.
19On the other hand, the defendants’ position itself appears to engender unnecessary litigation. The defendants’ position raises the question of how the plaintiffs can obtain an adjudication of their claim that the valuation of their shares must take into account the additional income and the impugned payments and other compensation to the individual defendants and their personal corporations. The defendants acknowledge that, on their theory of the strict distinction between derivative claims and personal claims, it would be necessary for the plaintiffs to commence a separate action to get a determination of their allegations of breach of fiduciary duties in order that any such determinations in such other action would then constitute findings that are res judicata for the purposes of this action. At best, the defendants’ own position therefore entails a multiplicity of actions that serves no purpose.
20Lastly, the logic of the defendants’ position drives them to assert an even stronger position. They say that the plaintiffs cannot ask the court to adjudicate derivative claims in order to determine what the shares would have been worth if a derivative action had been commenced and prosecuted. They say that the Medcan shares have a real value today and that exploring alternate values under hypothetical scenarios is of no relevance. In their factum, they express this point by saying that “to the extent that [John Mozas and Dan Pawliw] wish to have their shares valued in this action, they must take Medcan as it is – without out any impact from derivative litigation against [the individual defendants].”
21I do not think that this is reasonable in the context of a private corporation. In this case, the plaintiffs say that the individual defendants have treated Medcan as their personal piggy bank. They say that, in such circumstances, they have a reasonable expectation that any repurchase of their shares will be at fair value based on the income that Medcan would have enjoyed if the individual defendants had not received the impugned payments and other compensation and the individual defendants or their personal corporations had not received the benefit of the corporate opportunities that the plaintiffs say have been misappropriated.
22These are the very circumstances in which courts must consider what the financial results of the corporate defendant would have been if the impugned actions had not occurred. Moreover, in the context of a small, closely held corporation, these are the circumstances in which there is a real potential for the overlap of personal and derivative claims. The Business Corporations Act, R.S.O. 1990, c. B.16, does not exclude the possibility of such an overlap in such a context. In fact, it anticipates such a situation in providing in s. 247(c) that a court may order that any amount adjudged payable by a defendant in a derivative action brought under s. 246 shall be paid, in whole or in part, directly to former and present security holders of the corporation instead of to the corporation. In short, while the plaintiffs do not seek such a remedy in the present case, the inherent unfairness of the defendants’ position is itself a reason for rejecting their position on this motion.
Conclusion and Costs
23Based on the foregoing, the defendants’ motion is dismissed in its entirety. Costs in the agreed amount of $17,000 are payable by the defendants forthwith to the plaintiffs.
Wilton-Siegel J.
Date: April 18, 2017