Konopaski v. Konopaski et al.
[Indexed as: Konopaski v. Konopaski]
Ontario Reports Ontario Superior Court of Justice, Bale J. April 7, 2017 137 O.R. (3d) 699 | 2017 ONSC 2175
Case Summary
Corporations — Winding up — Parties' business relationship breaking down irrevocably — Appropriate remedy being order that respondent purchase applicant's interest in their joint enterprise at fair market value — Order granted for equalization of commissions from parties' investment business.
The parties owned companies through which they carried on an investment business and other enterprises. They shared their business income (including commissions) evenly until 2014, when their personal and business relationship started to deteriorate. The applicant brought an application for remedies under ss. 207 and 248 of the Business Corporations Act, R.S.O. 1990, c. B.16.
Held, the application should be allowed.
It was clear that the breakdown of the parties' business relationship was irrevocable and that the required trust and confidence between business partners no longer existed. The appropriate remedy was an order that the defendant purchase the plaintiff's interest in their joint enterprise at fair market value. An order equalizing their commissions from September 2014 to June 2016 was also appropriate.
Cases referred to
Statutes referred to
Business Corporations Act, R.S.O. 1990, c. B.16, ss. 207, (2), 248 [as am.]
APPLICATION for remedies under the Business Corporations Act.
Janice Wright and Greg Temelini, for applicant. Robert Zochodne, for respondent Michael Earl Konopaski.
BALE J.: —
Introduction
[1] Franklin Konopaski and Michael Konopaski are father and son, and are officers, directors and shareholders of the respondent corporations. Because Messrs. Konopaski share the same surname, it will be convenient, in these reasons, to refer to them as Frank and Michael.
[2] Frank and Michael each have a 50 per cent interest in the respondent corporations, except Kawartha Securities Ltd. Michael has a 75 per cent interest in Kawartha Securities, and Frank has a 25 per cent interest.
[3] Frank, at age 72, wants to liquidate his interest in their joint enterprise; Michael, at age 43, would like to purchase his father's interest. However, they have been unable to agree upon the value of that interest, and there has been a complete breakdown in their business and personal relationships.
[4] In this proceeding, Frank applies under ss. 207 (winding up) and 248 (oppression) of the Business Corporations Act, R.S.O. 1990, c. B.16 and asks that Michael be required to purchase his interest in the family businesses, or in the alternative, that the respondent corporations be wound up.
Background Facts
[5] Frank started Money Managers Inc., a mutual fund dealership, in 1987. Michael joined his father in 1995, and the two shared equally in the profits of the business. In 1999, both became licensed to sell individual securities and bonds.
[6] In June 2012, Frank sold Money Managers Inc. to Aligned Capital Partners Inc. ("ACP"). Frank became a director of ACP, and Michael became its chief financial officer. The parties thereafter carried on their investment business as an ACP branch office. Although each had his own advisor code, the two operated under an agency agreement between Frank and ACP.
[7] In 2010, Frank and Michael began making acquisitions in order to expand and diversify their business interests. The primary source of financing for the acquisitions was shareholder loans made by Frank.
[8] In September 2010, the parties purchased a GIC business, and a 50 per cent interest in a commercial building at 250 Queen Street, in Port Perry, from David Powell. These acquisitions were financed primarily by means of a $175,000 shareholder loan from Frank, although Tacit Accounting Ltd. contributed $32,500 toward the purchase of the building.
[9] In July 2012, the parties purchased an accounting business, and the other 50 per cent interest in the Port Perry building, from Robert Gauvreau. These acquisitions were financed by means of a $260,000 shareholder loan from Frank.
[10] In April 2013, the parties purchased an accounting business from Craig Hamilton. This acquisition was financed by means of a $110,000 shareholder loan from Frank.
[11] In February 2014, Michael purchased an accounting business from Roger Moase, by way of a purchase of the shares of Moase Professional Corporation. This acquisition was financed, in part, with a $50,000 cheque from Frank to Michael.
[12] Following the purchase from Roger Moase, Michael changed the name of the corporation to "Scugog Accounting Professional Corporation" ("Scugog PC"), and transferred the accounting practice that had been purchased from Robert Gauvreau to Scugog. The former Gauvreau practice had, until then, been carried on by Tacit Accounting Ltd.
[13] In May 2014, Michael established Kawartha Accounting Professional Corporation ("Kawartha PC"), a corporation of which he is the sole shareholder.
[14] Frank and Michael had no formal business agreement. However, prior to the breakdown in their business and professional relationships, they shared their business income evenly, including commissions (first from Money Managers and then from ACP), the profits of both the jointly owned businesses and the professional corporations, and Michael's salary as CFO of ACP. 1
[15] On September 18, 2014, at Frank's request, the parties met. Frank had, for some time, wanted to discuss succession planning with Michael, and in particular, the liquidation of his interest in their joint enterprise. The parties are at odds about what was said at the meeting, but suffice it to say that it went badly, and the relationship between father and son, already tense, continued on a downward slope.
[16] Following the meeting, Frank stopped sharing his ACP commissions with Michael. In response, Michael stopped sharing both his ACP commissions, and his CFO salary, with Frank. At that time, Frank's commissions far exceeded the combination of Michael's commissions and salary.
[17] There is somewhat of a void in the evidence after September 2014, and until June 2015. Between June 1 and June 23, 2015, Frank withdrew a total of $23,265 from various corporate bank accounts, without consulting Michael, and on June 26, Michael moved to a newly established ACP branch office, under a new agency agreement, and taking the business and staff with him.
[18] On July 20, 2015, ACP terminated Frank's agency agreement. ACP was aware of the dispute between father and son, and evidently had determined that it would be in the best interests of the company to terminate its existing agreement with Frank, and enter into a new one with Michael.
[19] In August 2015, the parties entered into an agreement pursuant to which Michael would pay $525,000 to Frank for his investment clients. However, Frank ultimately failed to complete the agreement.
[20] As a result of the termination of his agency agreement with ACP, Frank's licence to sell securities was suspended. For personal reasons, he found it difficult to deal with the situation, and it was not until February 2016 that his registration was reinstated. In the meantime, Michael had taken over most of his investment clients.
Expert Evidence
[21] Frank retained Ferguson + Mak LLP to value his interests in the family enterprise. Michael retained McColl Turner LLP to do the same. The following is a comparison of the results:
Discussion
[22] It is clear that the breakdown in the parties' business relationship is irrevocable. Hopefully, the resulting breakdown in their personal relationship is not. Under s. 207(2) of the Business Corporations Act, in cases where the required trust and confidence between business partners no longer exists (as in this case), the remedies provided for under both ss. 207 and 248 of the Act are available: Muscillo v. Bulk Transfer Systems Inc., [2009] O.J. No. 3061, at paras. 22 ff. In the circumstances of the present case, the appropriate remedy is an order that Michael purchase, at fair market value, Frank's interest in their joint enterprise.
[23] As is apparent from the preceding table comparing the expert valuations obtained by the parties, the difference between the two is comprised of the difference in the valuation of the businesses, and the inclusion by F+M (and not by MCT) of an equalization of the ACP commissions, and a sharing of Michael's ACP salary, both received between September 2014 and June 2016.
[24] At the outset of the hearing, Michael's counsel requested an adjournment, and argued that the application should proceed to trial with documentary and oral discovery. Frank's counsel opposed the adjournment arguing that the record was sufficient for me to fairly determine the issues, that "only the lawyers would benefit financially" from the requested adjournment, and that such an emotionally charged family dispute should be determined without further delay. At that time, I deferred my decision, and advised that I would hear argument on the application, and then only if necessary, order a trial of any issues that could not be determined on the existing record. Having now heard argument, and considered the case, I have concluded that although there are some gaps in the evidence, the elimination of such gaps would be unlikely to affect my determination of the major issues, and that any resulting changes in the numbers would not prove to be cost-effective for either party.
Valuation date
[25] While Michael considered that the parties' business relationship had ended in September 2014, in argument, his counsel allowed that since it was not until June 2015 that Michael took steps to terminate the relationship, June 30, 2015 would represent a fair valuation date.
[26] However, Frank argues that the valuation date should be June 30, 2016. I agree. While it is true that in June 2015, Michael moved out of the offices that he shared with his father, thus ending anything that remained of their business relationship, he took no steps to formally unwind their business affairs, or to compensate his father for the businesses taken with him. It was left to Frank to bring this application, which was commenced in April 2016. In these circumstances, the June 30, 2016 fiscal year-end is the appropriate valuation date.
[27] The difference between the June 2015 valuation date used by MCT, and the June 2016 valuation date used by F+M, is not particularly significant in relation to the valuation of the corporations, because in preparing its June 2016 valuation, F+M assumed that the historical financial performance for the three fiscal years ending on June 30, 2015 (with particular emphasis on the 2015 results) would be representative of their performance through June 30, 2016 (financial statements for fiscal 2016 were not available).
The professional corporations
[28] Frank's position is that Scugog PC and Kawartha PC should be included in the valuation of the parties' joint enterprise. I disagree.
[29] In support of his position, Frank argues that Michael has made a number of admissions which demonstrate that the professional corporations should be included.
[30] First, he says that Michael admitted, in a May 2016 e-mail, that the professional corporations were "indeed interconnected" with the respondent corporations. However, in the same e-mail, Michael says to Frank's counsel (referring to a term used in the notice of application): "You are wasting a lot of time, and a lot of Frank's money, trying to prove that the PCs are part of the financial ecosystem of the respondent corporations." Michael was therefore not admitting that Frank had any interest in the PCs; rather, he was arguing that Frank had no such interest, and that whatever the interconnection may have been, it was terminated as a result of the breakdown in their business and personal relationships. It should also be noted that Scugog PC was not acquired until January 2014, and Kawartha PC was not incorporated until May 2014, so any sharing was short-lived, and there is no evidence of what amounts may have been shared.
[31] Second, he says that Michael has admitted that Frank "helped finance the purchase of the Moase accounting practice which Michael apparently used to start Scugog PC". However, the parties did not purchase the Moase accounting practice; rather, Michael purchased the shares of Moase Professional Corporation, and then changed the name of the corporation to "Scugog Accounting Professional Corporation". Although it is not entirely clear, I am satisfied, based upon Michael's evidence, the e-mail correspondence at the time, and the cheque from Frank to Michael, that Frank was aware that Michael was purchasing the shares of Moase Professional Corporation, and advanced $50,000 to help him do so. Frank is entitled to repayment of the loan, but not to an interest in the corporation.
[32] Third, Frank argues that Michael admitted in his affidavit that "prior to the deterioration of their relationship, [he] considered that Frank was entitled to fifty per cent of the profits from the PCs, and paid them accordingly". However, in the paragraphs of the affidavit relied upon by Frank in support of this argument, Michael did not, in fact, admit that Frank had any such entitlement. Rather, again, he was arguing that Frank did not, and that he [Michael] was entitled to cease the sharing, as a result of the breakdown in their business and personal relationships.
[33] Fourth, Frank says that the employees of Tacit Accounting Ltd. "followed Michael to the PCs". However, in the paragraph of Michael's affidavit cited in support of this admission, what Michael actually says is that the employees followed him to his new location. I do not see how the fact that the employees left with Michael, on June 25, 2015, argues for including the PCs, when F+M's valuation was based upon the results for the three years leading up to the June 30, 2015 fiscal year-end.
[34] Fifth, Frank says that clients of Tacit Accounting Ltd. were diverted to the professional corporations without compensation. However, while it is true that the former accounting practice of Robert Gauvreau was transferred from Tacit to Scugog PC, Scugog paid Tacit for those clients, using the same formula for valuing the business that had been used in the purchase of the business from Gauvreau. 4 There is a suggestion in the evidence that other Tacit clients may have been diverted to Scugog PC, but there is no evidence that would allow me to determine the significance of any such diversion. It is also of note that the professional corporations were able to perform public accounting work that could not lawfully be done by Frank, or by any of the corporations jointly owned by Frank and Michael, and that Frank played no part in the operation of the professional corporations. In an e-mail relied upon by Frank dated December 16, 2015, Michael says that "this is also why revenues [of Tacit Accounting Ltd.] have dropped/will drop significantly in the 2015/2016 year". However, if the "2016/2016 year" is interpreted to mean the fiscal year ending June 30, 2016, then any such drop would not affect the valuation, since F+M assumed that the historical performance for the three fiscal years ending on June 30, 2015 would be representative of their performance through June 30, 2016. This would appear to be the proper interpretation, since the income statement summaries show the Tacit Accounting revenue to have increased each year to, and including, the fiscal year ending June 30, 2015.
[35] With respect to Kawartha PC, Frank relies upon a paragraph in Michael's affidavit in which he says, "to the extent that [Kawartha PC] services clients who were formerly looked after by Tacit Accounting Ltd., I agree that the applicant is entitled to compensation, which is to be determined". However, Kawartha PC was incorporated to carry on the accounting practice of Kevin Lee, who continues to be engaged in the practice as a contracted associate, and to serve new public accounting clients, and there is no evidence of any work, of substance, having been diverted to Kawartha. Michael's affidavit was sworn in October of 2016, so it is again worth noting that any diversion of clients after June 2015 would not affect the F+M valuation.
Equalization of ACP commissions
[36] Frank and Michael shared their ACP commissions up until September 2014. After that date, each kept the commissions paid under his own advisor code. Frank's position is that the commissions should be equalized for the period from September 2014 to June 2016. Equalizing the commissions over this period would require a payment from Michael to Frank of $224,875. Michael objects to an equalization, but on this issue, I agree with Frank.
[37] For the period from September 2014 to June 2015, Frank's commissions exceeded Michael's -- $444,537 to $168,950. For fiscal year-end 2016, F+M did not have Michael's commission statements (because Michael refused to produce them), but based upon Frank's commission statements, and annualizing the results for the earlier period, he estimated that Michael's commissions in 2016 exceeded Frank's -- $736,184 to $10,849. Assuming F+M's estimate to be correct, this dramatic shift would be the result of the fact that Frank was de-registered between July 2015 and February 2016, and the fact that by the latter date, Michael had taken over most of Frank's clients.
[38] In opposing this claim, Michael argues that Frank could have found a sponsor to replace ACP sooner than he did, and that he did not go after Frank's clients until mid-November 2015, which he described as a "normal waiting period". However, father and son had worked together in the investment business for 20 years, and the personal difficulty which Frank had in dealing with the break-up, and the resulting delay, are understandable. In addition, the "normal waiting period" cited by Michael might be appropriate in an arms-length situation, but would not accord with the reasonable expectations of the parties, in the unique circumstances of this case. The two had built up the investment business over many years, 5 and as Michael acknowledged, the advisor code under which a particular commission was paid did not necessarily reflect whose client was the source of the commission. It is also of note that Michael had access to Frank's client records. In these circumstances, it is appropriate that the commissions be equalized up until the valuation date.
Sharing of Michael's ACP salary
[39] Michael shared his ACP CFO's salary with Frank from June 2012 to September 2014, and it is Frank's position that the sharing should continue up until the valuation date. Michael opposes any further sharing, and on this issue, I agree with him.
[40] Frank's argument with respect to the sharing of Michael's salary seems to be no more than that for a period of time, the salary was part of the overall revenue stream shared by the parties. However, unlike the ACP commissions, Michael's salary entitlement was not a business that the parties had built up over the years, or to which Frank contributed anything. The fact that Michael did share his salary for a period of time is not, alone, a reason for requiring that he continue to do so.
Value of the respondent corporations
[41] F+M valued the businesses, with the professional corporations, at $691,717. MCT valued the businesses, without the professional corporations, at $407,000.
[42] In comparing these results, F+M attributes the difference of $284,717 to the exclusion by MCT of the value related to Scugog PC and Kawartha PC. Based upon an estimated value for Scugog PC and Kawartha PC of $250,000, F+M notes that this would explain all but $34,717 of the difference. 6 Using this analysis, in valuing the joint enterprise without the professional corporations, it would be fair to split the unexplained difference, and set the value at $424,359.
Disposition
[43] In the result, Michael will purchase Frank's interest in their joint enterprise for the total sum of $1,051,188, made up as follows: <graphicname:p709 û table.jpg>
[44] If the parties are unable to agree on prejudgment interest or costs, I will consider brief written argument provided that it is delivered to my assistant at Judges' Reception, Durham Region Court House, Sixth Floor, no later than April 30, 2017.
[45] If there are any difficulties in carrying these reasons into effect, an attendance may be arranged through the trial coordinator at Oshawa.
Application allowed.
Notes
1 Michael points out that there were exceptions: for example, they paid rent on their business premises to a holding company owned by Frank and his wife.
2 I have used F+M Scenario II. While Frank's counsel argued that Scenario III should apply to fiscal 2016, my understanding is that F+M first calculated the fiscal 2016 business loss at $691,717, and then bracketed that number with Scenarios I and III, simply in order to establish a range of values.
3 Adjusted from $387,441 to reflect information received following preparation of the F+M report.
4 F+M suggests that the practice was transferred to Scugog PC at an undervalue (but less than $8,000). However, I am satisfied with the explanation given by Michael, and noted in the MCT critique of the F+M report.
5 When Frank sold Money Managers to ACP, he kept his clients -- so the ACP commissions were a continuation of the business that had been built up over the 20 years the parties had worked together.
6 This may be an oversimplification since F+M uses a capitalized earnings approach (except in relation to KG Investments), based upon consolidated revenues of $1,942,435, of which $613,487 consisted of ACP commissions, which were not included in the MCT valuation. It is also of note that KG Investments (a real estate holding company) was valued by F+M at $252,758 and by MCT at $105,000.
End of Document