Halsey v. Genoil, 2017 ONSC 4817
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Tyson Halsey, Plaintiff
AND:
Genoil Inc., David K. Lifschultz, Slobodan Puhalac, Bengt Koch, Bruce Abbott, Timothy Bojar, Lifschultz Enterprises Co., LLC, Sidney B. Lifschultz 1992 Family Trust, Defendants
BEFORE: L. A. Pattillo J.
COUNSEL: Clifton P. Prophet and Benjamin Na, for the Plaintiff
Robert Brush and Clarke Tedesco, for the Defendants
HEARD: April 21, 2017
ENDORSEMENT
Introduction
1By Statement of Claim dated November 3, 2016, the plaintiff, Tyson Halsey (“Halsey”), commenced an action for breach of fiduciary duty and oppression against the defendants Genoil Inc. (“Genoil”), David K. Lifschultz (“Lifschultz”), Slobodan Puhalac (“Puhalac”), Bengt Koch (“Koch”), Bruce Abbott (“Abbott”), Timothy Bojar (“Bojar”), Lifschultz Enterprises Co., LLC, (“Lifschultz Enterprises”), Sidney B. Lifschultz 1992 Family Trust (the “Trust”), John Doe 1-100 (the “Action”). The Statement of Claim sets out multiple heads of relief against the defendants including an order appointing a receiver-manager to manage the affairs of Genoil.
2Halsey is a shareholder of the defendant Genoil Inc. (“Genoil”) which is a public company. The Action concerns the actions of the individual defendants in their roles as the officers and/or directors of Genoil.
3Halsey brings this motion for an order pursuant to s. 241(3)(b) of the Canada Business Corporations Act (“CBCA”) appointing an interim receiver-manager to manage the business and affairs of Genoil.
4In response, the defendants (with the exception of Puhalac) have brought a cross-motion for summary judgment dismissing the claims in the Action in their entirety or alternatively partially.
5For the reasons that follow, I dismiss both motions.
Preliminary Matter
6At the outset, the defendants’ preliminary motion to strike certain paragraphs in Halsey’s affidavit on the ground that the evidence was scandalous, vexatious, irrelevant and/or prejudicial was resolved by Halsey agreeing not to refer to or rely on the impugned paragraphs.
Background
7Genoil is a publically traded clean technology engineering company carrying on business in the oil and gas industry. It was incorporated pursuant to the CBCA and its shares currently trade on the OTC markets. It is widely held with approximately 5,000 to 6,000 shareholders. As at November 14, 2016, the date of Genoil’s last annual general meeting, there were 464,280,260 shares issued and outstanding.
8Halsey is a Chartered Financial Analyst who specializes in investments primarily energy companies for individuals and institutions. Halsey has held shares and/or options in Genoil, on and off, since 2006. At the time of the motion, he owned 1,000 shares which he has had since September 2014.
9Lifschultz is a director and the Chief Executive Officer of Genoil and resides in Bosnia. Abbott is a director and the President and Chief Operating Officer and resides in New York State. Koch, Bojar and Puhalac are or were Directors of Genoil at the material times. They reside in Sweden, Rode Island and Bosnia respectively. Lifschultz is the directing mind of Lifschultz Enterprises and a trustee of the Trust.
Position of the Parties
10Halsey submits that the court should appoint an interim receiver-manager to manage the business and affairs of Genoil pending the determination of the Action based on what he submits has been the oppressive conduct of management (Lifschultz and Abbott) and the Board of Directors over a number of years involving a lack of corporate governance, mismanagement, coercive actions of management and management self-dealing.
11In response, Genoil and the other defendants submit that in the circumstances a receiver-manager should not be appointed. They submit Halsey’s motion is an attempt to sidestep shareholder democracy and is completely inconsistent with the purposes for which receiver-managers are appointed. They further submit that Halsey has failed to satisfy the test required for the appointment of a receiver-manager. Finally, in respect of their summary judgment motion, the defendants submit the Action should be dismissed on the grounds that Halsey has failed to establish any of the alleged acts of oppression.
The Test for Appointing a Receiver-Manager
12The appointment of a receiver-manager (whether interim or permanent) is very strong extraordinary relief which may and often does give rise to significant cost consequences. As a result, it should only be granted cautiously and sparingly: Fisher Investments Ltd. v. Nusbaum, [1988] O.J. No. 1859 (SCO-HC) at p. 3; Murphy v. Cahill, [2013] A.J. No. 854 (AQB) at para. 7.
13While Halsey’s motion is pursuant to s. s. 241(3)(b) of the CBCA, in my view, the test for the appointment of a receiver is the same as under s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43 and is similar to the test for an interlocutory injunction as established by the Supreme Court in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 117 (SCC), [1994] 1 S.C.R. 311 (S.C.C.). The moving party must establish 1) a serious issue to be tried; 2) that he or she will suffer irreparable harm if the motion is refused; and 3) the “balance of convenience” favours the appointment. See: Anderson v. Hunking, 2010 ONSC 4008, 2010 ONCS 4008 (OSCJ) at para. 15.
14Further, where the order sought is for interim relief in an oppression action, as here, rather than being required to establish a serious issue to be tried, the moving party must establish a strong prima facie case which is a higher standard than serious issue. See: Natpao Holding Inc. v. Evanov Communications Inc., [2008] O.J. No. 2181 (SCJ) at para. 37; Stern v. Imasco Ltd., 1999 14934 (ON SC), [1999] O.J. No. 4235 (SCJ) at para. 32. In other words, the moving party must demonstrate the likelihood of ultimate success in the action.
15It is also important in considering whether to appoint a receiver-manager to have regard to the purpose of such appointment. In that regard, s. 95 of the CBCA provides:
A receiver-manager of a corporation may carry on any business of the corporation to protect the security interest of those on behalf of whom the receiver-manager is appointed.
Discussion
1. Strong Prima Facie Case
16In support of the motion, Halsey relies on his allegations of oppression. Pursuant to s. 241 of the CBCA, a complainant (which as a shareholder Halsey is) may apply to the court for one of the enumerated remedies if the business or affairs of the corporation have been carried out in a manner “that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer”. The plaintiff or applicant must show that i) the complainant’s reasonable expectations were violated in the circumstances of the case; and ii) the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” of the complainant’s interests: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560 (S.C.C.) at para. 56-59 and 70.
17Halsey raises a number of different actions or inactions on the part of management and the board of Genoil going back as far as 2012 which he submits are “oppressive or unfairly prejudicial to or unfairly disregards” his interests as a shareholder. In particular, he points to the board being invalidly constituted (no Canadians) for three years; the failure to hold shareholders’ meetings from 2012 to 2016; the replacement of the auditors appointed by the shareholders by the board; and repeated delays in issuing financial statements.
18Halsey also raises issues concerning mismanagement and management self-dealing including Genoil’s shares being cease traded in May 2014; the failure to commercialize Genoil’s patents and technologies; promises of business deals which never materialized; ineffective management controls; loans to Lifschultz and Abbott with no interest or terms of repayment; the direction of proceeds from the private placement of Genoil stock to Lifschultz Enterprises bank account; the granting of various series of convertible notes to management with interest rates of 12% together with a security interest in Genoil’s assets; and the issuance of 17.47% of Genoil’s total outstanding shares (69,042,192 shares) after Genoil’s stock was delisted.
19Finally, Halsey complains of management’s actions in respect of the November 14, 2016 annual general shareholder meeting, including the issuance of 31,763,888 shares of Genoil on the eve of the meeting; material misstatements and omissions in the Management Information Circular that was circulated to shareholders prior to the meeting; alleged threats by Lifschultz to shareholders prior to the meeting in the event they did not vote for the resolutions.
20In response, Genoil and Lifschultz have filed material taking issue with most of Halsey’s allegations. They do not dispute the fact that between 2012 and 2016 there were no shareholder meetings. They submit that prior to 2012 shareholder meetings were held annually. Following 2012, however, Genoil was effectively dormant due to lack of cash. As a result, it lacked the capital to hold annual shareholder meetings or to prepare audited financial statements. Its shares were cease-traded due to Genoil’s failure to file audited financial statements and it voluntarily allowed its shares to be delisted also for financial reasons.
21In 2015, Genoil began to raise capital through private placements to enable it to complete audited financial statements, hold shareholders meetings and have the cease-trade orders lifted. On October 12, 2016 it obtained an order from the Alberta Queen’s Bench entitling it to hold its annual general meetings of shareholders for 2012 to 2015 concurrently on or before November 30, 2016.
22Genoil’s shareholders meeting was subsequently held on November 14, 2016. A total of 216,849,509 shares or 46.71% of the total issued and outstanding shares voted. The individual defendants were all appointed directors by 75.48% of the shareholders voting. In addition, the accounting firm who had been auditing the financial statements was appointed by the shareholders as auditor. Subsequent to the meeting, Puhalac resigned as a director for health reasons. On November 23, 2016, the board replaced Puhalac and appointed a new director pursuant to the by-laws. Both of the new directors are Canadian residents bringing Genoil into compliance with the CBCA’s residency requirements.
23The defendants’ dispute that the Management Information Circular sent to shareholders in advance of the meeting was materially misleading. Lifschultz denies that he coerced any shareholder into voting. Further, Genoil has now filed its financial statements for the years 2013, 2014 and 2015. It denies that its financial statements contain significant misstatements. It also denies that any of the loans owed by Lifschultz to Genoil have been forgiven or that there was anything improper in the granting of those loans which approved by the board (with Lifschultz declaring his conflict and not voting), and disclosed to the auditors and to the shareholders in the financial statements. Lifschultz also denies any misappropriation of monies belonging to Genoil.
24The defendants have also provided an explanation concerning the issuance of the various series of convertible notes and the reasons for them. The board approved each issuance or extension of various series of notes, each time Lifschultz and Abbott declaring their conflict and recusing themselves from the vote.
25Considering all the evidence concerning Halsey’s allegations and the defendants’ responses, I am not satisfied that Halsey has established a strong prima facie case of oppression. Simply put, I am unable to conclude on the record before me that Halsey would likely succeed with respect to his claims for oppression.
26That conclusion does not mean, however, that I consider Halsey’s claims to be not capable of succeeding. While I agree that some of Halsey’s complaints, particularly in respect of corporate governance, have been addressed by Genoil and are therefore effectively moot, that does not mean that they are still not relevant. Further, there are some issues which Halsey has raised that give me concern. I refer specifically to the use of funds from private placements, the issues surrounding Genoil’s financial disclosure, the reasons for the issuance of the convertible notes, the issuance of shares following the cease trading of Genoil’s shares and, particularly, the issuance of 31,763,888 shares on the eve of the November 14, 2016 meeting.
2. Irreparable Harm
27Irreparable refers to the nature of the harm suffered rather than its magnitude: Anderson at para. 7. In the context of the appointment of an interim receiver-manager in an oppression action, I consider that irreparable harm equates to significant harm that is or will be occasioned to the assets of the corporation which, in turn, impacts on the complainant.
28The harm Halsey speaks to in his affidavit is the continued deterioration of shareholder value due to the inappropriate actions of management. There is no evidence, however, that shareholder value has deteriorated since he purchased his shares. In fact, Halsey paid $38 for those shares which Genoil says are now worth $80. Further, apart from the allegations concerning the November 2014 shareholders meeting, the remainder of Halsey’s allegations have occurred over some time.
29Nor does Halsey point to any imminent or threatened deterioration of Genoil’s assets that requires the protection of a receiver-manager. What he seems most concerned about is management’s failure to commercialize Genoil’s patents and thereby increase shareholder value. In other words, the harm he complains of is the failure to increase shareholder value. Not only is that not irreparable harm as I have defined it but it is something that Halsey has known about for a long time.
30I agree with the defendants’ submission that the real reason Halsey seeks the appointment of the receiver-manager is to remove Genoil’s management and pursue his strategic objective which he believes is more beneficial to increasing shareholder value than the current management’s objectives. The following excerpt from paragraph 99 of Halsey’s affidavit filed in support of his motion is instructive:
In my view, it is in the best interests of the company and shareholders that an interim receiver-manager be appointed to take control and manage the company for the purpose of having a feasibility study conducted and commercializing Genoil’s patents. An interim receiver-manager with these powers will permit steps to be taken for shareholders to realize value on the assets that the company holds.
31I hold therefore that Halsey has failed to establish irreparable harm.
3. Balance of Convenience
32Based on the evidence, it is my view that the balance of convenience favours retaining the status quo.
33As noted, the appointment of a receiver-manager is extraordinary relief which has significant cost consequences. That is particularly so in circumstances such as Genoil’s where the corporation has assets but no revenues. The result of such an appointment could and likely would end in bankruptcy for the company.
34On the other hand, as I have found, Halsey’s purpose in seeking a receiver-manager for Genoil is to implement his business objective rather than that of management. Management, I note, that was elected by a significant majority of votes cast at the November 14, 2016 shareholders meeting.
35Halsey began investing in Genoil in 2006, but sold his personal holdings in 2013 after becoming disillusioned with the company’s management. He bought back into Genoil in the fall of 2014 based on his assessment that there was an opportunity in Mexico to commercialize Genoil’s technology. For the next two years, he set out to obtain shareholder support for his view that the shareholders of Genoil needed to replace the current management with a new slate of directors and officers. Although Halsey claims that he succeeded in getting a significant group of shareholders to support him, at no time did he try to replace management through a proxy action. Nor did he take any steps to put forward a dissident slate of directors for election at the November 14, 2016 meeting to implement his business objective. As a result, the shareholders voted to re-elect the defendants as directors.
36In the circumstances, I conclude the balance of convenience does not favour appointing an interim receiver-manager to implement Halsey’s business objective. Rather, the proper way for Halsey to implement his strategic objective for Genoil as opposed to that of management is not by the appointment of an interim receiver-manager but by shareholder vote.
37For the above reasons, therefore, Halsey’s motion to appoint an interim receiver-manager is dismissed.
The Defendants’ Summary Judgment Motion
38As I have indicated, I consider that Halsey has raised some serious issues concerning the activities of the defendants in the running of Genoil which may or may not give rise to a finding or findings of oppression. Given the record, I am satisfied that the issues are not suitable for summary judgment, even with the expanded powers. The record raises issues, including credibility issues which in my view can only be fairly resolved by a trial.
39Nor do I intend to deal with each of the allegations to determine which should be dismissed and which should go onto trial. That, in my view, is not the purpose of summary judgment. Rather than such practice being cost effective, it only serves to increase costs.
40There is one issue which the defendants have raised in their summary judgment motion that I will address directly. They submit that Halsey’s claims are statute barred pursuant to the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B.
41The defendants submit that Halsey has been aware of the matters which he complains about for more than two years prior to the commencement of the Action. While that is true in respect of some but not all of Halsey’s complaints, acts of oppression are not necessarily confined to the initial act. Rather, they may and often do result in additional oppressive acts based upon the initial oppressive conduct which can constitute a discrete claim of oppression: see: Maurice v. Alles, 2016 ONCA 287 at paras. 52 -54.
42For the above reason, therefore, I do not consider that it is appropriate to dismiss Halsey’s claims for oppression as statute barred by way of summary judgment.
Conclusion
43For the above reasons therefore, both Halsey’s motion for the appointment of an interim receiver-manager and the defendants’ motion for summary judgment are dismissed.
44In light of the fact that the Action is in its early stages, I do not consider that I am seized of the trial.
45Following the argument, the parties advised me that they had agreed on the costs of the motions as follows: with respect to the receiver-manager motion, the successful party would receive $95,000 and with respect to the defendants’ summary judgment motion, the successful party would receive $15,000. In my view, given the issues raised, I consider those amounts to be fair and reasonable.
46Accordingly, the defendants are entitled to their costs of Halsey’s motion which are fixed at $95,000. Further, Halsey is entitled to his costs of the defendants’ motion which are fixed at $15,000. The costs shall be netted out such that Halsey shall pay to the defendants $80,000.
L. A. Pattillo J.
Released: August 18, 2017