Court File and Parties

COURT FILE NO.: CV-16-11653-00CL DATE: 20180629 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Karsten Arend, Hansjoerg Wagner and Bitrush Corp., Applicants AND: Werner Boehm, Alfred Dobias and MezzaCap Investments Ltd. and Elfriede Sixt, Respondents

BEFORE: L. A. Pattillo J.

COUNSEL: Alistair Crawley, Clarke Tedesco and April Engelberg, for the Applicants No one for the Respondents, although properly served.

HEARD: April 3, 2018

Endorsement

Introduction

[1] The applicants, Karsten Arend (“Arend”), Hansjoerg Wagner (“Wagner”) and BitRush Corp. (“BitRush”), (collectively the “Applicants”) seek to vary or obtain additional relief to that ordered by me in my November 14, 2018 reasons for decision (2017 ONSC 3582) (the “Reasons”).

[2] On November 29, 2017, I received a letter from the Applicants’ counsel requesting a chambers appearance to discuss issues relating to the settling of my judgment including the price at which I ordered certain shares of BitRush held by the respondent MezzaCap Investments Ltd. (“MezzaCap Investments”) be cancelled pursuant to paragraph 84(d) of the Reasons and additional terms relating to the payment of costs.

[3] At a chambers appointment on December 6, 2017, I directed that the Applicant’s motion be heard on January 5, 2018. I further directed that the orders restraining the holding of a BitRush shareholders meeting or the release of shares from escrow to MezzaCap Investments were to continue until the remaining issues were dealt with.

[4] The Applicants motion seeks to amend the relief claimed in the Application to require a buyout of MezzaCap Investments’ shares in BitRush at fair market value. In the alternative, the Applicants seek an amendment to subparagraph 84(d) of the Reasons to provide that the cancellation of the BitRush shares held by MezzaCap Investments in respect of the misappropriated $561,373, based on a value of $0.005/share as opposed to the value of $0.09/share applied by me in the Reasons. The Applicants also seek an order that in the event the respondent Werner Boehm (“Boehm”) and MezzaCap Investments do not pay the costs ordered within a reasonable time to be set, the number of BitRush shares valued at the amount of the costs award held by MezzaCap Investments should be transferred to BitRush or cancelled in the same manner as was done in respect of the $561,373 amount.

[5] For the reasons that follow, I allow the Applicants motion, in part. Based on the evidence filed, I am satisfied that the value attributed by me to the BitRush shares of $0.09/share in the Reasons for the purpose of compensating BitRush for Boehm’s misappropriation of $561,313 from BitRush was incorrect and that the correct value should be $0.005/share. Accordingly, the order in paragraph 84(d) of the Reasons shall be amended accordingly. I am not prepared however to order a buyout of MezzaCap Investments’ shares nor provide that the cost order be satisfied through the cancellation of shares.

Background

[6] On December 21, 2016, the Applicants commenced an application seeking various relief pursuant to s. 248 of the Business Corporations Act, R.S.O. 1990 c. B.16 (the “OBCA”) against the respondents (the “Application”). On April 13, 2017, the Application was amended to claim additional relief. The relief sought in the Amended Application included:

1. A declaration that Boehm, in his capacity as CEO of BitRush has acted oppressively, in breach of his fiduciary duty to BitRush;

2. An order transferring shares of BitRush from the respondent MezzaCap Investments to Dr. Joachim Kalcher (“Dr. Kalcher”) and HSRC Investments Pte. Ltd. (“HSRC”) to whom the shares are owed; and

3. An order that MezzaCap Investments’ remaining shares in BitRush be cancelled.

[7] In reasons released November 14, 2017 (the “Reasons”), I allowed the Application in part and granted judgment providing for the following relief:

a) a declaration pursuant to s. 248 of the OBCA that Boehm caused the affairs of BitRush to be conducted in a manner that was oppressive, unfairly prejudicial and unfairly disregarded BitRush and its shareholders and in breach of his fiduciary duties to BitRush;

b) an order that BitRush shall issue 4,500,000 shares from treasury to Dr. Kalcher and at the same time cancel 4,500,000 of MezzaCap Investments shares in BitRush and amend its share registry accordingly;

c) an order that BitRush shall issue 5,856,910 shares from treasury to HSRC and at the same time cancel 5,856,910 of MezzaCap Investments shares in BitRush and amend its share registry accordingly;

d) an order that BitRush shall cancel 6,237,478 of MezzaCap Investments shares in BitRush and amend its share registry accordingly.

e) the balance of the relief requested was dismissed without prejudice to BitRush raising it at some future time if it considered it appropriate.

[8] In addition, I awarded costs of the Application to the Applicants on a partial indemnity basis fixed at $225,956 in total, payable by Boehm and MezzaCap Investments.

[9] Although the respondents did not attorn to the jurisdiction of the court and filed no material in response to the Application, the individual respondents, Boehm, Alfred Dobias (“Dobias”) and Elfriede Sixt (“Sixt”) attended the hearing of the Application by conference telephone call. As a result, I requested that the individual respondents be served with the January 5, 2018 motion date together with all additional material and be permitted to attend the scheduling appointments and the motion, if desired, either in person or by phone.

[10] In advance of the January 5, 2018 date, the Applicants served and filed a Supplementary Application Record containing the affidavit of Arend, together with two expert reports opining on the value of BitRush shares as of November 14, 2017, the date of the Reasons and the ability of BitRush to access public capital markets.

[11] The valuation opinion is provided by Alan Mak, a Chartered Business Valuator with Ferguson + Mak LLP, an accounting firm experienced in business valuation, located in Toronto. Mr. Mak concludes that the en bloc equity value (or value available to shareholders) of the BitRush shares as at November 14, 2017 is nil.

[12] The capital markets opinion is provided by Echelon Wealth Partners Inc., a registered investment dealer and investment banking firm headquartered in Toronto. They conclude that BitRush would not be able to raise capital in the public equity markets due to MezzaCap Investment’s involvement as a substantial shareholder. Their report concludes: “BitRush cannot compete for public or private capital with a “bad actor” owning a substantial control block of shares, as this single issue is a major barrier to investment.”

[13] In response, the respondents submitted by email a “supplemental application record” containing affidavits from each of Boehm, Dobias and Sixt. The affidavits deal primarily with evidence directed to refuting my finding in paragraph 60 of the Reasons that Boehm’s actions in transferring CDN $561,373 from BitRush to companies controlled by him and refusing to account for the transfers or return the funds constituted misappropriation. Boehm also takes issue with the Applicants’ expert opinions as to the value of BitRush and its capital raising capability on the basis that the experts are not objective or independent. Boehm’s view of value was much more aggressive than Mr. Mak’s.

[14] The respondents’ supplementary application record also contains what is represented to be a valuation of BitRush prepared by both Sixt and someone by the name of Werner Sixt. Based on their analysis and the information available to them, they estimate that the fair market value of BitRush is in the range of between CDN $14.4 and $32.9 million (between CDN 0.10 and 0.26 per share).

[15] On the return of the Applicants’ motion on January 5, 2018, Boehm, Dobias and Sixt attended by conference call. It became apparent to me during the submissions that, in light of the dispute between the parties as to the value of BitRush’s shares, and without deciding whether the Applicants were entitled to the relief they were requesting, it was first necessary to have the respondents file proper expert material as to the value of BitRush’s shares as at November 14, 2017. While the affidavits of both Boehm and Sixt dealt in part with their views as to the valuation of BitRush, as parties they are not independent nor was I satisfied from the material that either had the qualifications to provide such opinion.

[16] Boehm indicated that he was prepared to obtain a valuation of BitRush’s shares by an independent expert business valuator and agreed that November 14, 2017 is the appropriate valuation date. The Applicants in turn agreed to provide information requested by the respondents’ expert as long as the request was reasonable. I advised that if there was any issue concerning production of information, I could be spoken to. Boehm estimated that it would take three to four weeks for the respondents to obtain the expert report. Accordingly, the Applicants’ motion was adjourned to a chambers conference on February 14, 2018 at 9:30 a.m. to determine status and set a date for the return of the motion.

[17] On January 16, 2018, Boehm sent an email to the court, to my attention, raising a concern involving the failure of the Applicants to produce financial information from BitRush. As a result, on January 17, 2018, I convened a conference call between Boehm and counsel for the Applicants to discuss the issue. BitRush submitted that it was not prepared to produce the information requested by the respondents given that the information requested involved a level of detail that far exceeded the types of records maintained by a junior company such as BitRush. In addition, the information was requested by the respondents, not their expert. BitRush raised a confidentiality concern that the respondents may be seeking the detailed information for purposes beyond a valuation. As directed in my endorsement of January 5, 2018, I advised Boehm that the respondents must hire a valuation expert who in turn should request the information he or she needs. I also advised BitRush to honour all such reasonable requests. Finally, I directed that the information to be provided was for valuation purposes only and not to be used for collateral matters.

[18] On February 1, 2018, the respondents advised that they had retained an independent valuation expert. Boehm forwarded the same information request (with some additions) and requested that the information be sent to their expert with a copy to all respondents. The Applicants’ counsel never heard from the respondents’ expert directly.

[19] Prior to the chambers conference scheduled for February 14, 2018, Boehm sent a motion record by email for a motion returnable on February 14, 2018, seeking an order requiring BitRush’s board of directors to call a special shareholders meeting to decide “the strategic and operative future of the Company”.

[20] At the chambers conference, I advised Boehm, who attended by conference call along with the other respondents, that if they wished to bring a motion in the Application, they must file their Motion Record at the Commercial List office and pay the applicable fees. That never happened.

[21] In respect of the production of the information relevant to the valuation of BitRush’s shares, BitRush advised that in the absence of a request for information from the respondents’ expert, it had proposed providing the same information package it had compiled for Mr. Mak, its expert. In addition, as a result of its confidentiality concerns, BitRush prepared a Confidentiality Protocol which it requested be signed by the respondents and their expert. The Protocol acknowledged their obligation to only use BitRush’s confidential information for the purpose of completing the valuation and for no other purpose. The respondents refused to sign the Protocol.

[22] In the circumstances and given that production of information concerning valuation was at an impasse, I set April 3, 2018 for argument in respect of the Applicants’ motion. I directed that the respondents could attend the hearing by phone, which they did. They made no submissions at the hearing.

The Issues

[23] The following are the issues on this motion:

1. whether the Reasons should be amended to provide for a court-supervised buyout pursuant to s. 248(3)(f) of the OBCA of MezzaCap Investments’ remaining shares in BitRush, valued as at November 14, 2017 at $0.005/share;

2. in the alternative, whether paragraph 84(d) of the Reasons should be amended to provide that the cancellation of the BitRush shares held by MezzaCap Investments to recover the misappropriated $561,373 be based on a value of $0.005/share as opposed to the price of $0.09/share used by me; and

3. whether, in the event Boehm and MezzaCap Investments do not pay the Application costs ordered within a reasonable time, an equivalent value amount of BitRush shares held by MezzaCap Investments should be transferred to BitRush or cancelled in the same manner as was done in respect of the $561,373 amount?

Discussion

[24] At the outset, I wish to make it clear that while I have reviewed the substantial amount of material provided by the respondents by email to the court, I have disregarded it entirely and have not relied upon it for the following reasons.

[25] Following my dismissal of their jurisdiction motion in advance of the hearing of the Application, the respondents indicated that they would be filing no material in response to the Application. I permitted them to monitor the proceedings by conference telephone on the understanding that they could make no submissions. When the Applicants subsequently sought an order to amend my Reasons, seeking relief that had not been claimed in the Application, I considered that the respondents should be contacted and given an opportunity to respond to the issues on the motion. In doing so, the respondents have provided affidavit evidence directed mainly to disputing my finding that Boehm and MezzaCap Investments had misappropriated $561,373 from BitRush. That evidence is improper and inadmissible. The respondents had ample opportunity to respond to the Application and file material but chose to only contest jurisdiction and when they lost that issue, elected not to attorn and file any evidence in response. The issue of Boehm and MezzaCap Investments misappropriation is now res judicata.

[26] Further, the bulk of the respondents’ material, to the extent that it deals with the evidence concerning my finding of misappropriation, is irrelevant to the issue before the court which is the valuation of the BitRush’s shares and whether the Applicants should be permitted to buy MezzaCap Investments remaining shares of BitRush or amend paragraph 84(d) of the Reasons.

[27] Finally, the balance of the respondents’ material deals with valuation, which is of no assistance given that it is based on the opinions of both Boehm and Sixt who are not independent or properly qualified to provide such opinion. The respondents were given ample opportunity to obtain and submit an expert opinion on value. Based on the events set out earlier in this endorsement, I consider that the failure of the respondents to file an expert valuation opinion is their fault entirely and no fault of the Applicants.

i. Buyout

[28] The Applicants submit that an order providing for the buyout of MezzaCap’s shares in BitRush is necessary because no other order will rectify the oppressive conduct of Boehm and MezzaCap Investments. They submit, as evidenced by the Echelon Wealth Partners’ opinion, that because of Boehm’s oppressive conduct, BitRush will not be able to raise capital as long as he, and through him MezzaCap Investments, retain a control block of BitRush shares.

[29] Further, and notwithstanding the Mak valuation, the Applicants submit that the court should set the value of the BitRush shares at $0.005/share which is the minimum price at which money can be raised on the Canadian Securities Exchange (“CSE”). They further submit that the benefits already obtained by Boehm and MezzaCap Investments (the misappropriated $561,373 plus the unpaid cost order of $225,956) represent more than fair value compensation for the remaining MezzaCap Investments shares in BitRush.

[30] In the Reasons, I concluded, based on the evidence, that Boehm’s conduct while acting CEO and then as CEO was in some instances oppressive, as that term is defined in the cases, and in others unfairly prejudicial to and unfairly disregarded the interests of BitRush and its shareholders. As a result of those findings, I then addressed the issue of remedy beginning at paragraph 65 of the Reasons.

[31] As I noted at paragraph 65 of the Reasons, the real issue in the Application was the remedy which should apply. In that regard, I addressed each incidence of conduct which I found to be oppressive, unfairly prejudicial to, and unfairly disregarded the interests of BitRush and its shareholders and fashioned a remedy which I considered was appropriate to address such conduct. I ordered that BitRush shares held by MezzaCap Investments be cancelled and issued to Dr. Kalcher and HSRC Investments Pte. Ltd. by BitRush to complete share transactions between them in accordance with prior agreements which had been entered into by Boehm and MezzaCap Investments. I also ordered (as requested by the Applicants) that 6,237,487 shares of BitRush (the share equivalent of $561,313 based on the trading price of the shares of $0.09/share at the date of the cease trade order) to remedy Boehm’s misappropriation of the monies.

[32] I did not, however, order that all of MezzaCap Investments’ remaining shares in BitRush be cancelled which was what the Applicants requested. That request was based on the Applicants’ submission that Boehm and MezzaCap Investments misrepresented the value of the assets that they brought to the reverse takeover in July 2015 (the “RTO”) when BitRush was formed in exchange for approximately 2/3 of the shares of BitRush. I stated at paragraph 80 of the Reasons as follows:

80. I am not prepared to make the order requested. In my view, Boehm’s oppressive conduct concerning the business and affairs of BitRush has nothing to do with misrepresentations that occurred prior to the RTO. Further, the representations were made on behalf of MezzaCap Investments, in respect of its subsidiary MezzaCap GmbH. The order requested does not arise from Boehm’s oppressive conduct that I have found.

[33] I acknowledge that as the judgment has not yet been issued and entered, the court has jurisdiction to vary its terms pursuant to rule 59.06(2)(d) of the Rules of Civil Procedure. I am not prepared, however, to amend the Reasons as requested to permit a buyout. I consider that the remedies which I fashioned in the Reasons were appropriate to address that oppressive conduct which I found.

[34] In my view, the Applicants’ request to seek an order to buyout the balance of MezzaCap Investment’s shares, given the valuation of $0.005/share they urge upon the court, is the equivalent of their initial request for cancellation of the shares. At the value proposed, it effectively results in the cancellation of MezzaCap Investments’ shares in BitRush.

[35] In submitting that a buyout is appropriate the Applicant’s continue to rely on Boehm’s conduct at the time of the RTO. But as I held in the Reasons, that conduct, while improper, cannot be redressed by the oppression remedy.

[36] While I agree that the oppression remedy is a flexible remedy, I do not consider that the Applicants’ request for additional relief is one which should be granted in order to avoid a new proceeding where the evidence will be the same. The issues in the Application are res judicata to the Applicants as well as the respondents.

[37] Finally, I am not prepared to rely on or give any weight to the Echelon Wealth Partners opinion. Simply put, while it expresses an opinion, it is not an admissible expert report. It is signed on behalf of the company and not by the individual who is giving the opinion. No individual is identified as providing the opinion and there is no curriculum vitae provided to establish expertise. Most importantly, there is no acknowledgement signed by the expert acknowledging the experts duty.

ii. Amendment of Paragraph 84(d) of the Reasons

[38] Paragraph 84(d) of the Reasons ordered that BitRush shall cancel 6,237,478 MezzaCap Investments shares in BitRush and amend its share registry accordingly. That order was based on the Applicants’ evidence was that BitRush shares were traded at $0.09/share at the time of the cease trade order on December 6, 2016.

[39] As noted, the Mak valuation establishes the value of BitRush as at November 14, 2017 at nil. It is based on an asset value approach, which in the circumstances, I consider to be appropriate. As Mak notes, BitRush is a developing company. Further, and while the valuation date is almost a year after the cease trade order I do not consider it to be much different than in 2016. The valuation is based on the September 30, 2016 financial statements plus adjustments to the valuation date which are not significant given that the company has essentially been in limbo since the commencement of the litigation.

[40] I accept the Mak valuation opinion. In my view, it more accurately reflects the fair market value of BitRush’s shares than the last trade value of 0.09/share at the time of the cease trade order. I agree with the Applicants that the market value approach is of no assistance in this case. The cease trade order was imposed within two days of the release of BitRush’s third quarter financial statements, leaving the market little time to become informed about the full extent of BitRush’s financial issues.

[41] Accordingly, I am satisfied that paragraph 84(d) of the Reasons should be amended to reflect the cancellation of BitRush shares held by MezzaCap Investments to redress the misappropriation from BitRush of $561,313 at a fair market value. Given the Mak valuation and the Applicant’s evidence that the minimum price at which money can be raised on the CSE is $0.005/share, I find that the fair market value of BitRush’s shares should be $0.005/share as opposed to $0.09/share. The Applicants shall advise me of the exact number of shares that shall be cancelled based on the $0.005/share valuation and paragraph 84(d) shall be amended accordingly.

iii. Costs

[42] As noted, in the Reasons, I awarded the Applicants costs on a partial indemnity basis totaling $225,956.87. The Applicants request that, given the difficulty in collecting those costs against Boehm and MezzaCap Investments that I order the cancellation of MezzaCap Investments’ shares in BitRush in a manner similar to the misappropriated $561,313.

[43] It is clear in my view, given the time since the release of the Reasons that neither Boehm nor MezzaCap Investments intend to pay the costs awarded against them. Otherwise, they would have paid them by now. Further, by not attorning, collection of the costs order will be expensive and uncertain.

[44] As noted above, while the respondents have been careful to not attorn, they have had no compulsion about providing the court with material setting out their position. Notwithstanding, I am not prepared to grant the order the Applicant’s request. I do not consider the respondents conduct sufficient to justify such an order. The Applicants understood the risks involved in commencing the Application against foreign respondents.

[45] I would order, however, that if MezzaCap Investments has any remaining shares in BitRush following the above amendment to paragraph 84(d) of the Reasons, that it not be permitted to vote those shares at a BitRush shareholders meeting until such time as it pays the costs ordered.

Conclusion

[46] The Applicants’ motion is allowed in part. Paragraph 84(d) of the Reasons is amended to provide for the cancellation of MezzaCap Investments’ shares in BitRush in respect of the misappropriated $561,313, based on a value of $0.005/share.

[47] MezzaCap Investments shall not be entitled to vote any of its BitRush shares at a shareholders meeting until it pays the costs of the Application in the amount of $225,956 to the Applicants.

[48] The balance of the motion is dismissed. There shall be no order as to costs.

[49] To date, the court has restrained the holding of a BitRush shareholders meeting or the release of BitRush shares from escrow to MezzaCap Investments pending completion of the issues in the Application. As the issues in the Application have now been completed, those orders shall rescinded 30 days from the date of the release of these reasons.

L. A. Pattillo J. Released: June 29, 2018