COURT FILE NO.: CV-18-606766-CL DATE: 20181015 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Estée Lauder Cosmetics Limited and The Estée Lauder Companies Inc., Applicants AND: Deciem Beauty Group Inc., Integridad Inc., Pasquale Cusano and Brandon Truaxe, Respondents
BEFORE: Penny J.
COUNSEL: Mark A. Gelowitz, Robert Carson and Lia Bruschetta for the Applicants Derek J. Bell for Pasquale Cusano R.S.M. Woods for Deciem Beauty Group No one appearing for Brandon Truaxe or Integridad Inc.
HEARD: October 12, 2018
ENDORSEMENT
Overview
1This is an oppression application brought under the Canada Business Corporations Act. The present motion is by the minority shareholder [1] of Deciem Beauty Group Inc., Estée Lauder Cosmetics Limited, and its parent, for various interim orders pending a full hearing on the merits of the application. The motion has been brought on an urgent basis. It was, however, on notice to all parties.
2The motion asks for interim orders:
(a) removing Mr. Truaxe from Deciem’s board of directors;
(b) removing Mr. Truaxe from any roles as an officer or employee that he holds with Deciem;
(c) appointing Nicola Kilner, (currently Deciem’s co-chief executive officer), as the sole interim chief executive officer of Deciem;
(d) declaring that the board of directors of Deciem consists of Pasquale Cusano and Andrew Ross (both of whom currently serve on Deciem’s board of directors);
(e) prohibiting Mr. Truaxe or Integridad Inc. from attempting to appoint or remove any person to or from Deciem’s board of directors;
(f) prohibiting Mr. Truaxe from interfering with the operation of Deciem’s business, including:
(i) employing or terminating employees of Deciem;
(ii) communicating with Deciem’s employees suppliers and other business partners, including landlords;
(iii) issuing statements or circulating media on any of Deciem’s social media accounts; or
(iv) holding himself out as a director or officer or employee of Deciem;
(g) prohibiting Mr. Truaxe from interfering with any of Deciem’s electronic or computer systems, documents or records, social media accounts, websites or any other electronic records or media;
(h) requiring consequential amendments to a unanimous shareholders agreement to reflect the above;
(i) restraining Deciem and Mr. Truaxe from acting in breach of the unanimous shareholders agreement;
(j) appointing PriceWaterhouseCoopers LLP to investigate and report to Deciem’s board of directors on: (i) public allegations made by Mr. Truaxe that “almost everyone Deciem has been involved in major criminal activity, which includes financial crimes;” and (ii) the financial condition of Deciem; and
(k) directing Deciem to resume operations in the ordinary course.
3Pasquale Cusano is Mr. Truaxe’s long time business partner. Mr. Cusano and Mr. Truaxe are the ultimate 50/50 owners of Integridad. Integridad owns two thirds of the shares of Deciem. In the summer of this year, Mr. Cusano initiated legal proceedings against Mr. Truaxe seeking, similar to this case, oppression remedies under the CBCA in respect of Integridad and Mr. Truaxe. Mr. Cusano appears in these proceedings through counsel. He is entirely supportive of the applicants’ motion and urges the court to grant the relief sought.
4Counsel for Deciem, Mr. Woods, is unable to obtain instructions due the governance crisis currently being experienced at Deciem. He therefore takes no position on the motion.
5Since about the beginning of this year, Mr. Truaxe, who is the founder, co-chief executive officer and a part owner of Deciem, has exhibited increasingly aberrant and irrational behavior.
6Last Monday, October 8, 2018, Mr. Truaxe abruptly and unilaterally directed the employees of Deciem to cease all operations immediately. He did so without consulting Deciem’s board of directors or any other parties to a unanimous shareholders agreement. He also sent a mass email to all Deciem employees purporting to terminate for cause various employees and members of Deciem’s executive team, including his co-chief executive officer and the chief financial officer, and threatened that anyone who did not follow his directions would “be terminated tomorrow.”
7Mr. Truaxe also released a video on Deciem’s corporate Instagram account in which he asserted that Deciem was shutting down all operations until further notice. He alleged during this video that “almost everyone at Deciem has been involved in a major criminal activity which involves financial crimes. I’ve been a soldier for 13 years and been made fun of as a drug dealer and porn actor. It’s all ending now.”
8Mr. Truaxe also released written posts on Deciem’s Instagram account in which he threatens a number of entities, ranging from banks to hotel chains and pharmacies, and a number of people, including Deciem employees and Hollywood celebrities, and vows that “every one of you who has been laughing at me will with certainty face criminal prosecution.”
9Mr. Truaxe also emailed Leonard Lauder (chairman emeritus of Estée Lauder) and Estée Lauder’s appointee to the Deciem board, Andrew Ross, again copying all Deciem employees, announcing his intention to close all of Deciem’s offices, stores, factories and warehouses immediately. Among other things, he announced that “anyone who disrespects the guidance I have provided in this email will be terminated tomorrow.”
10Later that day, Mr. Truaxe spoke to Mr. Ross on the telephone and threatened to shut down Deciem’s corporate email account. Mr. Truaxe was previously a computer engineer and was integral in setting up the email and other computer systems that Deciem relies on in its operations.
11Shortly thereafter, Mr. Truaxe sent another email to all Deciem employees as well as Ross, Lauder and a number of others, demanding that the employees follow his instructions or risk immediate termination of employment. Mr Truaxe reconfirmed in this email to all Deciem employees his direction to shut down all Deciem offices, stores and manufacturing operations immediately.
12All of this has become very public as a result of Mr. Truaxe’s posts on the company’s Instagram account.
13Following Mr. Truaxe’s unilateral directions, the employees did not show up at work and most of Deciem’s stores did not open on October 9, 2018. They remain closed. All operations at Deciem have ceased.
14Deciem operates a significant online business in addition to sales through its own stores and other retailers. Deciem’s website has been shut down. The site is nothing but a blank screen.
15As a result of these unilateral and unauthorized actions, this highly successful international company is now teetering on the brink of disaster. Customers, suppliers, landlords and others have taken Mr. Truaxe’s statements as, among other things, constituting anticipatory breach of Deciem’s obligations and have threatened to terminate relations and or initiate litigation.
16It is in this context that the applicants moved under the oppression remedy provisions of the CBCA to seek immediate interim relief.
17At a hearing on Friday, October 12, 2018, I issued an order granting interim relief of the nature described above with reasons to follow. These are those reasons.
18The application is supported by a lengthy and detailed affidavit from Andrew Ross. Mr. Ross is a senior executive with Estée Lauder and Estée Lauder’s appointee to the Deciem board. In these brief reasons I have focused on the highlights of some of Mr. Truaxe’s actions and behavior which have given rise to these proceedings. But I emphasize that in my recitation of the facts I have barely scratched the surface of the evidence supporting the need for urgent interim relief in this case.
Background
19Deciem is a corporation incorporated under the CBCA. While headquartered in Toronto, Deciem operates a global retail business producing and selling affordable beauty products. Its sales are conducted through about 30 Deciem stores around the world, through other retailers and through a very significant online business conducted through Deciem’s website.
20Deciem employs approximately 400 people and is relied on by a wide range of other business stakeholders including landlords, manufacturers of its products, customers, consumers and suppliers.
21Integridad is also a CBCA corporation. It owns two thirds of Deciem’s shares. Mr. Truaxe and Mr. Cusano each own half the shares of Integridad.
22Estée Lauder Companies Inc. is a Delaware company. Its wholly-owned subsidiary, Estée Lauder Cosmetics Limited owns the other third of Deciem’s shares.
23The parties to this litigation are all parties to a unanimous shareholders agreement. The unanimous shareholders agreement requires, among other things, that:
(a) certain matters, such as any significant transactions, material changes in the business, and the hiring and firing of senior employees, require the unanimous approval of Deciem’s entire board of directors (consisting of Mr. Cusano, Mr. Ross and Mr. Truaxe);
(b) each party to the unanimous shareholders agreement must hold in strict confidence and not disclose confidential information, which includes confidential or proprietary information relating to Deciem and its business or relating to any party to the agreement; and
(c) all public notices and other announcements concerning the agreement or the matters contemplated by the agreement must be jointly planned and coordinated by the shareholders and Deciem.
24The events of last week are a culmination of many tumultuous months in which Mr. Truaxe has exhibited a wide range of erratic, irrational and often disturbing and offensive behaviour; conduct that is inconsistent with the duties and responsibilities of a corporate officer and director.
25Since January 2018, Mr. Truaxe has placed literally hundreds of erratic and disturbing posts on Deciem’s social media accounts and websites. Many of these posts were directed against Deciem’s employees, directors, shareholders, customers, suppliers, and competitors.
26Some of Mr. Truaxe’s posts also disclosed confidential information about Deciem’s operations or announced unauthorized corporate transactions (or the unauthorized termination of business lines or business relationships). All of Mr. Truaxe’s statements were made without prior consent of or consultation with Deciem’s board of directors or Estée Lauder, as required by the unanimous shareholders agreement.
27Mr. Truaxe has caused Deciem to take a number of unauthorized business and commercial actions. In February, Mr. Truaxe unilaterally terminated Ms. Kilner as co-chief executive officer. This led to Deciem’s chief financial officer resigning. In July, Mr. Truaxe unilaterally announced Ms. Kilner’s return in a post on Deciem’s Instagram account. On October 8, 2018, he terminated Ms. Kilner again. This was all done without consultation with or the approval of the board of directors.
28Also earlier this year, Mr. Truaxe announced that Deciem was discontinuing a line of products that Deciem had developed with a doctor from the United Kingdom. His post to the doctor was put online and was, to say the least, very rude and unbusinesslike. More importantly, Mr. Truaxe again did not consult with Deciem’s board of directors or with Estée Lauder before making or announcing those decisions.
29Mr. Truaxe also appears to have entered into material lease agreements and commitments, including leasing a private plane and new headquarters, without prior consultation with or approval from Deciem’s board of directors and without regard to Deciem’s liquidity position.
30The evidence is that in May 2018, Mr. Truaxe was detained by authorities in the United Kingdom. Because of his erratic behaviour, he was taken to a psychiatric hospital in London, where he stayed for several days.
31Later the same month, Mr. Truaxe became involved in another series of erratic behaviors as a result of which Mr. Truaxe again appears to have been in psychiatric hospital for several days in Canada.
32Mr. Ross documents many, many efforts on his part and the part of others, to contain Mr. Truaxe’s irrational and destructive behavior and imploring Mr. Truaxe to seek help. From a governance point of view, Mr. Ross and Mr. Cusano have also sought to put in place policies which would deal with governance concerns around the conduct of Deciem’s business and operations and the conduct of Deciem’s president and chief executive officer, Mr. Truaxe. In response, Mr. Truaxe circulated a resolution in which he purported unilaterally to remove Mr. Cusano from the Deciem board and replace him with Mr. Truaxe’s own choice, someone named Mohammed.
33Mr. Ross specifically raised the following concerns with Mr. Truaxe:
(a) Mr. Truaxe’s behaviour did not meet the standard of appropriate conduct for a chief executive officer, which exposed Deciem to significant reputational risk and potential claims, and constituted a breach of Mr. Truaxe duties to the corporation;
(b) Mr. Truaxe had caused Deciem to have a number of unauthorized communications through personal and corporate email and social media accounts which required the consent of Deciem’s board of directors and/or Estée Lauder under the unanimous shareholders agreement and which constituted disclosure of confidential information, in breach of the unanimous shareholders agreement;
(c) Deciem had weak corporate governance and unauthorized decision-making which, among other things, constituted a breach of the unanimous shareholders agreement and Mr. Truaxe’s employment agreement; and
(d) Mr. Truaxe had created a negative tone as chief executive officer and failed to focus on Deciem and its business, again in breach of his employment agreement.
34At a May 31, 2018 board meeting, Mr. Ross introduced a motion to approve a governance resolution addressing these concerns. Mr. Ross and Mr. Cusano voted in favour of the motion. Mr. Truaxe (and Mohammed, who also attended the meeting) declined to vote. Mr. Truaxe’s conduct at the meeting was disruptive throughout.
35In June and early July, Mr. Truaxe’s aberrant behaviour seemed to subside somewhat. Mr. Truaxe proposed a 30 day cooling off period to give himself time to prepare a proposal that would address a path forward. Mr. Truaxe gave his assurance he would not behave erratically during this time and that he would address Estée Lauder’s concerns and prepare a plan for the business and for his ongoing future role.
36It was shortly after this that Mr. Truaxe announced the return of Ms. Kilner to the Deciem senior management team. He agreed to resume regularly scheduled board meetings and acknowledged that there was a need for him to have personal counsel separate from that of Deciem’s corporate counsel.
37This period of relative calm was short-lived, however. In August Mr. Truaxe again began to exhibit erratic behavior in posts on Deciem’s Instagram account. This included a number of bizarre posts that had nothing to do with Deciem or its business. Some of these posts nevertheless generated adverse consumer response.
38Then, Mr. Truaxe announced the termination of Deciem’s relationship with a significant online makeup operation, again on the Deciem Instagram account. This was done without approval by Estée Lauder or the Deciem board.
39In late August, Mr. Ross attended another meeting with Mr. Truaxe to continue discussions regarding a possible path forward. Mr. Truaxe was agitated at this meeting and maintained that the events earlier in the year “never happened” yet were the result of Cusano and Estée Lauder trying to work against him. He told Mr. Ross that he wished to make “big changes” at Deciem. This mostly involved mass employee terminations so that Mr. Truaxe could handpick a new team who were not “liars” and “disrespectful.” Later the same day, Mr. Truaxe terminated two senior employees, again without consultation with or approval by the Deciem board or Estée Lauder. Mr. Truaxe asserted that he had been improperly accused by these employees of drug use and bipolar disorder.
40In September 2018, Mr. Truaxe published screenshots of private email correspondence with Mr. Ross on the Deciem Instagram account. This private email correspondence disclosed details of discussions from Deciem board meetings and details of ongoing concerns that Estée Lauder had with Mr. Truaxe’s continued conduct and destructive social media behaviour.
41What then followed were the culminating events of October 8 and 9, 2018 outlined in paragraphs 5 to 14 above.
Issues
42The principal issue for resolution is whether this is an appropriate case for the imposition of interlocutory injunctive relief and the application of the additional remedial powers available under the CBCA. Injunctive relief in this case requires establishing that:
(1) there is a triable issue of oppression;
(2) Estée Lauder (and Deciem) will suffer irreparable harm if the injunction is not granted (that is, harm not compensable in damages); and
(3) the balance of convenience favours granting the injunction in the sense that the harm to Estée Lauder and Deciem if the injunction is not granted will outweigh any harm suffered by Mr. Truaxe if it is.
43The request for the exercise of additional remedial powers essentially involves amendments to the unanimous shareholders agreement consequent upon the interim orders sought in these proceedings and the appointment of PriceWaterhouseCoopers LLP to conduct an investigation and report to the board of directors of Deciem.
Analysis
44The requirement that the applicant raise a triable issue of oppression in this case is more than met. The oppression remedy is all about reasonable expectations of the parties. Estée Lauder reasonably expected Mr. Truaxe to honour the unanimous shareholders agreement. Estée Lauder reasonably expected Mr. Truaxe to act honestly and in good faith and to act in the best interests of the company. There is ample evidence that Mr. Truaxe is behaving irrationally and has taken actions that are not only not in the best interests of Deciem but are actively destructive of the company and its business. This conduct has defeated Estée Lauder’s reasonable expectations.
45Mr. Truaxe’s actions have, as I said above, brought Deciem to the brink of disaster. Without immediate remedial action, Deciem will cease to function and go into a tail spin. Approximately 400 employees will be out of work, the company will become embroiled in a hurricane of legal proceedings and much of its value will likely evaporate.
46I have no hesitation in concluding the first requirement for an interlocutory injunction is met.
47Some of the same considerations arise in the context of irreparable harm. The harm occasioned by the collapse of highly successful international business which employs about 400 people in research and development, manufacturing, sales and administration is manifestly irreparable in nature.
48Finally, the loss of the jobs, the loss of the business and its going concern value will far outweigh any harm to Mr. Truaxe from being temporarily removed from his position while stabilizing actions are taken to “right the ship.” The balance of convenience overwhelmingly favours granting the injunctive relief sought on this motion.
49Thus, I am satisfied that the requirements for an interlocutory injunction in the circumstances of this case are met.
50The specific remedies sought regarding Mr. Truaxe are all contemplated by the provisions of s. 241(3) of the CBCA. Furthermore, they are in my view all necessary to curtail Mr. Truaxe’s destructive behaviors, enable Deciem to resume normal business operations and to put Deciem back on an even keel.
51With respect to amending the unanimous shareholders agreement, s. 247 of the CBCA provides that the court may order a director or officer or party to comply with, or restrain from acting in breach of, a unanimous shareholders agreement. Section 241(3)(c) of the CBCA permits the court to regulate Deciem’s affairs by amending the unanimous shareholders agreement. I find in the circumstances (especially given that orders are being made requiring Mr. Truaxe and Deciem not breach the unanimous shareholders agreement) that it is necessary that the unanimous shareholders agreement between the parties to this proceeding be amended to conform to the interim orders being made.
52Finally, s. 241(3)(m) of the CBCA specifically empowers the court to direct an investigation under Part XIX. PriceWaterhouseCoopers has indicated its willingness to act. It is clear to me that Mr. Truaxe’s allegations that Deciem is riven with criminal conduct must be examined and reported upon by a qualified, independent investigator. It is also clear, given the chaos of the last year or so, that the work of PriceWaterhouseCoopers will also be invaluable to the board and senior management in assessing the financial condition and circumstances of Deciem. For these reasons, I grant the request for the appointment of PriceWaterhouseCoopers in this role.
Conclusion
53It is for these reasons that I issued the order sought on October 12, 2018. In summary:
(a) Mr. Truaxe is removed from Deciem’s board of directors;
(b) Mr. Truaxe is removed from his role as an officer and employee with Deciem;
(c) Nicola Kilner is appointed as the sole interim chief executive officer of Deciem;
(d) the board of Deciem shall consist of Mr. Cusano and Mr. Ross;
(e) Mr. Truaxe and Integridad are prohibited from taking any action to appoint any person to or remove any person from the Deciem board or otherwise interfere with or alter the composition of Deciem’s board;
(f) Mr. Truaxe is prohibited from taking any actions in relation to the operation of Deciem’s business including:
(i) employing or terminating the employment of any employees of Deciem;
(ii) communicating with Deciem’s employees, suppliers or other business partners as well as current or prospective landlords;
(iii) issuing statements or circulating media on any of Deciem’s social media accounts; or
(iv) holding himself out as a director or officer or employee of Deciem.
(g) Mr. Truaxe is prohibited from taking any actions to disrupt or delete any electronic or computer systems, email, e-commerce or electronic operations, documents or any electronic records of Deciem;
(h) Deciem shall immediately resume operations in the ordinary course;
(i) Deciem and Truaxe are prohibited from acting in breach of the unanimous shareholders agreement;
(j) PriceWaterhouseCoopers shall be appointed to investigate and report to Deciem’s Board of Directors on:
(i) public allegations made by Mr. Truaxe that “almost everyone at Deciem has been involved in major criminal activity, which includes financial crimes;” and
(ii) the financial condition of Deciem;
(k) PriceWaterhouseCoopers may come before the court to establish its powers and duties and fix its remuneration;
(l) Deciem is required to pay all costs of the investigation, subject to further order of the court;
(m) any party may apply to the court to vary or amend this order upon appropriate notice; and
(n) Mr. Truaxe shall pay the costs of the applicants, Mr. Cusano and Deciem in an amount to be set following further submissions.
Penny J.
Date: October 15, 2018
1Estée Lauder owns one third of the shares of Deciem.