Court File and Parties
COURT FILE NO.: CV-19-00614920-00CL DATE: 20190607 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
ARTHUR CORBER Applicants – and – MICHAEL HENRY, FAIGIE KOPELMAN and 1192922 ONTARIO LIMITED Respondents
Counsel: Warren Rapoport, for the Applicant Brendan van Niejenhuis and Emily Quail, for the Respondents, Faigie Kopelman and Michael Henry
HEARD: May 29, 2019
V.R. CHIAPPETTA J.
Overview
[1] The respondents Michael Henry (“Henry”) and Faigie Kopelman (“Kopelman”) (collectively, the “respondents”) are married. Since 1989, the respondents have together owned a 50% interest in a restaurant called The Artful Dodger (the “Dodger”). The Dodger leased space at a property located at No.10-12 Isabella Street, Toronto, ON. In 1996, the respondents learned of an opportunity to purchase the property.
[2] In 1997, the applicant, Arthur Corber (“Corber”), was a close personal friend of the respondents. He was offered and accepted the opportunity to purchase the property that housed the Dodger with the respondents, with equal one-third interests. 1192922 Ontario Limited (“119”) was incorporated for the sole purpose of purchasing the property. On October 1, 1997, the parties each invested $70,000 into 119, as one-third shareholders, to purchase the property. 119 does not have an unanimous shareholder agreement. The Dodger was and remains the only tenant of the property.
The Disagreement
[3] As the property appreciated in value over the years, Corber began seeking opportunities for 119 to sell it. The respondents did not wish to sell.
[4] In 2019, Corber solicited an offer from developer KingSett to purchase the property for $13.5 million. The offer was dated January 21, 2019 and expired January 28, 2019. On February 8, 2019, KingSett made a second offer to purchase for the same amount. This offer expired March 15, 2019. On March 19, 2019, KingSett made a third offer for the same amount expiring April 30, 2019 (the “2019 Offer”). The offer has since been extended considering the within litigation. It remains available for acceptance.
[5] On February 18, 2019, Kopelman called a special shareholder’s meeting to vote on the 2019 Offer. Warren Rapoport, legal counsel for Corber, attended the meeting as his proxy. Having considered the merits of a sale that would liquidate and terminate 119’s business and affairs, the shareholders called the question. Corber voted yes. Henry voted no. Kopelman voted no. There is a significant disagreement between the shareholders on a way forward for the corporation.
[6] Corber wants to sell 119’s only asset to KingSett. The majority of the shareholders do not. Corber asks the court to order the sale, directly or indirectly, by way of an oppression remedy under s. 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”). He seeks either an order for the corporation to accept the 2019 Offer outright, or an order for the shareholders or 119 to purchase his shares of 119 at a price based primarily on the proposed purchase price for the property. The circumstances of this case, however, do not warrant the exercise of the court’s power or discretion to do so.
[7] In my view, the application is properly dismissed. The evidentiary record fails to demonstrate oppressive or unfair conduct. Nor does it substantiate lack of business judgment by the respondents as directors. Rather, the evidence reflects that the parties disagree on the way forward for the business of the corporation. The disagreement does not amount to oppression, nor does it paralyze the operations of the corporation. The applicant has been outvoted as a consequence of being one of an odd number of shareholders in a single purpose corporation, operating without a shareholders’ agreement.
Analysis
Business Judgment
[8] The Supreme Court outlined the fiduciary duty of a director to a corporation in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560 at paras. 37-40: “The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is a going concern, it looks to the long-term interests of the corporation.” The directors must consider the best interests of the corporation. In doing so, they may look to the interests of shareholders, employees, creditors, consumers, governments and the environment.
[9] The “business judgment rule” states that courts should give appropriate deference to decisions of directors, so long as the decisions lie within a range of reasonable alternatives: BCE at para. 40. Under the business judgment rule, “the court looks to see that the directors made a reasonable decision, not a perfect decision”: Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177 (C.A.) at p. 192. The business judgment rule is only available to shield business decisions from court intervention where they are made prudently and in good faith, and where the board’s actions actually evidence the exercise of their business judgment: Ernst & Young v. Essar Global Fund Ltd., 2017 ONCA 1014, 420 D.L.R. (4th) 23 at paras. 196-197. The rationale behind the rule is a respect for the autonomy and integrity of corporations, and the fact that directors are in a far better position to make decisions affecting their corporations than a court reviewing the matter in hindsight: UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc. (2004), 250 D.L.R. (4th) 526 (Ont. C.A.) at para. 6.
[10] The applicant submits that the respondents have entirely abdicated their business judgment with respect to 119 and have preferred their interests in the Dodger over those of 119. The respondents do not want to sell the property, the applicant argues, because they prefer the interests of the tenant to those of the landlord. Selling the property would be lucrative for the corporation. The 2019 Offer is more than double the property’s appraised value and it has been rebuffed without consulting financial and real estate experts, obtaining an appraisal of the property or making a counter-offer. The respondents’ judgment is clouded, the applicant submits, as the sale of the property would result in the relocation of the Dodger.
[11] Kopelman states that she has no interest in ever selling the property. She believes that it is sustainable for 119 to continue to hold the property and collect its substantial income. Her business judgment is oriented towards sustainability, not growth.
[12] Henry states that he has never ruled out selling the property. He does not believe it is the right time. In his business judgment, the best approach is to wait and see and continue accruing income.
[13] The applicant argues that Kopelman’s desire to own the property in perpetuity is without any business judgment and Henry refuses to vote against Kopelman to avoid marital discord.
[14] In BCE, the Supreme Court confirmed that the directors’ fiduciary duty is owed to the corporation and not any particular constituency. The directors may, but are not required to, give consideration to a range of interests when exercising business judgment. Provided the directors’ decision was within the range of reasonable choices that they could have made in weighing conflicting interests, the court will not go on to determine whether their decision was a perfect one.
[15] 119 is a single purpose corporation. It is in the business of being a landlord of the property. It has operated a successful business plan with the same tenant for over two decades. Corber wants to sell the only asset of 119, effectively terminating its business. In the interests of the landlord, Kopelman, as director, disagrees. She wishes to continue to follow the original business plan. This is within the range of reasonable choices, as there has been a consistent income stream and a significant return on investment for the shareholders since the time of incorporation. Henry prefers to wait and see. This too is within the range of reasonable choices. Henry chose not to sell to previous interested purchasers. This proved to be a wise decision and resulted in the shareholders receiving successively higher offers from different developers. None of the parties can know what the future of the market may bring to impact on the value of the property. There is no evidence to suggest, however, that the respondents have abdicated their business judgment as directors because they disagree on the optimal timing to terminate the successful business of 119, or whether to terminate that business at all.
Unanimous Shareholder Agreement
[16] Section 108 of the OBCA provides a mechanism for shareholders to control the directors’ operation of a corporation through a unanimous shareholder agreement. The section provides that a written agreement entered into by all of the shareholders of the corporation can restrict the powers of the directors to supervise and manage the business and affairs of the corporation. A unanimous shareholder agreement allows shareholders to agree to certain regulations on the conduct of the business, and tailor some of the rules that would ordinarily apply to their corporation, including rules about the number of votes required to effect an action and the dissolution of the corporation: OBCA ss. 5(4); 207(1)(b)(i). Shareholders can agree to exit mechanisms like “shotgun” or “buy-sell” clauses, or agreements on the lifespan of the enterprise.
[17] The parties were counseled when they incorporated 119 to enter into a unanimous shareholders’ agreement. They did not do so. There is no document between the parties providing for an exit mechanism or the lifetime of the enterprise. There is no evidence sufficient, therefore, to infer that in the event of a dispute among shareholders, the shared intention is to dissolve the corporation.
Arrangements
[18] The OBCA has a scheme designed to protect shareholders who disagree with certain major corporate actions. Section 182(1) of the OBCA sets out a number of major corporate actions that constitute an “arrangement”, including the transfer of all or substantially all property of the corporation, or a liquidation or dissolution of the corporation. Section 182(2) requires a corporation proposing any such arrangement to prepare a statement setting out what is proposed to be done and how it will affect each class of shares, so that shareholders can determine if the proposed arrangement is fair and reasonable: Re Tip Top Canners Ltd., [1973] 1 O.R. 626 (H.C.J.). Section 185(1) outlines that a shareholder may dissent from a limited number of corporate resolutions, including a resolution to sell, lease or exchange all or substantially all its property. Section 185(4) provides that when the action approved by the resolution from which the shareholder dissents becomes effective, the dissenting shareholder is entitled to be paid by the corporation the fair value of the shares in respect of which he or her has dissented. In sum, the OBCA provides that a shareholder who disagrees with certain fundamental changes has a right to be bought out of their shares.
[19] Corber is asking the court to compel the sale of the property to KingSett either directly through the sale outright, or indirectly through the shareholders or corporation purchasing his shares of 119 at a price based primarily on the proposed purchase price for the property. The court is being asked to order the sale of 119’s only asset. This sale would constitute a fundamental change governed by Part IV of the OBCA and, in particular, an “arrangement” described in s. 182 (1) (e) and (g). The OBCA protects the rights of a shareholder to be paid fair market value for their shares if they dissent from an arrangement that is approved by a sufficient majority (s.185). No such protection is available to a shareholder like Corber, who disagrees with the majority decision and chooses a fundamental change over business continuity.
Winding up
[20] The substance of the remedy sought, given that the property is 119’s only asset, is a winding-up order pursuant to s. 207 of the OBCA.
[21] Section 207 of the OBCA provides that the court can order that a corporation be “wound up” in a number of circumstances, including where it would be “just and equitable.” In closely held corporations, it may be just and equitable to order a winding where there is a lack of confidence and trust between the parties: Goft v. 1206468 Ont. Ltd. (2001), 11 B.L.R. (3d) 131 (Ont. S.C.) at para. 30, citing Ebrahimi v. Westbourne Galleries Ltd., [1972] 2 All E.R. 492 (U.K. H.L.) at p. 500. However, mere disagreement or disharmony alone will not trigger an equitable winding up. “Quarrelling and incompatibility, even to the point of a breakdown in the personal relationships between shareholders of a private company, are not, by themselves, sufficient grounds for an equitable winding-up of the corporation”: Animal House Investments Inc. v. Lisgar Development Ltd. (2007), 87 O.R. (3d) 529 (S.C.) at para. 56, aff’d Animal House Investments Inc. v. Lisgar Development Ltd. (2008), 237 O.A.C. 261 (Div. Ct.) at para. 7. Winding up may be appropriate where it can reasonably be inferred that the parties have agreed that, or would have agreed that, in the particular circumstances that have arisen, the business association between them would terminate: Animal House (S.C.) at para. 68.
[22] While there is a disagreement in terms of a way forward for the corporation, there is no evidence that the disagreement prevents 119 from continuing to run its business and collect its rent, or make any decisions on significant business matters. There is no evidence that the parties intended dissolution in the face of a disagreement among shareholders. There is also no evidence sufficient to conclude that any unfairness to Corber in business continuity is so serious that the only effective remedy would be a winding-up order extinguishing 119.
Oppression
[23] Section 248 of the OBCA prevents a corporation from acting in a way that is oppressive, unfairly prejudicial to or that unfairly disregards the interests of any security holder. This oppression remedy is intended to give the court broad, equitable jurisdiction to ensure that the corporation is acting in a way that is not just legal, but also fair: BCE at para. 58. The oppression remedy is fact-specific. What is fair, just and equitable in a case is judged by the reasonable expectations of the stakeholders in the circumstances, with regard to the relationships at play: BCE at para. 59. In order to determine whether there has been conduct that should give rise to a remedy for oppression, the court must first ask whether a reasonable expectation has been breached. Reasonable expectations are judged on an objective standard – the actual expectation of the particular stakeholder is not conclusive. The question is whether the expectation is reasonable in the circumstances of the case, the relationships at issue and the entire context, including conflicting claims and expectations from other stakeholders: BCE at para. 62. The nature of the corporation, the relationships in the case, past practice, and the fair resolution of conflicting interests are all factors that can be examined in determining whether an expectation was reasonable.
[24] After determining what the claimant is reasonably entitled to expect, the court must determine whether the corporation’s conduct violated that expectation. “Not every failure to meet a reasonable expectation will give rise to the equitable considerations that ground actions for oppression. The court must be satisfied that the conduct falls within the concepts of “oppression”, “unfair prejudice” or “unfair disregard” of the claimant’s interest”: BCE at para. 89.
[25] Corber was cross-examined on his expectations when he bought his one-third interest in 119. He deposed that he expected that:
- 119’s only business would be the renting of the building to the Dodger;
- The purpose of 119 acquiring the building was for the purposes of renting it to the Dodger;
- Henry and Kopelman were involved in managing and operating the Dodger;
- Henry and Kopelman were shareholders in the Dodger;
- The only reason the opportunity for 119 to buy the property arose is because they were operating the Dodger when the owner put it up for sale;
- Henry and Kopelman owed duties to their fellow shareholders in the Dodger just as they did to him; and
- Any two of the three shareholders could outvote the third if there was a disagreement.
[26] The evidence does not establish that Corber’s reasonable expectations were violated by conduct falling within the terms of “oppression,”, “unfair disregard” or “unfair prejudice” of a relevant interest. I make this conclusion for the following reasons, taken together.
[27] Corber submits that the respondents have prevented a rent increase for the Dodger for 15 years by claiming a consistent decline in sales when, in fact, financial records indicate that the Dodger’s income stream was steady throughout. Corber submits that, during this same period, the Dodger was also consistently issuing dividends and management fees to its shareholders, 50% of whom are the respondents.
[28] I find as fact that, in 2011, Corber began to complain that 119 should raise the rent. The respondents had differing views on the rent. Corber did not call a directors’ meeting or a shareholders’ meeting. On November 1, 2015, his lawyer demanded they sell the property or Corber would sue. Corber brought his first notice of application on March 13, 2017, seeking to force a sale to another developer on substantially similar facts. The application was settled in October 2017 on basis of the parties’ agreement that the rent paid by the Dodger would be increased, Corber would be responsible for the renegotiation of the lease with the Dodger’s other shareholder and the respondents would stay out of it. The allegation of oppression based on suppressed rent therefore was resolved in the 2017 application.
[29] Corber further submits that, after this rent increase as a result of the 2017 application, the respondents did not permit the additional income to flow to shareholders through increased distributions. Instead, they belatedly cited negative tax consequences, which arose out of their own unilateral change to the characterization of distributions from management fees to dividends and shareholder loan repayments.
[30] The evidence reflects that after the rent was raised, Kopelman, as Treasurer, determined that the current rate of distribution should be maintained until the extent of the new tax burden on 119 was better understood. Once the tax effects were clearer, the higher income could be translated into increased distributions. This was communicated to Corber through his counsel. The regular amounts of $2,900 were paid out from January to March 2018. The decision not to distribute the increased rental income was commercially reasonable. The increases will flow through to the shareholders once the altered tax liability of 119 is determined.
[31] Corber also claims that the respondents used the additional income from the rent increase to pay themselves wages, without justification.
[32] I find that, on January 25, 2019, in accordance with the company’s By-Laws, Kopelman provided a notice of a meeting of directors via teleconference on January 30, 2019. Corber had signed a consent to appear to all meetings via teleconference. Kopelman proposed a number of resolutions, including wages for the officers and employees of the corporation who had before only received management fees. Corber did not attend. The respondents approved wages for themselves as officers. The timing of this decision was not ideal. It does not amount to oppressive conduct however. I accept that the work of running 119 had become a full-time job for the respondents. Corber did not contribute to the work. It is a reasonable expectation that the employees carrying the weight of the business of the corporation would receive relatively modest salaries.
[33] Corber submits that it was oppressive for the respondents to move 119’s bank account to Italian Canadian Savings and Credit Union, where Corber has no authority or access to corporate financial records. He further submits that the respondents have withheld his monthly distribution from him since November 2018.
[34] The evidence shows that, in 2018, Corber unilaterally and without notice withdrew $9,000 from 119’s account at CIBC. When alerted of this, the account manager at CIBC froze the account. The unauthorized payment was assigned as Corber’s distributions for three months. At the directors’ meeting in January 2019, the directors resolved to open a new corporate bank account that would not be vulnerable to unilateral withdrawals by Corber. This conduct was in response to Corber’s unauthorized improper conduct. Corber was nonetheless sent a financial package with the current information from the former CIBC account and the new information from the new bank. He refused to accept the package.
[35] Corber claims that the respondents concealed information from him about offers to purchase the property, including meetings and calls with KingSett, information about other developer interest, and an earlier viable offer.
[36] There is no evidence that the respondents actively concealed any information. I accept the evidence of the respondents that they saw the information as irrelevant, as the 2016 KingSett offer was the same as a recently-rejected previous offer. Further, they were advised by Corber’s counsel that the first application was pending and therefore thought it prudent not to speak directly with Corber about such matters. On a personal basis, during this time the respondents were overwhelmed with pressures on their time dealing with separate family members who had serious health issues.
[37] Corber states that it was oppressive conduct for the respondents to ignore the 2019 Offer and to refuse to conduct due diligence into its merits. The offer was over double the property’s appraised value, and the property’s value will plummet after KingSett’s development plans are approved. The respondent’s failure to consider the offer was a result of their preference of the Dodger’s interests at the expense of 119’s.
[38] I find that 119 and the Dodger were intertwined from 119’s inception. 119 was incorporated to purchase the property that housed the Dodger, a business partially owned by the respondents. There could be no reasonable expectation that the respondents would completely ignore the interests of the Dodger. Rather, it would be reasonable to expect that the respondents would consider the interests of the Dodger as a stakeholder, as they are permitted to do as part of their business judgment. There is no evidence that the respondents’ ownership of the Dodger unduly influenced their conduct or business judgment to the detriment of 119 or Corber. 119 and Corber have benefitted from the relationship. The property’s mortgage was paid off in 2007. The asset has been unencumbered for twelve years. Since 2007, profits from the rent of a stable tenant have been distributed directly to the shareholders. Each shareholder has accrued in excess of $550,000 by way of distributions alone. The principal form of relief sought by Corber is to have the court order the sale of the property. But for Corber’s bald statement and his purported 1997 handwritten note reading “selling in future…how long?”, there is no evidence to suggest that selling the property when the property appreciated and the parties approached retirement was a reasonable expectation of the shareholders. The respondents deny that it was. Further, without a unanimous shareholder agreement, there can be no reasonable expectation that 119 would be wound up and its business terminated.
[39] Corber further points to the respondents’ decisions to remove Corber as Vice President of 119 in January 2019 and as Director in February 2019. He states that the respondents’ decision to reduce the number of directors of the board from three to two prevented him from ever participating in 119’s management.
[40] The evidence shows that, in January 2019, Kopelman provided notice of a meeting of the directors via teleconference. She further provided notice of a meeting of shareholders via teleconference. Corber did not attend the meetings. The directors removed Corber as an officer of 119 and the shareholders removed him as a director. This was not punitive. The reasons for doing so were directly related to Corber’s own improper conduct in unilaterally placing financial stress on the company. He made an unlawful withdrawal of $9000 from 119’s account at CIBC and he ordered his own cheques from CIBC and issued cheques to himself and the respondents in the amount of $20,000 and $4,100. The respondents’ actions were reasonably required in the interest of 119, considering issues of financial security and preserving the ongoing business of the corporation.
[41] In conclusion, the evidence does not show that the respondents acted in a way that was oppressive, or that unfairly prejudiced or disregarded the interests of the applicant. Their actions were reasonably required in the interests of the corporation, and were in line with what Corber could reasonably expect in the circumstances, given that he knew that the respondents had a relationship with and a duty to the Dodger, and the intended purpose of the corporation was to rent the property to the Dodger.
Millar v. McNally
[42] The applicant relies heavily on Millar v. McNally (1991), 3 B.L.R. (2d) 102 (Ont. Gen. Div.). This reliance is misplaced. Millar is substantively distinguishable from the facts of this case.
[43] In Millar, the applicant was also one of three directors and shareholders in a closely held company, and claimed that the other two, a husband and wife, had caused the corporation to act oppressively towards him. Similarly to this case, the corporation’s intrinsic value lay in the value of the land it owned and the husband and wife ran a restaurant on the land through a separate corporation. The application judge ultimately found that the husband and wife had unfairly cut the applicant out of the operation of the corporation, and had unfairly favoured the interests of the restaurant to the detriment of the corporation. They were ordered to buy the applicant’s shares in the corporation at a price based on the value of the real property owned by the corporation and the value of both the corporation and the restaurant’s businesses.
[44] However, the facts and reasonable expectations at play in Millar differ significantly from those at play here. First, when the corporation in Millar was incorporated, in 1977, it had acquired both the real property and the restaurant business. The separate restaurant corporation was incorporated by the respondent husband and wife without notice to the applicant in 1989, after the breakdown of the relationship between the parties. Neither the restaurant corporation nor its shareholders paid consideration to the original corporation for the business. Further, the respondents granted their restaurant corporation a lease to the land from the original corporation for $1, also without notice to the applicant. Over time, the cash position of the original corporation was depleted through the lease arrangements with the restaurant corporation, which benefitted the respondents to the detriment of the applicant. The respondents gave no notice of either shareholders’ or directors’ meetings to the applicant after the relationship broke down, and the respondents withheld financial information about the corporation from the applicant until he commenced his action. Finally, the parties had entered into a shareholder’s agreement for the corporation that provided that, if the relationship between the parties broke down, the respondents could purchase the applicant’s shares for a pre-determined price within thirty days. The respondents did not exercise this option within thirty days, and so they were bound by the consequences.
[45] In Millar, the applicant’s reasonable expectations were violated when the respondents created a separate corporation to run the restaurant business without notice to him, and granted a lease to this restaurant corporation for nominal consideration, also without notice to him. In this case, the applicant knew at the time that 119 was incorporated that the respondents ran a separate restaurant business that would be 119’s tenant. The lease that 119 granted to the Dodger was not for a nominal amount, and, following the 2017 application, the applicant was even given the opportunity to renegotiate the lease with a director of the Dodger who was at arms-length with 119. Further, the lease did not result in a business loss to 119 – 119 remained profitable and paid distributions to its shareholders throughout. The respondents in this case have provided the applicant with notice of every action they have taken and meeting they have held, and have not withheld the corporation’s financial information. Finally, there is no shareholder’s agreement at play here to show the parties’ intentions in the case of a breakdown of their relationship.
Conclusion
[46] There are three shareholders of 119 with equal votes. Two can outvote one on any matter. The majority of shareholders have voted against the sale of the property to KingSett. The disagreement has not paralyzed the business of 119. It was a function of the business judgment exercised by the directors and does not offend the objectives or reasonable expectations held by the shareholders at the commencement of the company. There is no basis for the relief sought. The application is dismissed.
[47] In terms of costs, I will accept written submissions of not more than three pages. The respondents shall serve and file their submissions within 30 days. The applicant shall serve and file his response within 30 days thereafter. A reply, if any, shall be served within 20 days of receipt of the response to costs submissions.
V.R. Chiappetta J.
Released: June 7, 2019
COURT FILE NO.: CV-19-00614920-00CL DATE: 20190607 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ARTHUR CORBER Applicants – and – MICHAEL HENRY, FAIGIE KOPELMAN and 1192922 ONTARIO LIMITED Respondents REASONS FOR JUDGMENT V.R. Chiappetta J.