Court File and Parties

COURT FILE NO.: 18-75539

MOTION HEARD: 20190718

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Paul Sun, Plaintiff

AND:

Duc-Tho Ma, also known as Tom Ma, Defendant

And Between

Duc-Tho Ma, also known as Tom Ma, Plaintiff by Counterclaim

AND:

Paul Sun and Ironyun Incorporated, Defendant by Counterclaim

BEFORE: Master Kaufman

COUNSEL: Shawn J. O’Connor, Counsel, for the Paul Sun

Alison V. Sutherland, Counsel, for the Duc-Tho Ma

HEARD: July 18, 2019

REASONS FOR DECISION

[1] The parties are businessmen who, together with another individual, founded IronYun Corporation, a corporation registered in the Cayman Islands that develops facial recognition software. The plaintiff, Paul Sun, sued the defendant to recover moneys allegedly lent to him for the purpose of buying 1,000,000 Series A Preferred shares in IronYun.

[2] The defendant brings two motions. The first is for leave to amend his counterclaim to add a claim for misappropriation of Founder / Ordinary 1 shares (founder shares). He also seeks certain disclosure orders and an order for substituted service. The second motion seeks to add PAKK LLC as a defendant to the counterclaim, further disclosure, and an order varying the timeline for the completion of this proceeding.

[3] Because much of the relief claimed as part of these motions depend on the success of the defendant’s proposed amendment to add a claim of alleged misappropriation of founder shares, I will decide this issue first. The second issue is whether an order for substituted service on IronYun should be granted. The third issue is whether the Court should order the plaintiff to disclose documents belonging to IronYun. The final issue is costs.

Should the defendant obtain leave to amend the counterclaim

[4] Rule 26 of the Rules of Civil Procedure provides that the Court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated by costs or an adjournment. While the Rule is expressed in mandatory language, the Court is entitled to inquire into the merits of the proposed amendment to ensure that it meets a basic threshold of legal soundness. In other words, the Court will not permit an amendment if it is not tenable in law.[^1]

The original action

[5] The defendant and Mr. Sun are two of the three key founders of IronYun Incorporated. The defendant alleges that the three founders agreed, in May 2015, that they would each invest $200,000 U.S. in exchange for 1,000,000 series A Preferred shares. Because the defendant did not have these funds available, Mr. Sun agreed to loan him these funds, and if the loan was not repaid, then the defendant could transfer 2,000,000 of his founder shares to him to satisfy that debt. When the plaintiff asked for repayment of the $200,000 US loan, the defendant argued that the plaintiff never advanced him the $200,000 and that the $1,000,000 Series A preferred shares had never been issued to him. The defendant alleges that he was made to execute a promissory note under duress, which is the subject of the plaintiff’s action.

The proposed counterclaim

[6] The parties executed a shareholder agreement on January 23, 2015 by which they designated respective nominee corporations as the entities to which IronYun founder shares would be issued. The defendant designated IZ Incorporated as the entity which would receive his 15,713,250 founder shares. The plaintiff designated PAKK LLC, a Delaware corporation.[^2]

[7] Under the shareholder agreement, the parties agreed to submit “any dispute, controversy or claim arising out of or relating to this Agreement” to the ROC Arbitration Association for arbitration in Tapei in accordance with the Rules of this association. The parties selected the laws of the Republic of China to govern their agreement. [^3]

[8] The defendant alleges that he recently discovered that all of IZ Incorporated’s founder shares had been transferred without his knowledge or consent to PAKK LLC, a corporation controlled by the plaintiff.

[9] Mr. Sun replies that none of IZ Incorporated’s shares were transferred to PAKK LLC. Rather PAKK LLC acquired additional shares in 2018 at a cost of $250,000 US. The reduction in IZ Incorporated’s shareholdings in IronYun stems from the application of section 4.2 of the shareholders agreement: it provides for the retraction of shares when an officeholder is terminated for cause. Mr. Sun states that any dispute regarding the defendant’s termination, and the invocation of s. 4.2 of the shareholders agreement, must be referred to arbitration.

[10] I agree with the plaintiff that the proposed amendment should not be granted. First, the defendant does not, in his personal capacity, have standing to assert a claim on behalf of IZ Incorporated. He selected IZ Incorporated as the corporation to which his founder shares would be issued, no doubt for valid tax planning reasons. But that decision carries with it the consequence that any claim by IZ Incorporated must be asserted by that corporation, which has a separate legal personality from that of the defendant. Pursuant to the common law rule in Foss v. Harbottle, a shareholder in a corporation, even a controlling or sole shareholder, does not have a personal cause of action for wrong done to the corporation. This rule respects a basic principle of corporate law, namely that a corporation has a legal existence separate from that of its shareholders. [^4]

[11] I also agree with the defendant that the proposed amendment relates to a shareholder dispute that is governed by an arbitration agreement. Here, because the parties have their place of business in different countries, and because the place of arbitration specified in arbitration agreement is Taiwan, the arbitration agreement is an international one within the meaning of the International Commercial Arbitration Act, 2017. [^5] Pursuant to Article 8 of the Model Law — which has force of law in Ontario[^6] — a court before which an action is brought in a matter which is the subject of an arbitration agreement shall refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.[^7] Should the amendments be allowed, the Court would be faced with a motion to stay the counterclaim in favour of arbitration. The defendant does not argue that the Shareholder Agreement is null and void or inoperative. To the contrary, he relies on that shareholder agreement for his entitlement to founder shares.

[12] Based on the foregoing, the defendant’s motion to amend the counterclaim to add a claim for misappropriation of his founder shares, to add PAKK LLC as a defendant, for production of documents belonging to PAKK LLC, to dismiss the plaintiff’s claim, and to vary the timeline in these proceedings is dismissed.

Substituted Service upon IronYun

[13] The defendant also seeks an order for substituted service upon IronYun by service upon the plaintiff’s solicitor. Rule 16.04 entitles the Court to make such an order where it appears to the court that it is impractical for any reason to effect prompt service of an originating process or any other document. Unfortunately, there is no evidence on the record that serving IronYun is impractical. There may be an increased expense associated with service abroad, but this does not constitute impracticability. In his notice of motion,[^8] the defendant states that “The Defendant has properly served IronYun at its place of business in Tapei, Taiwan, and yet the Plaintiff claims to have no knowledge of this. Since the corporation has not yet retained counsel, it will be very expensive for the Plaintiff to have to directly serve the corporation again. Substituted service is not intended to spare a party the inconvenience or expense of personal service, if the latter can be effected. [^9] The defendant provides no details as to why service is impractical, or the cost associated with the service. Moreover, the fact that the defendant claims to have properly served IronYun suggests that service is not impractical.

Should the Court order the Plaintiff to produce records belonging to IronYun

[14] Because the proposed amendments relating to the claim for misappropriation of founder shares were not permitted, the only issues before the Court relate to the plaintiff’s action upon a promissory note and the defendant’s defences based on duress and lack of consideration. The defendant asks for an order that the plaintiff produce all documents which are relevant to the claim and/or the counterclaim which are under the plaintiff’s control or power as a director, officer and shareholder of IronYun.

[15] Parties to an action must disclose every document relevant to any matter in issue within their possession, control or power. Under Rule 30.01(1)(b), a document shall be deemed to be in a party’s power if that party is entitled to obtain the original document or a copy of it and the party seeking it is not so entitled.

[16] Mr. Sun describes himself as the Chairman of the Board of Directors[^10] and he is IronYun’s largest shareholder (indirectly through PAKK LLC)[^11]. His affidavit of documents lists certain corporate documents of IronYun (such as share transfer form and share certificates). I am satisfied that Mr. Sun is entitled to obtain copies of documents belonging to IronYun and that the defendant is not. To the extent that there are any documents that have not been disclosed which are relevant to the defendant’s defences of duress and lack of consideration (with respect to the 1,000,000 series A Preferred shares) the plaintiff must disclose them.

Alternate spelling of the defendant’s name

[17] The defendant seeks an order to amend his statement of defence and counterclaim to change his name to “Tho Duc Ma” because he recently learned that his name is spelt this way on his birth registration. This order will be made on consent of the parties. The style of cause is hereby amended and the defendant / plaintiff by counterclaim shall be referred as follows: “Duc-Tho Ma also known as Tom Ma or Tho Duc Ma”.

Costs

[18] The plaintiff was mostly successful in resisting the motion. The plaintiff’s bill of costs amounts to $3,205 on a partial indemnity scale. The defendant’s bill of costs is almost identical ($3,291.51) also on a partial indemnity scale.

[19] I fix costs in the amount of $3,200, inclusive of HST, payable to the plaintiff within the next 30 days. In accordance with Rule 57, I find that this is the amount that the unsuccessful party could reasonably expect to pay in relation to this motion.

Master Kaufman

Date: July 30, 2019

[^1]: Plante v. Industrial Alliance Life Insurance Company, 2003 64295 (ON SC), 66 O.R. (3d) 74, [2003] O.J. No 3034 at para 16 (S.C.J., Master).

[^2]: Defendant’s Supplementary Motion Record, Exhibit “B” to the Affidavit of Duc-Tho Ma, p. 22.

[^3]: Ibid, at p. 20.

[^4]: Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 2002 41710 (ON CA), 61 O.R. (3d) 786 (C.A.) (at paras. 12-13).

[^5]: International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5, Schedule 2, UNCITRAL Model Law on International Commercial Arbitration, Article 1(3).

[^6]: Pursuant to s. 5(1) of the International Commercial Arbitration Act, 2017.

[^7]: International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5, Schedule 2, UNCITRAL Model Law on International Commercial Arbitration, Article 8.

[^8]: Defendant’s motion record dated January 21, 2019, Tab 1.

[^9]: Laframboise v. Woodward (2002), 2002 49471 (ON SC), 59 O.R. (3d) 338 (Ont. Sup. Crt.) at paragraph 9.

[^10]: Affidavit of Paul Sun sworn July 8, 2019, at para 12.

[^11]: Affidavit of Duc-Tho Ma, sworn January 21, 2019, exhibit “K”.