COURT FILE NO.: CV-18-163-00

DATE: 20190913

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

ANTHONY GABRIEL DEODATO, JR. and JOSEPH PATRICK DEODATO

Applicants

– and –

TONY DEODATO & SONS LIMITED, ANTHONY GABRIEL DEODATO, MICHAEL WARREN DEODATO, FREDERICK ANTHONY DEODATO and ZACHARY DEODATO a.k.a. ZACH DEODATO

Respondents

Counsel:

Kenneth M. Wright and Kyle Van Schie, for the Applicants

R. Bruce Nelson, for Tony Deodato & Sons Limited

John R. Crouchman and Kristin Muszynski for Anthony Gabriel Deodato, Michael Warren Deodato and Frederick Anthony Deodato

Michael J. Pretsell for Zachary Deodato

HEARD: 18 and 19 April 2019, at Kingston

REASONS FOR DECISION

MEW J.

(Application under section 248 of the Business Corporations Act and for related relief)

[1] A dispute has arisen between three generations of the same family over who should run the family wholesale grocery business in the future. They now ask the court to decide what should happen to the business, having been unable to agree amongst themselves.

Background

[2] In 1923, Tony Deodato opened a small shop on Princess Street in Kingston selling fruit and vegetables. He also sold produce wholesale, and in 1944 the business became strictly wholesale.

[3] Tony Deodato and his wife Ida had ten children, three of whom were boys – Anthony (“Tony Sr.”), Samuel and Vincent.

[4] In January 1966 the three brothers incorporated the business as Tony Deodato & Sons Limited (the “Company”) and formally took over the running of the business from their father.

[5] Samuel died in 1983, after which the Company was owned by Tony Sr. and Vincent. In 1978 Tony Sr.’s son, Anthony Gabriel Deodato Jr. (“Tony Jr.”), started working for the Company. Other sons of Tony Sr. joined as time went by: Joseph (“Joe”) in 1982, followed by Michael. Vincent’s son, Frederick (“Ted”) also joined the business.

[6] In 1988 there was a reorganisation, as a result of which Vincent’s shares were redeemed. By a Shareholders’ Agreement dated 31 December 1988, Tony Sr. became the holder of 500 Class C shares and the four sons of Tony Sr. and Vincent each held five Class A common shares in the Company. Tony Sr.’s Class C shares were subsequently replaced by 499 Class D shares (there is a difference of opinion as to whether the Class C shares were redeemed or transferred). Tony Sr.'s Class D shares enjoy voting rights but they were frozen in value at $399,200. By contrast, the Class A shares are the “value” shares, representing the balance of the value of the Company, but without voting rights.

[7] The dispute that has now arisen over the future of the business has pitted Joe and Tony Jr. against their father and other family members.

[8] In August 2017, a proposal was made for a company to be formed by, inter alia, Zachary Deodato (“Zach”), who is the son of Ted and the great nephew of Tony Sr. (and second cousin of Tony Jr., Joe and Michael) to purchase all of the outstanding shares of the Company for $8,000,000. Tony Sr., Ted and Michael supported this proposed transaction. The applicants did not. The proposed purchase did not proceed.

[9] A similar, but not identical, proposal was put forward in January 2018. But this time the offer was accompanied by a threat. A letter from Tony Sr.’s lawyers to the applicants’ lawyers stated:

If your clients maintain their position that they will not retire, nor will they sell their shares at this time, then Mr. Tony Deodato Sr., to resolve the problem of the proposed retirement of senior management, and his wishes for the business to continue under the next generation, will be forced to sell the assets of the corporation to Zachary Deodato ….

[10] The applicants responded by purporting to exercise rights of first refusal under the Shareholders’ Agreement to purchase the individual respondents’ shares. The respondents took the position that the right of first refusal had not been validly triggered.

[11] In the face of the applicants’ continued opposition to the proposal to sell the Company to Zach, on 8 February 2018, the Company purported to enter into an Asset Sale Agreement, whereby the assets of the Company, including its goodwill, would be sold to Zach (or a company incorporated by him) for $4,000,000.

[12] At a shareholders’ meeting on 12 April 2018, Tony Jr. and Joe, in response, made a higher offer of $4,200,000 for the assets of the Company. Although it was a better offer financially than Zach’s offer, Tony Sr. described it as “an inferior Offer” because “it fails to achieve any of my goals laid in instigating the succession process”. Accordingly, the applicants’ offer was rejected by the other shareholders, who then proceeded to accept the lower offer made by Zach.

Procedural History

[13] On 10 May 2018 this application was commenced in which the applicants seek, inter alia, injunctive relief to restrain the asset sale, specific performance of their right to first refusal under the Shareholders’ Agreement, and relief under section 248 of the Business Corporations Act, R.S.O. 1990, c B.16 (“OBCA”).

[14] On 14 May 2018 I made an order, consented to by all parties, restraining the parties from completing the asset purchase sale to Zach (or any other sale of the assets of the Company) and preserving other aspects of the status quo pending further order of the court or judgment.

[15] On 19 March 2019 I ordered the disclosure by the respondents of an unredacted copy of a term sheet setting out the financing arrangements made between Zach and the Toronto Dominion Bank in relation to his proposed purchase of the Company’s assets.

Facts

[16] As already noted, the Company traces its formal existence back to January 1966 when the goodwill of the previously unincorporated business was acquired from the founder of the business. No consideration was given by the Company or its shareholders for the acquisition of the business.

[17] In 1988, Tony Sr., effected what the applicants describe as an “estate freeze”. As of 31 December 1988, Tony Sr. was the owner of 20 Class A common shares and 500 Class C shares. On 31 December 1988, Tony Sr. transferred 5 Class A common shares to each of Joseph, Tony Jr., Michael and Ted. Tony Sr. retained his Class C shares. Paragraph 1 of the Shareholders Agreement provided that “Unless all the Class C shares in the capital of Corporation held by Tony [Sr.] are redeemed by the Corporation, the Corporation shall have one director, the director shall be the nominee of Tony [Sr.]. Initially, the director shall be Tony [Sr.]”. The paragraph goes on to provide that unless the Class C shares held by Tony Sr. have been “redeemed in full” and unless the shareholders unanimously agree, there should be four directors, namely Tony Jr., Joe, Michael, Ted or their nominees.

[18] On behalf of the Company, Mr. Nelson characterises the arrangements in 1988 as allowing Tony Sr. to share the value of the business with his three sons and nephew. The Class A shares were gifted to each of them. But Tony Sr. deliberately retained control of the company.

[19] In 1992 Tony Sr. disposed of his Class C shares to the Corporation in consideration to the issuance to him of 499 Class D shares. This was for the purposes of a rollover pursuant to Section 85 of the Income Tax Act. The applicants argue that the effect was a redemption in full of the Class C shares, thereby triggering the provision, in paragraph 1 of the 1988 Shareholders Agreement, concerning the number of directors.

[20] Assuming, without deciding, that the Class C shares were redeemed, the arrangement prescribed by paragraph 1 of the Shareholders Agreement was not, in fact, followed. While annual filings made with the Ministry of Government Services identified Tony Sr. and the Class A shareholders as directors of the company, the Minute Book resolutions represented Tony Sr. as sole director. Indeed, the applicants admit that they signed annual resolutions that purported to elect Tony Sr. as the sole director.

[21] Regardless of the formalities, the Class A shareholders each assumed different roles and responsibilities in the company. For example, Ted authorised the annual returns of the company (which name Tony Sr., Michael, Ted, Tony Jr. and Joe as directors). Ted has also been the individual instructing the Company’s lawyer. But it is also equally clear that Tony Sr. has retained ultimate executive authority within the Company.

[22] The issue of succession has been a regular subject of discussion. According to Joseph Deodato:

Over the years it was always discussed, and was the stated intention, that the Corporation would remain in the family and that ownership would eventually be passed down to the next generation, with 25% of the business to one son of each of Tony Jr., Michael, Ted, and myself. This was explicitly discussed at a succession planning meeting that was held in 2004, when we were told that we could each hire one son to work for the Corporation with the intent that we would be able to eventually pass on our shares to that son.

[23] Sons of each of the Class A shareholders have, indeed, worked in the business. In 2005, Tony Jr.’s son, Anthony Deodato (“Mudge”) joined the company. Ted’s son Zachary followed (2007), then Michael’s son Brad (2009) and Joseph’s son, Konnor (2015). Other children of the Class A shareholders have also worked for the company, and some of them still do.

[24] As might be expected, things have not always gone harmoniously. One of the sons was terminated as a result of a workplace assault. Another was “pushed out…due to a hostile work environment”, then re-hired, then fired again.

[25] Tony Sr. rejects Joseph’s perception of the succession plan. He points out that in 2004 the eldest of the next generation was 19 years old and the youngest was only 3. It would have been impossible for him to judge any potential leadership abilities of the next generation at that time. He says that he had hoped that each shareholder would produce a family member with the potential to be a leader in the next generation. As things have turned out – from Tony Sr.’s perspective at least – only Zach has fulfilled that potential.

[26] In late 2016 Tony Sr. consulted the Company’s lawyer “about what would happen to my Corporation” should he pass on. He states that this consultation was done independently without the knowledge of any other shareholder.

[27] As a result of advice that he received from the Company’s lawyer, Tony Sr. then met with the Company’s accountant to discuss a proper evaluation of the Company and the business.

[28] One of the conversations that took place was in August 2017 when Tony Sr. met with Tony Jr. to discuss the possibility of Tony Jr. selling his shares and retiring. Tony Jr. did not swear an affidavit in this proceeding, however, Joe says that Tony Jr. thought that he would be selling his shares to his son Mudge. It became apparent, not long afterwards, that that was not in Tony Sr.’s plan.

[29] In August 2017 Zach presented a proposal whereby a “NewCo” owned by Zachary, Jake, Brad and Mudge would buy out Class A shareholders for $8,000,000 ($2,000,000 each). Joe’s son, Konnor was not part of this plan. The “offer” was presented to each of Tony Jr. and Joe by Zach. Joe says that both he and Tony Jr. felt “ambushed” by this proposed sale. Joseph says that the sale price had been stated by Tony Sr. to be a “family discount” to make the succession plan more affordable for the next generation. When Joe and Tony Jr. said they would not agree to any sale of their shares, Joe claims that he and Tony Jr. began to be isolated and cut out from the decision-making process of the company.

[30] The “preliminary offer” presented by Zachary on behalf of “NewCo” was signed back by Michael and Ted with an amendment reflecting their wish to have one more year of work than the “minimum of one year” proposed in the proposal. But they otherwise found the proposal acceptable.

[31] Zach did not seek legal advice before preparing his proposal and acknowledged, during cross-examination, that his intention was less of an “offer” and more of an invitation to talk. There was no evidence relating to the valuation of $8,000,000 other than statements that that was the amount indicated by Tony Sr.

[32] Tony Sr.’s perspective on the situation after that the August 2017 “offer” was that both Tony Jr. and Joe began to “dissent” and “everything went awry”. Tony Sr. refers in his affidavit to a confrontation with Joseph and his wife in which they accused him of not caring about his grandchildren. His affidavit also expresses the belief that the atmosphere at the head office of the business has become toxic and that the negativity and disruptive actions of the applicants had an impact on the ability of management to work in a cohesive manner.

[33] On 18 January 2018 a meeting was convened at which, according to Joe, Tony Sr. expressed his desire for the Company to be passed on to the next generation in the family and, more particularly, that he wanted Zach to run the business. This was not acceptable to Tony Jr. or Joe who said that they were not prepared to retire or to have their interests in the Company purchased by Zach. Instead, they offered to purchase the shares of Ted, Michael, and Tony Sr. They added that the only way that they were prepared to sell their interests in the company was if 25% of the company was going to one of each of Ted’s, Michael’s, Tony Jr.’s and Joe’s sons. The meeting ended without agreement.

[34] On 22 January 2018 the solicitors then representing the Company (but also purporting to represent the positions of Tony Sr., Michael and Ted, personally) wrote to the applicant’s solicitors, referring to the proposal of Zachary Deodato to purchase the issued and outstanding shares in the Company for the amount of $8,000,000 and, if the business continued to thrive, maintaining the same level of pay and benefits that Ted, Michael, Joseph and Tony Jr. were currently receiving until 31 December 2020. The letter made no reference to “NewCo” and proposed slightly different payment arrangements than in the “preliminary offer” of August 2017. There was also no mention of Mudge, Brad or Jake. After reiterating that the proposal had the support of Tony Sr., Ted and Michael the letter continued that (as previously referenced) not only would the Company’s assets be sold to Zach but also that:

…Zachary Deodato would not be prepared to carry employees with significant levels of compensation since the financing costs of the debt incurred would start immediately as opposed to the 3 year payment structure of the share sale. Also, it would be necessary for the corporation to pay termination/severance packages to employees with significant levels of compensation which payments would deducted from the asset purchase price, as would the payment for Mr. Tony Deodato Sr.’s shares.

[35] On 30 January 2018 the applicant’s solicitors responded to the notice of Zach’s proposal to purchase the shares of the company with a notice of their own that they were exercising their rights to purchase the shares of the Company pursuant to paragraph 11 of the Shareholders’ Agreement which provides that:

If any of the Shareholders receive an offer to purchase any or all of the shares in the capital of Corporation, such Shareholder shall advise the other Shareholders of such offer in writing within 10 days of the receipt of such offer. If a Shareholder wishes to accept such offer, then the other Shareholders shall have the right, upon notice in writing to such Shareholder within 10 days of the receipt of notice of such offer, to purchase all of the shares in the capital of the Corporation held by such Shareholder on the terms and conditions set out in such offer, mutatis mutandis. Subject to the foregoing, if Shareholders representing 75% of the number of issued and outstanding common shares in the capital of the Corporation wish to accept such offer, then all of the Shareholders shall accept such offer. If such offer is for less than all of shares in the capital of Corporation then all of the Shareholders shall sell shares on a pro rata basis.

[36] The 30 January 2018 letter also presented Tony Sr., Ted and Michael with an alternative solution in which the applicants would agree to sell their shares provided that 25% of the shares went to one son each of Ted, Michael, Tony Jr. and Joseph and that they were provided with periods of guaranteed employment (10 years for Tony Jr. and 7 years for Joseph).

[37] Correspondence dated 31 January 2018 from the solicitors for the Company (plus Tony Sr., Ted and Michael), disputed the applicability of paragraph 11 of the Shareholders’ Agreement, asserting that the applicants had not given notice within 10 days of the August 2017 preliminary offer and reiterating the threat of an asset sale.

[38] There was further correspondence from the applicant’s solicitors on 1 February 2018 asserting that the proposal contained in the 22 January 2018 letter was a new and different offer from the one presented in August 2017 and that, as a result, the applicants were still entitled to exercise their rights to purchase.

[39] On 20 February 2018 a letter from the solicitors representing Tony Sr. advised that as the sole director, holding more than 75% of the voting shares in the company, Tony Sr. would be proceeding to sell the Company’s assets to Zachary. However, the letter indicated that Tony Sr. would be prepared to abort that sale if the applicants agreed to the share sale proposal that previously been advanced.

[40] On 29 March 2018 notice was given of a special meeting of the shareholders, scheduled for 12 April 2018, to vote on and approve an Asset Purchase Agreement. Prior to that meeting, Joseph and Tony Jr. registered their opposition to the proposed asset sale and made their own offer to purchase the assets of the company for $4,200,000 on substantially similar terms to those put forward by Zach.

[41] Notwithstanding that the offer from the applicants was for $200,000 more, the other shareholders voted to accept Zach’s offer.

[42] The applicants then called a special meeting of the shareholders of the corporation on 8 May 2018 seeking approval of a formal Asset Purchase Agreement which they had presented following the 12 April meeting. That offer was rejected without discussion.

[43] As already noted, in his affidavit, Tony Sr. acknowledges that the applicant’s offer is “slightly better financially” then Zach’s offer but it fails to achieve his succession plans.

[44] As a result of this court’s order on 14 May 2018, the asset purchase sale to Zachary has not proceeded. The main protagonists continue to be employed. However, if the proposed sale to Zach goes ahead (and despite a term of the asset purchase agreement to the effect that the employment of all of the Class A shareholders and their wives would be terminated), the evidence is that Ted and Michael would continue to be employed in the business, whereas the applicants would not.

[45] In the event that the asset purchase sale to Zach proceeds, it would be financed through a credit facility of $2,600,000 from TD Bank and a $1,400,000 vendor take back by the Company. The applicants were unaware of the proposed vendor take back until disclosure of the TD Bank term sheet.

[46] The applicants also draw to the court’s attention that, subsequent to the court’s interim order, Tony Sr., with the consent of Michael and Ted, has taken a total of $79,000 out of the Company by way of dividends, having never taken dividends out of the Company previously (it has subsequently been conceded that Tony Sr.’s Class D shares limit him to a maximum cumulative dividend of $10,329.30 per annum and that the dividends taken in excess of that amount will be re-classified as a loan).

[47] The applicants also draw attention to what they regard as preferential treatment (in terms of promotions and salary increases) to Ted and Michael’s children, of whom there are 5 working for the Company, the depletion of the Company’s cash as result of the purchase of a new truck and the leasing of a new Porsche for Ted (which, together, cost the Company in excess of $200,000) and various steps taken by Michael and Ted, acting under Tony Sr.’s authority) to reprimand the applicants and strip them of authority within the Company.

[48] No independent valuation of the Company’s shares or assets has been undertaken.

Issues

[49] The issues presented on the hearing of the application have been refined somewhat from those initially pleaded in the notice of application. While the parties have each cast the issues in slightly different ways, they can be summarised as follows:

a. Have Tony Sr., Mike and Ted breached the fiduciary duties owed by them to the Company to act honestly and in good faith and in the best interests of the corporation?

b. Have the applicants been treated oppressively, unfairly, prejudicially, or had their interests unfairly disregarded, contrary to section 248 of the OBCA?

c. If there are findings under section 248 or 143 of the OBCA, what remedies are appropriate?

Legal Framework

[50] Section 248 of the OBCA, reads, in part, as follows:

(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,

(a) any act or omission of the corporation or any of its affiliates effects or threatens to affect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the money paid by the security holder for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 154 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 250;

(l) an order winding up the corporation under section 207;

(m) an order directing an investigation under Part XIII be made; and

(n) an order requiring the trial of any issue.

[51] Section 134(1) of the OBCA provides:

Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall,

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

[52] The oppression remedy has been described in Matthew J. Cumming and Dennis H. Peterson, Shareholder Remedies in Canada, 2^nd. ed. (Toronto: LexisNexis, 2009) (loose-leaf) at §17.1 as follows:

It seeks to enforce fairness and equity, and is not limited to the enforcement of lawful conduct. It is broad and flexible, allowing almost any type of corporate activity to be the subject of judicial scrutiny. The potential protection it offers corporate stakeholders is awesome. Nevertheless, the legislative intent of the oppression remedy is to balance the interests of those claiming rights from the corporation against the ability of management to conduct business in an efficient manner. The remedy is appropriate only where, as a result of corporate activity, there is some discrimination or unfair dealing amongst corporate stakeholders, a breach of a legal or equitable right, or appropriation of corporate property.

[53] Family-owned companies are said to be involved in a disproportionate number of oppression cases: Kevin P. McGuinness, Canadian Business Corporations Law, 3^rd ed. (Toronto: LexisNexis, 2017) at §21.638. Such disputes can become particularly acrimonious (McGuinness at §21.631). The present case would seem to confirm that.

[54] The preferred approach to the interpretation and application of section 248 of the OBCA is to first look at the principles underlying the oppression remedy, and, in particular, the concept of reasonable expectations. If a breach of reasonable expectations is established, one goes on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard of the interests” of (in this case) the applicants: BCE Inc. v 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008 SCC 69, at para. 56.

[55] The concept of reasonable expectations is objective and contextual. The actual expectations of a particular stakeholder is not conclusive. Rather, the question is whether the expectation is reasonable having regard to the facts of the case, the relationships between the parties and the entire context, including the existence of conflicting claims and expectations: BCE, at para. 62.

[56] Factors that can be taken into account when considering reasonable expectations may include the nature and size of the company (greater latitude can be extended to directors of small, closely held corporations to deviate from strict formalities), past practice and Shareholder Agreements.

[57] Where the interests of the Company and the reasonable expectations of individual shareholder, concerning a given result, conflict, the Company’s interests prevail: BCE at para. 64 and 65.

[58] Assuming a breach of reasonable expectations has been established, consideration is then given to whether the conduct complained of is oppressive, or unfairly prejudicial to, or unfairly disregards the interests of, the applicants and, hence, whether it would be “just and equitable” to grant a remedy.

[59] In the discharge of their duties Section 134(1) of the OBCA, directors and officers of a company are required to manage the company according to their best judgment and their decisions are typically entitled to deference. This is the so-called “business judgement rule”. However, a prerequisite to such deference is that the directors or officers have acted honestly, prudently, in good faith, and with a reasonable belief that their actions were in the company’s best interests: Pente Investment Management Ltd. v Schneider Corp. (1998) 1998 CanLII 5121 (ON CA), 42 O.R. (3d) 177, 1998 CarswellOnt. 4035 (C.A.) at para. 33, 34 and 36; Unique Broadband Systems, Inc. (Re) (2014) 2014 ONCA 538, 121 O.R. (3d) 81, at para. 71.

[60] That said, acting in the best interests of the company does not necessarily mean that the directors must act in the best interests of one of the groups protected by section 234 of the OBCA. There may be – indeed there often is – a conflict between the interests of individual groups of shareholders and the best interests of a company: Pente Investment, at para. 34, citing Brant Investments Ltd. v KeepRite Inc. (1987), 1987 CanLII 4366 (ON SC), 60 O.R. (2d) 737 (Ont.H.C.), aff’d (1991), 1991 CanLII 2705 (ON CA), 3 O.R. (3d) 289 (C.A.) at para. 301.

[61] Although the provisions of section 248(3) of the OBCA give the court broad discretion in fashioning a remedy, that discretion can only be exercised for the purpose of rectifying the oppression. As stated by Côté J in Wilson v Alharayeri, [2017] 1 S.C.R.1037, 2017 SCC 39, at para. 54:

The oppression remedy recognizes that, behind a corporation, there are individuals with “right, expectations and obligations interests which are not necessarily submerged in the Company structure” [reference omitted]. But it protects only those expectations derived from an individual’s status as a security holder, creditor, director or officer. Accordingly, remedial orders under S.241(3) may respond only to those expectations. They may not vindicate expectations arising merely by virtue of a familial or other personal relationship.” [emphasis added]

[62] Ultimately, fashioning a fit remedy is a fact–dependant exercise. In Wilson, at para 56, Côté J. recites the pronouncement by Carthy J.A. in Themadel Foundation v Third Canadian General Investment Trust Ltd. (1998), 38 O.R. (3d) 749, 1998 CanLII 973 (C.A.) at p.754:

The point at which relief is justified and the extent of relief are both so dependant upon the facts of a particular case that little guidance can be obtained comparing one case to another and I would be hesitant to enunciate anymore specific principals of approach then have been set out above.

Discussion and Analysis

[63] It will be appreciated that there was a substantial record before the court and that oral arguments were presented over a day and a half of hearing. While all of the evidence and arguments presented have been carefully considered, reference is made only to those elements that I consider necessary to explain my conclusions on the issues presented.

[64] Although the arguments presented distinguished between the fiduciary duties owed by every director and officer of a corporation (section 134 of the OBCA) and oppressive conduct (section 248), there is considerable overlap in the evidence and allegations relating to these issues. I therefore consider them together, while appreciating that even if an officer or director has acted in good faith, his or her actions can nevertheless oppress or unfairly deal with the interests of a shareholder: 820099 Ontario Inc. v Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 at para. 119.

Reasonable Expectations

[65] The applicants say that for more than a quarter of a century they have worked for the Company and held the reasonable expectation, based on past practices and representations made concerning succession, that they would be entitled to remain shareholders, officers and, arguably directors of the Company, until such time as they decided to pass on their respective 25% interests to one of their sons. They say that this was explicitly discussed at a succession planning meeting that was held in 2004 when they were told that they could each hire one son to work for the company.

[66] As already noted, over time, at least one of each of the four Class A shareholder’s sons did, in fact, start working for the company.

[67] It would appear that it was not until around April 2017 that Joseph and his son Konnor met with Tony Sr. to discuss the Shareholders’ Agreement and succession planning. Joseph states that due to the workplace environment, Konnor suspected at that time that the succession plan had been changed. Joseph goes on to say that as it turned out, the April 2017 meeting occurred months after Tony Sr, Ted, Michael, and Zach had started their plans to remove Konnor from the succession plan.

[68] By the time of the August 2017 meeting, it was clear that Tony Sr.’s plans for the future ownership and management of the Company did not coincide with what the applicants say their expectations were.

[69] Tony Sr. sees things very differently. He asserts that there has never been a succession plan in place to give the business to any of his grandchildren. He says he was not in attendance at the 2004 meeting at which Joseph alleges that it was decided that each shareholder could nominate one son of their choosing to inherit their shares in the Company. He adds that he has been advised by Ted, who did attend the meeting, that the possibility had been raised of limiting the number of Deodatos from the next generation to be admitted into the Company as employees, perhaps restricting this to one per family. However, that principle fell by the wayside in the following years “with nearly every Deodato working for the business in some capacity at one time or another”.

[70] In fact, members of the Deodato family came and went. Michael’s son, Justin, was hired and fired. Tony Jr.’s son Brendan was hired, then left “due to a hostile work environment created by his Uncle Michael”, was subsequently re-hired and then fired again. Konnor has also now left the Company, due to what Joseph describes as the abusive behaviour of Michael, Zach and Brad.

[71] As members of the Deodato family, the applicants may well have had an expectation that they would be able to pass their interests in the business on to their sons. But the standpoint from which reasonable expectations are to be assessed is not that of family members. Rather, the reasonableness of the applicant’s expectations has to be considered from their standpoint as shareholders (and, arguably, directors). While blood is often said to be thicker than water, that is not an underlying principle of business corporations law. And although it is often desirable in a family-owned and run business to keep things in the family to the extent reasonably possible (and consistent with commercial common sense) there will inevitably be situations where it is neither appropriate nor commercially reasonable to impose on a Company the appointment of unsuitable shareholders, directors, or officers simply because they happen to be members of a particular family. A case in point might be one of the Class A shareholder’s sons who was eventually dismissed for assaulting a co-worker.

[72] Furthermore, there is nothing in writing to suggest that the children of all four Class A shareholders would participate. Even if that was the arrangement it would belie business common sense to impose the participation of the shareholders children, if doing so would be contrary to the best interests of the company.

[73] Indeed, in the event of the death of any of the Class A shareholders, the Shareholders Agreement provides for that shareholder’s shares to be sold to either the Company or to the surviving shareholders on a pro rata basis. That express provision would seem inconsistent with what the applicants believed the succession arrangements to be.

[74] Looked at from the standpoint of an owner of the Company (or a director), I do not accept that the applicants had a reasonable expectation that they would each be able to pass their shares on to one of their sons (in the case of Tony, who has three sons, with him deciding who that son would be).

[75] The discussion and analysis of reasonable expectations does not, however, end there. The applicants say that they had reasonable expectations that they would be treated fairly as shareholders and, arguably, as directors. By way of examples of this not happening, they point to the rejection of their purported exercise of their right of first refusal, contrary, they say, to the Shareholders Agreement. They also assert that they are, in fact, directors, and that they had a reasonable expectation of being treated as such, and, whether as shareholders or directors, they say that they could reasonably expect to have been kept informed about the operation of the business, including having access to the books and records of the Company, to be paid fairly, and to be accorded an appropriate degree of authority within the Company. Furthermore, it was within the realm of reasonable expectations that they would not be dispossessed of their ownership interest in the Company by was of an improvident or otherwise inappropriate sale of the company’s assets.

[76] I agree that, from the standpoint of the applicants in their quality as shareholders, it was reasonable for them to expect to be treated fairly and transparently. To the extent that these reasonable expectations have not been met as a result of oppressive behaviour, they would be entitled to a remedy. I therefore turn to the principal complaints which they make.

The Right of First Refusal

[77] The applicants purported to exercise their rights of first refusal under paragraph 11 of the Shareholders Agreement on 30 January 2018. In response, the Company and the other shareholders took the position that they could not do so because the applicants had failed to exercise their right within ten days of receiving Zachary Deodato’s offer. This position was predicated on the assertion that the 22 January 2018 letter had effectively repeated an offer that had been made in August 2017 and, accordingly, that the ten day window for exercising the right of first refusal had run from the earlier date.

[78] The applicants argue that the “offer” conveyed in the 22 January 2018 letter was a different offer to the one originally presented in August 2017. Aside from the subsequent acknowledgment by Zachary Deodato that the August 2017 “offer” was not intended to be an offer but, rather, a “lets talk” invitation, there are elements of the August 2017 “offer” and the proposal conveyed in the 22 January 2018 letter, which are different. For a start, the offeror in August 2017 was a NewCo owned by Zach, Brad, Jake and Mudge: in January 2018 the offeror was a NewCo owned by Zach alone. Then, although the total financial consideration was the same - $2,000,000 - it was in different tranches. There were also different provisions with respect to future employment of the Class A shareholders and the conditions under which there could be a re-negotiation of the terms.

[79] The proposal conveyed in the 22 January 2018 letter was, in my view, a distinct and separate one from that previously conveyed in August 2017. However, I do not regard either the August 2017 proposal, or that conveyed in the January 2018 lawyers’ letter to be “offers” within the meaning of paragraph 11 of the Shareholders’ Agreement. Neither “offer” was capable of becoming a binding agreement without more. Indeed, the 22 January letter is not even an “offer” made by Zach Deodato. Rather it is a letter from the solicitors representing the Company and/or Michael and Ted describing Zach’s proposal.

[80] I find that the right of first refusal was not engaged by either of these proposals.

The Directors

[81] While there appears to be merit to the argument that the re-freeze that occurred in 1992 effected a redemption of the Class C shares, rather than an exchange of Class C shares for Class D shares, according to the shareholder minutes and resolutions between 1966 and 2006, Tony Sr. was recorded throughout as the sole director of the corporation. Paragraph 19 of the shareholders agreement provides that any matter recorded in the Minute Book of the Company as having been approved by a resolution of the directors or the shareholders is deemed, for the purposes of the Shareholders Agreement, to have been consented to by all parties.

[82] Furthermore, if paragraph 1 of the Shareholders Agreement had been followed as the applicants suggest it should have, Tony Sr. would not have been a director at all, yet he continued to be the operating and directing mind of the corporation until 1999 and continues to this day to be a director (although, for reasons relating to his health, more and more of the day to day management of the Company has been ceded to others, principally Ted and Michael Deodato).

[83] I am not persuaded that the manner in which the issue of directorships has been dealt with by Company, Michael and Ted has breached the applicants’ rights under the Shareholders Agreement or otherwise been oppressive.

Asset Sale

[84] The applicants raise several objections to the proposed asset sale to Zachary Deodato. The proposed transaction implements the threat made by the other shareholders in the event that the applicants maintain their refusal to sell their shares. There was a covert quality to the transaction, in that the asset sale agreement was entered into on 8 February 2018 with an original closing date of 9 March 2018. The applicants were not told about the asset purchase agreement until 20 February 2018 and did not receive a copy of the agreement until 29 March 2018 when they received the notice of the special meeting of the shareholders scheduled for 12 April. The applicants believe that the special meeting was only called because their lawyer had pointed out that the asset sale could not proceed without a special resolution having been passed.

[85] The business judgement rule accords deference to a business decision so long as it lies within a range of reasonable alternatives: Kerr v Danier Leather Inc., 2007 SCC 44, [2007] 3 S.C.R. 331, at para. 54.

[86] Aside from other concerns about process concerning the proposed asset sale – whether to the applicants or to Zach – the record is insufficient to make a determination of the reasonableness of the valuation placed on the assets (whether $4,000,000 or $4,200,000). There is no independent valuation of the shares or the assets of the corporation. The respondents were prepared to enter into a share purchase transaction based on a valuation of all of the shares of $8,000,000. This has been said to represent a “family discount”. How that valuation translates into a $4,000,000 valuation of the Company’s assets is not explained.

[87] Tony Sr. maintains that his primary objective is the future health and success of the Company. He believes this is best achieved if the business is taken over by Zach. He denies any suggestion that the asset sale is improvident. Rather, it is argued on his behalf, it represents his best judgement as to arrangements that would achieve the objective of serving the Company’s best interests.

[88] All counsel made reference to the Ontario Court of Appeal’s decision in Naneff v Con-crete Holdings Ltd. (1995) 1995 CanLII 959 (ON CA), 23 O.R. (3d) 481. In that case the founder of a family business had, by means of an estate freeze, made his two sons equal owners of all of the equity in the business, although the father had retained complete control of the business through redeemable voting special, or preference, shares. One of the sons became estranged from his father and brother and after a year of escalating tensions that son was removed as an officer of the companies which comprised the family business, and excluded from management. He was also virtually cut-off from the receipt of any income from the business. The trial judge held that this and other conduct by the father and the remaining brother towards the excluded brother was oppressive to the latter. He ordered that the business be sold publicly as going concern with each of, or any combination of, the father and two sons being entitled to purchase it. The Court of Appeal, however, took a different approach, ordering the father and the remaining son to acquire the ousted son’s shares of the companies at fair market value fixed as of the date of his ouster without a minority discount.

[89] In coming to its decision in Naneff, the Court of Appeal, while noting that a dispute involving a family business would not oust the provisions of section 248 of the OBCA, said that the fact that the dispute was a family matter must be kept very much in mind when fashioning a remedy, as it bears directly upon the reasonable expectations of the principals. Specifically, although the ousted son expected, ultimately, to be an equal owner of the business with his brother, he would also have understood that until the father died or voluntarily relinquished his interest in the business, the father retained ultimate control over the business and, further, that the father had built the family business. Expanding on the second point, the Court of Appeal said that it should have been apparent to the ousted son that he could not expect his father to continue to be bountiful to him if his family ties were severed. The Court of Appeal adopted, with approval, the words of Farley, J. in 820099 Ontario Inc. v Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 at p. 197 (Ont. Gen. Div.) aff’d (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.):

The court should not interfere with affairs of a corporation lightly. I think that where relief is justified to correct an oppressive type of situation, the surgery should be done with a scalpel, not a battle axe. I would think that this principle would hold true even if the past conduct of the oppressor were found to be scandalous. The job for the court is to even up the balance not tip it in favour of the hurt party.

[90] The Court of Appeal went on to characterise as punitive a remedy which put at risk the very condition upon which the father had exercised his bounty in favour of his sons – his total control of the business during his active life: Naneff, at para. 34. In approving as the just remedy, the acquisition of the ousted son’s shares at fair market value, without minority discount, Galligan J.A. observed, at para. 39, that while the father’s oppressive conduct should not endanger his right to control the business, neither should he be able to take away what he had given to the ousted son, or to take away what the son had contributed to the business. Such a remedy would put the ousted son, insofar as money can, a position which he would have been had he not been ejected. It would not, however, have given him an opportunity for which he had no reasonable expectation, namely, the acquisition of the entire business.

[91] Although oppression remedy cases are inevitably very fact driven, there are some similarities between Naneff and the present case which bear reflecting on.

[92] However well motivated the proposed asset sale to Zach is, it is oppressive to the applicants. Not only have they presented an offer for a slightly higher amount but, more importantly, neither of the proposed transactions can be said, with confidence, to be provident.

[93] The proposed asset purchase by Zachary Deodato would result in almost his entire asset purchase being financed with debt ($2,600,000 from TD Bank and a vendor take back from the Company of $1,400,000). The applicants were unaware of the vendor take back proposal until they received disclosure of the term sheet, following a contested motion for production of that information a few weeks before this application was heard. As the sale of the assets would leave the Company intact, any subsequent failure of the business conducted by Zach would be highly prejudicial to the applicants, as shareholders of the Company.

[94] Furthermore, the threat of, and subsequent entering into, an asset sale agreement with Zach Deodato, in response to the applicants’ refusal to sell their shares to him is oppressive, both because of the manner in which it was brought about but, also, because of concerns about whether the asset purchase price is reasonable and the financing arrangements.

Workplace Issues

[95] The workplace issues complained of by the applicants are symptomatic of the general breakdown of relationships between the protagonists in this dispute. The parties offer very different perspectives on who is in the right and who is in the wrong. But I do accept that the applicants’ roles in the Company have been diminished and that, to some extent at least, this has been on the instigation of Michael and Ted, as the day to day managers of the business.

[96] While their status as employees of the Company may well change, or, likely, be terminated, if control of the Company passes to Zach, their rights and remedies as employees would be maintained vis-à-vis the Company (obviously, if, ultimately, the business of the Company is transferred to Zach by way of an equity transfer, rather than an asset transfer, the applicants’ rights and interests as employees would be preserved).

Dividends and other Benefits

[97] In addition to the dividends improperly received by Tony Sr. (which will either be returned or charged as a shareholder’s loan), the applicants raise understandable concerns about other expenditures incurred by the Company while the current dispute has rumbled on. This would include the leasing of a new Porsche for Ted and the purchase of a new truck at a time when it would have been known that these would be part of the assets to be transferred to Zachary Deodato (through his Company) as the purchaser under the asset sale.

Findings

[98] Some of the conduct described and discussed in these reasons has been oppressive from the standpoint of the applicants as shareholders. This particularly so in respect of the proposed asset sale. Even if that proposed sale can be said to reflect the bona fide exercise of the business judgment of the individual respondents, aspects of the proposed transaction – the lack of a valuation, the covert way in which it came about and the financing arrangements – are such that the court should not defer to the decisions that have been made.

[99] And while, in respect of other conduct complained of by the applicants, I do not find the individual respondents to have breached their fiduciary duties or their obligation to act in good faith, the effects on the applicants of certain actions – for example the diminution of their authority and standing in the workplace - have been oppressive from their standpoint.

[100] Significantly, I do not find that the reasonable expectations of the applicants include the succession plan which they allege would have seen their shares in the Company passed on to their sons.

Remedies

[101] For the reasons discussed, the sale of the assets of the Company whether to Zach, or to the applicants, should not be allowed to proceed as presently proposed. By any yardstick, it would not be a transaction that could be seen as being in the best interests of the Company as a whole, or of any of its shareholders.

[102] What, then is to be done? In terms of fashioning a remedy, as the Court of Appeal did in Naneff, the fact that this is a family matter must be kept very much in mind.

[103] Ultimately, although the references by Tony Sr. to “my company” are unfortunate, until Tony Sr. passes on or relinquishes his current interests as a shareholder and director of the Company, Tony Sr. retains the right to control the family business and, subject to his legal and fiduciary obligations to the Company and its shareholders, to determine matters of succession.

[104] The relief sought by the applicants – directing the individual respondents to sell their shares to the applicants or compelling the acceptance by the Company of the applicants’ offer to purchase its assets, – would render meaningless Tony Sr.’s voting rights and his entitlement, near the end of a lifetime’s dedication to the custodianship and continued success of the Company and its business, to implement a reasonable succession plan.

[105] The judgment of three of the Company’s five shareholders, representing 50% of the equity and all of the voting control of the Company, is that the Company’s best interests are served by the transfer of ownership and management responsibilities to Zach Deodato. Even the applicants offer very little, by way of evidence, to suggest that Zach Deodato is unsuitable and, specifically, that he does not possess the qualities or abilities to successfully assume the role of the Company’s principal.

[106] Conversely, Tony Sr. expresses grave reservations about the applicants’ abilities to successfully manage the Company. I make no finding in that regard. I simply observe that it is a view held by the current principal and apparently subscribed to by two of the other equity shareholders representing, between them, 50% of the Class A shares.

[107] In Altomare v Oudeh (2000), 9 B.L.R. (3d) 210, 2000 CanLII 22782 (ONSC) at para 12; Cullity J. said:

As is very commonly the case when dealing with a breakdown of personal relationships any solution imposed by the court is likely to be less than perfect. However, among the factors that are relevant to the exercise of the court’s discretion in the corporate world are the allocation of responsibility for the deadlock that has arisen and the question of clean hands. …. If the equities in respect of these matters are equal, or substantially equal, I believe it will be a relevant consideration if only one party seeks to continue the business

[108] The deadlock between the parties manifested itself because of Tony Sr.’s wish to sell the shares to Zach. As I have found, there is no reason for the court to interfere with Tony Sr.’s judgment that passing the reins to Zach serves the Company’s best interests. To the extent that there has been misconduct, including oppressive behaviour, on the part of any of the parties, like Cullity J. in Altomare, I do not regard such conduct is not as sufficiently significant to justify a decision that the individual respondents must sell their shares to the applicants or that the Company should sell its assets to them. But, by the same token, the applicants should not be deprived of the fair value of their interest in the Company as shareholders.

[109] All of the parties acknowledge that the current impasse can only be broken by changing the ownership of the Company or of its assets. As I have already observed, there are concerns about the valuation of the assets and there is always the risk that the redeployment of the assets under different ownership may deprive all of the shareholders of the full value of their respective interests. The $8,000,000 value for the shares, as reflected in the proposals (and said to have reflected “family discount”) is not supported by any independent valuations. If, as the respondents all submit should be the case, the applicants are to be deprived of their shareholdings, the only fair basis for doing so would be through compensation for the full and fair market value of the shares.

[110] That, it seems to be me, is the appropriate way to resolve this dispute. The purchase of the applicants’ shares at their fair market value as of the date of the release of these reasons will provide an opportunity for the business to continue, and will permit the valuation of the shares to be made on an ongoing concern basis. Such valuation is to be determined by an independent valuator chosen by the parties or, if they are unable to agree, by the court from independent valuators proposed by each of the applicants, the responding shareholders, the Company and Zachary Deodato.

[111] I therefore order and direct the sale of the applicant’s shares, following independent valuation, for their fair market value, such sale to be to Zach Deodato, save that if Zach Deodato is unwilling or unable to complete the purchase of such shares within 90 days of the date of this order, the Company shall purchase the applicant’s shares.

[112] Counsel for the Company should contact the Trial Coordinator at Kingston to schedule an attendance before me to address any directions which need to be given for the process of valuation of the shares and any other orders which are appropriate in light of these reasons.

[113] In the meantime, my interim order of 14 May 2018 shall remain in full force and effect.

[114] I will also hear the party’s submissions on costs on their next attendance.

Graeme Mew J.

Released: 13 September 2019

COURT FILE NO.: CV-18-163-00

DATE: 20190913

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

ANTHONY GABRIEL DEODATO, JR. and JOSEPH PATRICK DEODATO

Applicants

• and –

TONY DEODATO & SONS LIMITED, ANTHONY GABRIEL DEODATO, MICHAEL WARREN DEODATO, FREDERICK ANTHONY DEODATO and ZACHARY DEODATO a.k.a. ZACH DEODATO

Respondents

REASONS FOR JUDGMENT

Mew J.

Released: 13 September 2019