SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Arash Etedali and Aracon Corp. v. Disi-Peri Mgt. Inc.
BEFORE: MASTER R. A. MUIR
Counsel: Christopher Yung for the plaintiffs Rahul Shastri for the defendant
REASONS FOR DECISION
Master R. A. Muir –
[1] The plaintiffs bring this motion seeking answers to undertakings and one question refused on the defendant’s examination for discovery. The undertakings have now been answered. The refused question was the subject of argument.
[2] This is a wrongful dismissal action. The plaintiff Arash Etedali is the former vice-president of business development and a director of the defendant corporation. The plaintiff Aracon Corp. is Mr. Etedali’s personal holding company and the holder of certain shares of the defendant. No distinction need be made between the plaintiffs for the purposes of this motion. Mr. Etedali either quit or was terminated from the defendant on November 7, 2017.
[3] The relationship between the parties is governed by an Employment and Share Acquisition Agreement dated June 24, 2014 (the “Agreement”). The Agreement sets out the terms of Mr. Etedali’s employment and shareholding rights.
[4] The refusal in issue on this motion involves a request by the plaintiffs for the production of various financial documents. The defendant has produced its unaudited financial statements for the fiscal years 2014 to 2017. However, the plaintiffs take the position that further production is required. The plaintiffs seek various documents that provide back-up to the entries on the financial statements. The plaintiffs take the position that the requested documents are relevant to matters in issue in this action and the request is proportional given the complexity of this litigation and the amounts involved.
[5] The defendant is opposed to the relief sought by the plaintiffs. It argues that the requested documents are not relevant, not consistent with the principle of proportionality and that the production request is based on a document prepared for mediation that was improperly placed before the court on this motion. The defendant describes the plaintiffs’ production request as a “fishing expedition”.
[6] In determining the issues on this motion I have applied the relevance test set out in Rule 30.03. I have also considered the proportionality requirements of Rule 29.2.03. I am also mindful of the principles applicable to relevance as summarized in my decision in Minotar Holdings Inc. v. Ontario (Municipal Affairs and Housing), 2018 ONSC 4552 at paragraph 7.
[7] I agree with the plaintiffs. The requested documents are relevant to the plaintiffs’ claim for bonus shares. The issue of entitlement to the bonus shares is a matter in issue in this action. It is clearly pleaded at paragraphs 1(c), 15 and 51 of the statement of claim. Pursuant to the terms of the Agreement, the plaintiffs are entitled to these bonus shares if the defendant achieved certain gross revenue and net margin targets. It is true that the unaudited financial statements purport to show that these targets were not met during the plaintiffs’ tenure. However, in my view, the plaintiffs are entitled to test the accounting choices and assumptions made in arriving at the numbers in the financial statements. They should not have to accept them at face value. The only way for the plaintiffs to do this is to examine the defendant’s back-up and source financial documents.
[8] In my view, the documents requested are also relevant to issue of the value of the shares presently held by the plaintiff corporation. Although the Agreement appears to assign the responsibility for the valuation of the shares to the board of directors of the defendant, the language in the relevant section of the Agreement is not entirely clear. Section 2.13 of the Agreement states that the board “may” determine the value of the shares itself or may do so by engaging business valuators. The Agreement also requires the board to act reasonably. In any event, the proper approach to valuing the plaintiffs’ shares and whether the board acted reasonably are matters for trial. The merits of these issues are not to be determined by the court on this production motion. Relevance for the purposes of discovery is determined by the pleadings. See Minotar at paragraph 7. The value of the shares is clearly raised in the statement of claim at paragraphs 1(d) 46 and 51 of the statement of claim. The documents requested are relevant to this issue.
[9] I do agree with the defendant that this production request appears to involve a large number of documents. It will be time consuming and may require the involvement of the defendant’s management team and perhaps its external accountants. However, there is simply no evidence or other information before the court about the potential value of the plaintiffs’ shares and the bonus shares. Mr. Etedali’s claim for wrongful dismissal damages would appear to be relatively modest but the value of the shares is unclear. I am unable to determine whether this production request is out of proportion to the amounts in issue in this action. It is clear, however, that this private closely held corporation does a considerable amount of business. The defendant’s most recent financial statements disclose gross revenue of more than $60,000,000.00 in fiscal 2017. The value of the shares may be significant.
[10] I also agree with the defendant that the document at pages 60 and 61 of the plaintiffs’ motion record should not have been included in the record for this motion. It was prepared for the purposes of mediation. However, I do not view this disclosure as a basis for denying the requested production. The plaintiffs are not seeking the production of any privileged documents or other information. They simply seek production of the underlying financial source documents.
[11] I am therefore ordering the production requested by the plaintiffs as set out in their amended Schedule “B” filed with the court on January 23, 2019. The only exception to this order is with respect to item 12 on the amended Schedule “B” which seeks copies of the defendant’s projections, budgets and forecasts for fiscal 2018 and beyond. The value of the plaintiffs’ shares and any bonus shares will be determined as of November 7, 2017, as pleaded by the plaintiffs. This value will be based on actual financial results through to fiscal 2018 and not projections, budgets and forecasts.
[12] If the parties are unable to agree on the issues of costs or the time for making this additional production, they shall provide the court with brief submissions in writing by March 4, 2019. These submissions may be sent directly to me by email.
2019 01 24
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