Court File and Parties

Court File No.: CV-19-625218 Date: 2019-11-29 Superior Court of Justice - Ontario

Re: David McNab, Mary Derango, and Boris Masip, Applicants And: Paul Burton, Respondent

Before: Nishikawa J.

Counsel: Samuel Michaels, for the Applicants Alexander Burton-Vulovic, for the Respondent

Heard: November 27, 2019

Endorsement

Overview and Factual Background

[1] The Applicants, David McNabb, Mary Derango and Boris Masip, bring an application seeking orders pursuant to s. 253(1) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, compelling the Respondent, Paul Burton, to comply with the terms of a unanimous shareholder agreement. Specifically, they seek, among other relief: (i) an order directing the Respondent to provide copies of all source code and other images and documentation for Flowtracker 2.0 and FTCryptor products (the “Code”); and (ii) an order directing the Respondent to sell his 6,375 common shares in the company, Flowtracker Analytics Inc. (“FTI”) back to FTI at book value.

[2] The Applicants and Respondent are the sole shareholders of FTI. FTI is a software company that offers data analysis services through a proprietary software called “Flowtracker.” FTI utilizes an encryption product called “FTCryptor” which allows customers to safely and securely use the Flowtracker software. The Respondent was involved in the development of a second version of Flowtracker (“Flowtracker 2.0”) and FTCryptor.

[3] The Applicants and the Respondent entered into a unanimous shareholder agreement dated July 31, 2016 (the “First SHA”). There is also an unexecuted unanimous shareholder agreement dated October 31, 2016 (the “Second SHA”) that was circulated when Mr. Masip became a shareholder. The Second SHA which is largely identical to the First SHA with the exception of a one substantive change, which is at issue in this application.

[4] After a dispute arose in April 2019, the Respondent left FTI and resigned from his role as a director. The Respondent claims ownership over FTCryptor and has refused to provide a copy of the source code to FTI.

[5] Since there is a dispute over whether the shareholders agreed to the Second SHA and no cross-examinations were conducted, at the hearing, I asked counsel whether both parties agree to have this matter determined by application on the affidavit evidence. Both agreed that it would be appropriate for this court to determine this matter by application because of the cost to their respective clients if the matter were converted into an action or if trial of an issue were ordered.

Analysis

Is the Second SHA Enforceable?

[6] In support of the order sought requiring that the Respondent sell his shares to them, the Applicants rely on s. 1.35 of the Second SHA. Section 1.35 permits a special majority of shareholders to require that a minority shareholder sell their shares to the remaining shareholders under certain circumstances.

[7] The First SHA contains an “entire agreement” clause, which states that the parties “may supplement this Agreement by written amendments executed by all Shareholders.” The Second SHA was not executed. The Applicants submit that all shareholders agreed to the essential terms of the Second SHA, either by email on October 20, 2016 or during a teleconference on October 31, 2016.

[8] Mr. McNab circulated a draft of the Second SHA on October 20, 2016. The Applicants rely on the email responses sent by Ms. Derango, Mr. Masip and Mr. Burton to argue that all shareholders consented to the terms of this draft Second SHA. However, the email messages contain vague statements that do not specifically refer to the draft Second SHA. Rather, the email messages appear to indicate that all parties were content that Mr. Masip become a shareholder.

[9] In addition, Mr. McNab circulated another draft of the Second SHA on October 31, 2016. In his email attaching the revised draft, he stated that Mr. Masip had suggested certain changes, including to a non-competition provision. The terms of the draft circulated on October 20, 2016 were therefore not final and could not have been accepted by all the shareholders.

[10] The Applicants also claim that the October 31, 2016 draft Second SHA was accepted by all shareholders during a conference call on October 31, 2016. This is undermined by the fact that the Respondent disputes that this teleconference took place. There are no contemporaneous documents to reflect the parties’ consent to the Second SHA. There is no documentation, such as an email confirmation or calendar entry, to confirm that the teleconference took place. Even if all the Applicants agreed to the terms of the Second SHA, in order for an agreement to be binding, all parties have to have agreed to its terms. The Respondent’s evidence is that he did not agree.

[11] Moreover, the evidence does not support the existence of a course of conduct to suggest that the shareholders agreed not to be bound by the term requiring that amendments be executed by all shareholders. In any event, I cannot conclude that all the shareholders agreed to the terms of the Second SHA.

[12] Accordingly, the Second SHA is not a valid, enforceable contract and did not amend the First SHA.

Can the Respondent be Required to Sell his Shares?

[13] Since I have found that the Second SHA is not enforceable, the terms of the First SHA govern the parties’ relationship.

[14] The First SHA contains a provision under which a minority shareholder may be bought out, but only applies to a minority shareholder with less than 10 percent of the total shares. That provision does not apply here because the Respondent owns more than 10 percent of the shares of FTI.

[15] Therefore, there is no basis in the First SHA on which this court could order the Respondent to sell his shares back to FTI or the other shareholders.

Should the Respondent be Required to Provide the Code?

[16] The Applicants rely on s. 5.8 of the First SHA to argue that the Flow Tracker 2.0 and FT Cryptor are the property of FTI. Section 5.8 states:

Inventions

Each Shareholder/Employee, Shareholder and Nominee agrees that if he shall develop any product, derivative, concept, process, system or improvement related in any way to the business of the Corporation of any kind, he shall promptly notify all the Directors of the Corporation and shall provide the Corporation with all necessary information or documentation related thereto without compensation of any kind whatsoever. Each Shareholder/Employee, shareholder and nominee acknowledges that any such product, derivative, concept, process, system or improvement shall become the exclusive property of the Corporation without compensation or reservation of rights of any kind whatsoever.

[17] The Respondent opposes on the basis that s. 5.8 applies to inventions, as indicated by the heading, which are items that may be patented. The Respondent submits that s. 5.8 was not intended to apply to software, which would be protected by copyright. The Respondent also points to a patent held by Mr. McNab’s over the first version of Flowtracker, which is held by a corporation owned wholly by him, to argue that it was not intended that a shareholder’s innovation would become the property of FTI. The Respondent further argues that s. 5.8 is prospective, and he performed the bulk of the work on FTCryptor before becoming a shareholder of FTI.

[18] In my view, s. 5.8 cannot be read as narrowly as the Respondent suggests. The reference to “product, derivative, concept, process, system or improvement” was intended to be broad and to cover intellectual property developed by employees or shareholders. This broad interpretation is further supported by the words “related in any way to the business of the Corporation of any kind[.]”

[19] Moreover, FTI has only one product, Flowtracker 2.0. FTCryptor is an integral part of that software. Interpreting s. 5.8 purposively, and in a commercially reasonable manner,[^1] FTI would be expected to maintain ownership over the software that is at the core of its business. An interpretation that would find that FTI did not own such software, or elements essential to its functioning, would not be commercially reasonable. The Respondent appears to have recognized this when in August 2016, he published FTCryptor with a copyright notice in FTI’s name. While the Applicants developed a work-around after the Respondent refused to return the Code, this does not mean that it was not necessary to FTI’s business.

[20] Based on my interpretation of s. 5.8, the Code is the property of FTI and must be returned to it by the Respondent.

Conclusion

[21] Accordingly, I grant the Applicants’ application in part.

[22] Pursuant to s. 253(1) of the Ontario Business Corporations Act, an order will issue as follows:

(a) directing the Respondent, Paul Burton, to provide copies in electronic format of all source code, compiled code, system images and documentation of Flowtracker 2.0 and FTCryptor products to FTI (the “Code”) in accordance with his obligations under s. 5.8 of the First SHA; and

(b) directing the Respondent, Paul Burton, to destroy all other copies of the Code, and any other data, software and documentation belonging to FTI or FTI’s clients in Burton’s possession in accordance with his obligations under s. 5.8 of the First SHA.

[23] As success has been divided, I make no order as to costs.

Nishikawa J.

Date: November 29, 2019

[^1]: GATX Corp. v. Hawker siddeley Canada Inc. (1996), 1996 8286 (ON SC), 27 B.L.R. (2d) 251, at para. 38.