Crescent (1952) Limited in the Name of and on Behalf of Safety Insurance Service (1959) Limited v. Jones et al. Crescent (1952) Limited v. Safety Insurance (1959) Limited et al.
[Indexed as: Crescent (1952) Ltd. v. Jones]
Ontario Reports
Ontario Superior Court of Justice
McEwen J.
May 7, 2019
145 O.R. (3d) 594 | 2019 ONSC 931
Case Summary
Contracts — Relational contracts — Plaintiff selling all shares in company to defendant — Share Purchase Agreement providing that plaintiff's preferred shares were to be purchased three years after purchase of common shares and that price would be adjusted downward if company failed to meet earnings target for three-year period — Defendant retaining key employees of company — Share Purchase Agreement not having hallmarks of relational contract.
Corporations — Oppression — Plaintiff selling all shares in company to defendant — Share Purchase Agreement providing that plaintiff's preferred shares were to be purchased three years after purchase of common shares and that price would be adjusted downward if company [page595] failed to meet earnings target for three-year period — Defendant retaining key employees of company but ultimately constructively dismissing them — Defendant breaching Share Purchase Agreement and acting oppressively towards plaintiff with respect to its treatment of those employees as it undermined plaintiff's ability to reach earnings target.
The plaintiff entered into a Share Purchase Agreement ("SPA") with a wholly owned subsidiary of the defendant JDIMI for the sale of Safety, which operated as a specialized transportation insurance broker. The SPA provided that $12,187,500 was to be paid to the plaintiff for common shares of Safety on closing and that up to $4.3 million was to be paid to the plaintiff for preferred shares on a deferred basis. The price of the deferred shares could be adjusted downward at the end of a three-year period (the "warranty period") if Safety failed to meet an earnings target during the warranty period. Safety in fact failed to meet that target. The plaintiff alleged that the defendant essentially sabotaged Safety's ability to meet the target by constructively dismissing two key employees of Safety who were retained after the sale. It also argued that the SPA created a relationship in which the parties owed each other the highest duties of co-operation and good faith, thus constituting a relational contract. It brought an action alleging a breach of the SPA and oppression of its interests as a shareholder, and a derivative action in the name of Safety for alleged breach of fiduciary duties relating to the failure to protect the plaintiff's interests in Safety as a shareholder. The defendant took the position that Safety's failure to meet the target was a result, primarily, of the 2008 financial crisis.
Held, the oppression action should be allowed in part.
The SPA was not a relational contract. It was not a long-term contract. Rather, it was an agreement involving the purchase of shares with one specific carve-out with respect to the preferred shares. The terms of the SPA were clearly quantified and defined with no important issues being left undefined. It did not have the hallmarks of an employment contract or a franchise agreement that involve close co-operation over a long term, where some terms and conditions are not specified in the agreement.
Properly interpreted, the SPA provided that only the price of the preferred shares was to be reduced if Safety failed to meet the earnings target at the end of the warranty period, and not that the overall purchase price, including the price of the common shares, was to be reduced, as argued by the defendant.
The defendant constructively dismissed the two key employees who were retained after the sale by unilaterally attempting to change their system of remuneration from guaranteed draw plus commission, as stipulated in their employment contracts, to commission only, with a requirement that they be responsible for their own bad debts. Even if those employees were not constructively dismissed, the defendant's behaviour exhibited a callous disregard for the plaintiff's interests as a shareholder, as the defendant was aware that the employees were integral to Safety's business. The defendant breached the SPA and acted oppressively towards the plaintiff with respect to its treatment of those employees as it undermined the plaintiff's ability to make Safety reach the earnings target. Damages should be calculated in accordance with the SPA.
Further submissions were sought on some further claims, and others were dismissed.
Churchill Falls (Labrador) Corp. v. Hydro-Québec, [2018] S.C.J. No. 46, 2018 SCC 46, 428 D.L.R. (4th) 1, consd [page596]
Other cases referred to
BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, 301 D.L.R. (4th) 80, 383 N.R. 119, J.E. 2009-43, 52 B.L.R. (4th) 1, 71 C.P.R. (4th) 303, EYB 2008-151755, 2008 SOACQ para. 10,147, 2008 CCAN para. 10,065, 2009 CCSG para. 51,112, 2009 BCLG para. 78,675, 2009 OCLG para. 51,488, 2009 CCLR para. 200,832, 2009 CSLR para. 900-288, 2009 ACLG para. 79,251, 172 A.C.W.S. (3d) 915; Potter v. New Brunswick Legal Aid Services Commission, [2015] 1 S.C.R. 500, [2015] S.C.J. No. 10, 2015 SCC 10, 381 D.L.R. (4th) 1, 468 N.R. 227, 2015EXP-830, 2015EXPT-425, J.E. 2015-438, D.T.E. 2015T-173, EYB 2015-248943, 21 C.C.E.L. (4th) 1, 33 B.L.R. (5th) 1, 432 N.B.R. (2d) 1, 18 C.C.P.B. (2d) 1, [2015] CLLC para. 210-017, 249 A.C.W.S. (3d) 802
Statutes referred to
Limited Partnerships Act, R.S.O. 1990, c. L.16, ss. 2(2), 8 [as am.], 9, 11, 13(1), 15(1), 24
Partnerships Act, R.S.O. 1990, c. P.5, s. 44 [as am.]
Authorities referred to
Koehnen, Markus, Oppression and Related Remedies (Toronto: Carswell, 2004)
ACTIONS for damages for oppression and breach of fiduciary duty.
Stephen F. Gleave and William McLennan, for plaintiff.
Jonathan L. Rosenstein, for defendants.
[1] MCEWEN J.: — On June 12, 2008, Stephen Palmer ("Palmer") and Crescent (1952) Limited ("Crescent") entered into a Share Purchase Agreement (the "SPA") with 6993354 Canada Inc., in which Palmer and Crescent sold Safety Insurance (1959) Limited ("Safety"), and Safety Group Benefits Inc. ("SGBI") to 6993354 Canada Inc., which is a wholly owned subsidiary of Jones Deslauriers Insurance Management Inc. ("JDIMI"). As will be noted below, the SPA was later amended, with respect to certain issues, by a second amended agreement dated July 31, 2008 and later, by way of letter dated March 6, 2009.
[2] Shortly thereafter, the relationship between Palmer and Crescent on one hand and JDIMI and its principals on the other deteriorated, leading to this litigation.
[3] Crescent brings two actions. The first, commenced in 2011, is a derivative action that Crescent has brought in the name of Safety, for alleged breach of fiduciary duties relating to the failure to protect Crescent's interests in Safety as a shareholder. The defendants in the actions are JDIMI and its directors, Robert Jones ("Jones") and Richard Deslauriers ("Deslauriers").[^1] [page597]
[4] In the second action, commenced in 2013, Crescent sues Jones, Deslauriers and Safety alleging a breach of the SPA and oppression of its interests as a shareholder.[^2]
[5] The same allegations are essentially made in each action.
Overview
[6] Palmer owned all of the shares of Crescent, which in turn owned Safety. Safety operated as a specialized transportation insurance broker.
[7] In accordance with the provisions of the SPA, Palmer and Crescent sold all of Crescent's shares in both Safety, and the related smaller company SGBI[^3] to 6993354 Canada Inc., which was wholly owned by JDIMI.[^4] After the sale, Safety became a subsidiary of JDIMI. Jones and Deslauriers, who were directors of JDIMI, also became directors of Safety. Also, after the sale, as per the terms of the SPA, Palmer was employed as a manager of Safety.
[8] The relationship between Palmer and the principals of JDIMI, primarily Jones, was a rocky one and several disputes arose. The main points of contention in these two actions involve a dispute between the parties as to whether Safety earned sufficient revenue during the post-sale three-year period (the "Warranty Period"), so that Crescent would receive $4.5 million for its Preferred Shares and, if sufficient revenue was not earned, the ramifications for Safety's failure to do so.
[9] The relevant provisions of the SPA relating to this dispute provide as follows:
-- The original Purchase Price was set at $18 million. For reasons not important to the two actions, the price was ultimately lowered to $16,687,500 in the second amended agreement.
-- $12,187,500 was paid for common shares of Safety on closing and up to $4.5 million was to be paid to Crescent for its Preferred Shares on a deferred basis. [page598]
-- A critical feature of the SPA, which has primarily generated the two actions, is the provision that the price of the Preferred Shares could be adjusted downwards if Safety failed to attain certain revenue during the Warranty Period.[^5] The Preferred Shares were to be purchased at the end of the Warranty Period.
-- In order for Crescent to receive the $4.5 million for the Preferred Shares, it was agreed that the earnings, as defined in s. 2.1.13 of the SPA during the Warranty Period, would have to be at least $6,525,000 (the "Target EBITDA").
-- The earnings, as defined in s. 2.1.13, would be calculated by determining revenue of Safety, other than interest income, minus certain expenses ("EBITDA"). EBITDA was defined as follows:
2.1.13 EBITDA -- "EBITDA" means (a) the revenue of the Corporation other than interest income, minus (b) expenses (excluding interest, taxes, depreciation and amortization).
[10] The main dispute in these actions is whether Safety met the Target EBITDA over the Warranty Period, and the ramifications for failing to do so, with respect to the Purchase Price. Crescent asserts that Safety did so, JDIMI claims it did not.
[11] In short, Crescent alleges that JDIMI essentially sabotaged Safety's ability to meet the Target EBITDA. Crescent primarily alleges that JDIMI constructively dismissed or, at least, drove out two of Safety's salespeople, including Safety's most prolific salesperson, Norm McIntyre ("McIntyre"); several members of its accounting staff were fired; Palmer was driven from the business; Safety's accounts were wrongly allocated to JDIMI; key documents that would have tracked Safety's revenue were destroyed; improper accounting practices were employed; JDMI impaired Crescent's ability to track and calculate EBITDA; and overall, JDIMI exhibited callous disregard for Palmer's and Crescent's interests.
[12] Conversely, JDIMI submits that Safety's failure to meet the Target EBITDA was a result, primarily, of the effect of the 2008 financial crisis on Safety's business; Palmer's overestimation of the amount of revenue Safety could generate during the Warranty Period; and the vagaries of the business world that resulted in Safety losing a key client (Kingsway Insurance), and [page599] its key producer, McIntyre, which had nothing to do with JDIMI's operation of Safety.
[13] I will deal with each of the discrete disputes between the parties below. As will be demonstrated, in certain cases, I have sided with Crescent and in others, with JDIMI.
[14] Before I conduct a review of each and every dispute, it bears noting that the trial was somewhat complicated by the fact that there are two actions that are both based on alleged breaches of the SPA along with allegations of oppression. Counsel for Crescent concedes that the oppression-based claims resonate in the same fashion in both actions.
[15] I am of the view that, notwithstanding the various types of actions, the same legal analyses apply with respect to issues of liability. In a few instances, however, different remedies for damages could be applied. I will deal with each of these as they arise.
[16] Punitive damages, although pleaded, were not pursued at trial. In any event, I am satisfied that no successful claim for punitive damages was made out at trial. I, therefore, do not propose to conduct an in-depth analysis in this regard. Although I do have some significant criticism of JDIMI, particularly in the way it treated McIntyre, I do not find that the behaviour of JDIMI justifies an award for punitive damages.
[17] Further, Crescent, at the conclusion of trial, abandoned a number of claims. I will, therefore, not conduct any analysis with respect to these claims.[^6]
[18] Last, in discussions with counsel at the conclusion of the trial, it was agreed that the parties would have to re-attend to make further submissions with respect to the actual EBITDA calculation as a result of my findings, since additional calculations will have to be performed. In addition, as will be discussed below, issues arose during the trial that will require a re-attendance by the parties to make further submissions with respect to a few discrete issues.
Preliminary Issues
The interpretation that ought to be given to the SPA [page600]
[19] Crescent submits that the SPA (and the subsequent amendments) is a relational contract. In this regard, Crescent primarily relies upon the decision of the Supreme Court of Canada in Churchill Falls (Labrador) Corp. v. Hydro-Québec, [2018] S.C.J. No. 46, 2018 SCC 46, 428 D.L.R. (4th) 1. Relying upon the decision in Churchill Falls, Crescent submits that the SPA created a relationship in which the parties owed each other the highest duties of co-operation and good faith -- thus constituting a relational contract.
[20] I do not accept this submission. In my view, the SPA was not a relational contract. The interpretation of a relational contract accepted by the Supreme Court of Canada involved those contracts that set out rules for a close cooperation that the parties would maintain over a long term. Examples of such contracts could include employment contracts and franchise agreements.
[21] The SPA is not a long-term contract. Rather, it is an agreement involving the purchase of shares with one specific carve-out with respect to the Preferred Shares. The terms of the SPA are clearly quantified and defined with no important issues being left undefined. It does not have the hallmarks of an employment contract or a franchise agreement that involve close co-operation over a long term, where some terms and conditions are not specified for in the agreement.
[22] Furthermore, with respect to the issue of the Target EBITDA, the parties specifically turned their mind to this issue in s. 3.5.5 of the SPA. Section 3.5.5 provides that Palmer and Crescent should be provided with some flexibility to achieve the Target EBIDTA and set out specific examples as to how this would be achieved. Section 3.5.5 reads as follows:
3.5.5 For clarification, the Purchaser acknolwdges [sic] and confirms that the Vendors shall be permitted some flexibility to achieve the Target EBITDA at the First Closing and during the Warranty Period (as applicable) as follows:
a) By generating higher income for the Corporations;
b) By wage reduction -- As an example, the Vendors reserve the right to sever employees during the 12-month period following the First Closing in order to redistribute their work and reduce wage expenses;
c) By purchasing the 50% interest in the Androhn book of business from Tim Farquhar prior to the First Closing and thereby generating an additional $80,000 of commission income;
d) By the extent of the benefit gained by the Purchaser, if any, as a result of Safety's loss carry-forward to be applied on or prior to June 30, 2011. Alternatively, the Purchaser may reimburse Crescent with the amount of the tax benefit, if any, that arises as a result of the application of such loss carry-forward; [page601]
e) By assisting the Purchaser in obtaining new business from customers such as Vitran Corporation Inc. and Andlauer Transportation Services and thereby earning referral fees or a portion of the commission income with respect to such new business; and
f) By enhancements to the business of the Purchaser and the JD Group through the Vendors' negotiation of overrides, enhanced contingent profits and higher commission levels.
For greater certainty, in the event that the Purchaser assists with the saving of costs as to the operation of the Businesses of the Corporations through the integration of the Businesses with those of the Purchaser or the use of existing resources of the Purchaser, the Purchaser shall be entitled to allocate reasonable costs to the Business for their share of costs incurred by the Purchaser in such regard.
(Emphasis added)
[23] In all of these circumstances, I do not find that the SPA was a relational contract.
The safety and JDIMI computer systems
[24] Many of the disputes between the parties involve Crescent's allegation of improper accounting procedures, initiated by JDIMI, in the method Safety's clients were recorded and commissions were allocated.
[25] After the transaction closed, JDIMI, as it was entitled to, began integrating the two businesses. Part of this integration involved their computer systems. Safety and JDIMI both used computer-based accounting systems.
[26] Safety used an accounting software called Signassure. JDIMI used a system by the name of TAM.
[27] At the time of closing, Safety had approximately 408 customers. In the first year following the sale, Safety continued to use the Signassure system to track all of its customers and record commissions. In the second year, JDIMI decided to transition Safety's client files from the Signassure system to the TAM system.
[28] This process was overseen by a representative of TAM and Tammy McCarthy ("McCarthy"), an employee of Safety/JDIMI. McCarthy had previously been a key employee at Safety and was summonsed by Crescent to testify at trial.
[29] On this issue, McCarthy testified that she oversaw the transition and ensured that all of the customers that had been in Signassure were successfully imported into the TAM system. This was verified by Mike Jack ("Jack"), Safety/JDIMI's controller.
[30] I am, therefore, satisfied that there are no issues with respect to any transitional errors insofar as transferring the [page602] customers from one system to the other. Furthermore, I do not accept Crescent's generalized, unsupported claims that this transition was improperly implemented, which led to Safety being unable to track its commissions and/or that commissions were, in general, wrongly allocated to JDIMI.
[31] Additionally, at some point after the transition took place, JDIMI coded the Safety clients utilizing agency code "9", which was thereafter amended so that Safety clients were tracked under agency code "H". Notwithstanding the fact that Palmer, to this day, refuses to accept the integrity of the TAM system and that all Safety customers were properly transitioned and thereafter recorded, there is no credible and reliable evidence to support this belief. No expert evidence was called by either party and there is nothing in the documentation at trial that would suggest some form of corruption.
[32] As will be seen below, however, there is some healthy debate as to whether, in certain instances, commissions were attributed improperly to JDIMI as opposed to Safety. I will deal with those on a case by case basis. Overall, however, there is no support for the contention made by Palmer and Crescent that the transition, overseen in part by McCarthy, and the ultimate record keeping in the TAM system, was in some way corrupted.
[33] Also, at the commencement of trial, Crescent took the position that JDIMI had intentionally destroyed documents. At trial, however, no evidence was adduced to suggest that this was the case. This argument was also not pursued by Crescent in closing argument.
The Disputes Between the Parties
Introduction
[34] Before I identify each and every discrete dispute, I will identity a few overarching issues.
[35] First, I accept JDIMI's submission that the economic downturn in 2008 had an effect on Safety's business. Aside from a common-sense acceptance of the fact that this significant downturn would have affected the trucking industry, upon which Safety relied to sell insurance policies, this was also conceded by Palmer at his examination for discovery. Although he subsequently disputed the negative effect of the downturn in the economy in his evidence at trial, I prefer his earlier discovery evidence. It is more sensible and accords with the general difficulty experienced by industries in all sectors during that time frame.
[36] Second, there were obvious culture clashes between Safety on the one hand, led by Palmer, and JDIMI on the other hand, led [page603] by its director and president, Jones. Palmer was a popular leader at Safety who amassed a loyal staff who were well-compensated with generous salaries and bonuses.
[37] JDIMI, on the other hand, admittedly did not "coddle" its salespeople. They were paid largely on a commission basis and were responsible for their own receivables. They too had an opportunity to earn a generous income, albeit in a different setting that also involved personal risk.
[38] Palmer and Jones did not mesh well on a personal level. Pursuant to s. 4.5.3 of the SPA, Palmer agreed to enter into an employment contract with Safety during the Warranty Period earning a salary of $100,000 per year. He left Safety, however, in March of 2010. In part, Palmer left due to his desire to try to enhance the EBITDA by leaving his salary in the company and, in part, because of the on-going tension between him and Jones. There was obvious tension between Palmer's role as an employee and the provision in the SPA (s. 3.5.5) that stipulated he should have some flexibility to achieve the Target EBITDA. Palmer clearly did not have the role in the company he desired, and he complained a number of times at trial as to the lack of information he received from JDIMI.
[39] These tensions also flowed between other employees of the two companies. As will be reviewed later, Safety's top producer McIntyre and another salesperson, Martin Skinner ("Skinner"), took exception to the way they were treated by one of JDIMI's key employees, Glenn Murray ("Murray"), who was also a shareholder in JDIMI. Other Safety employees were dismissed when the two companies merged.
[40] Notwithstanding Palmer/Crescent's list of grievances, however, I do not find that there was any overall intent by JDIMI or any of its principals or employees to act in bad faith. It was simply a situation where corporate cultures clashed. Although, as noted above, I have found that JDIMI acted improperly in specific instances.
[41] I will now deal with each disputed issue in turn.
The proper interpretation of the SPA
[42] Crescent submits that if there is any reduction in the Purchase Price, which it denies, the reduction is limited to the amount of the $4.5 million attributed to the Preferred Shares. This payment was deferred until the completion of the Warranty Period.
[43] JDIMI, on the other hand, submits that the reduction in the Purchase Price is not limited solely to the $4.5 million attributable to the Preferred Shares but rather to the entire [page604] Purchase Price of $16,687,500. Thus, JDIMI submits that the amount paid for the Common Shares can also be reduced, right down to zero dollars, depending on the EBITDA calculation.
[44] JDIMI further submits that the proper EBITDA calculation is $2,449,000, well short of the $6,525,000 required for Crescent to receive the $4,500,000 for its Preferred Shares. If I accept JDIMI's EBITDA calculation and JDIMI's argument that the reduction in the Purchase Price is not limited solely to the $4.5 million attributable to the Preferred Shares, this would result in a massive reduction in the Purchase Price. JDIMI would end up purchasing Safety at a cost of approximately $3 to $4 million. As a result, not only would Crescent receive nothing for the Preferred Shares, it would have to refund to JDIMI the vast majority of the money it received for the Common Shares.
[45] JDIMI submits that, based on the plain wording of s. 3.5.3 of the SPA, it is clear and unambiguous that if the Target EBITDA is not met, the overall Purchase Price, which includes the Preferred Shares and Common Shares, will be reduced.
[46] Section 3.5.3 provides as follows:
3.5.3. The parties have agreed that, in the event that the Aggregate Warranty Period EBITDA is less than the Target EBITDA (with the amount by which the Target EBITDA exceeds the Aggregate Warranty Period EBITDA being hereinafter referred to as the "Warranty Period Deficiency"), the Purchase Price, the Pref Price and the aggregate Redemption Amount of the Preferred Shares shall be adjusted downward as follows:
a) in the event that the Aggregate Warranty Period EBITDA is less than the Target EBITDA but greater than Six Million Dollars ($6,000,000.00), then the Purchase Price, the Pref Price and the Aggregate Redemption Amount of the Preferred Shares will be adjusted downward, on a dollar for dollar basis, by the amount of the Warranty Period Deficiency.
As an example, if the Aggregate Warranty Period EBITDA is $7,110,000.00, which is $90,000 less than the Target EBITDA of $7,200,000 for the Warranty Period, the Warranty Period Deficiency is $90,000.00. This would result in a downward reduction of the Purchase Price, the Pref Price and the aggregate Redemption Amount of the Preferred Shares by an amount equal to the Warranty Period Deficiency of $90,000.00, being $90,000.00. On such basis the Pref Price payable by the Purchaser to the Vendors for the Preferred Shares on the Second Closing would be $4,410,000.00.
b) in the event that the Aggregate Warranty Period EBITDA is less than Six Million Dollars ($6,000,000.00), then, in addition to the downward adjustments set out in Section 3.5.3 (a) above, the Purchase Price, the Pref Price and the aggregate Redemption Amount of the Preferred Shares shall be further adjusted downward by an amount equal to four (4) times the amount by which Six Million Dollars ($6,000,000.00) exceeds the Aggregate Warranty Period EBITDA. [page605]
As an example, if the Aggregate Warranty Period EBITDA is $5,910,000.00, which is $1,290,000.00 less than the Target EBITDA of $7,200,000 for the Warranty Period, the Warranty Period Deficiency is $1,290,000.00. This would result in a downward reduction of the Purchase Price, the Pref Price and the aggregate Redemption Amount of the Preferred Shares by an amount equal to $1,560,000.00 calculated as follows: (i) a dollar for dollar reduction for the Warranty Period Deficiency between $7,200,000.00 and $6,000,000.00, being $1,200,000.00; and (ii) four (4) times the amount by which $6,000,000.00 exceeds the Aggregate Warranty Period EBITDA of $5,910,000.00, or four (4) times $90,000.00, being $360,000.00. On such basis, the Pref Price payable by the Purchaser to the Vendors for the Preferred Shares on the Second Closing would be $4,500,000.00 minus $1,560,000, being $2,940,000.00
The parties have further agreed that such adjustment shall take place as soon as possible after the EBITDA for the third fiscal year of the Warranty Period has been determined.
(Emphasis added)
[47] JDIMI also relies upon language contained in s. 3.5.1 of the SPA, the relevant portion of which provides as follows:
3.5.1 The Purchaser and the Vendors acknowledge that the valuation of the Purchased Shares has been predicated and determined on the basis of the Corporations generating combined EBITDA[.]
(Emphasis added)
[48] By way of reference, the defined terms in the aforementioned sections are as follows:[^7]
2.1.29 Preferred Shares -- "Preferred Shares" means the 2,500 Preferred shares in the capital of Safety, created in the reorganization of the capital of Safety referred to in Section 1.4 above and that will be retained by Crescent on the First Closing and sold by Crescent to the Purchaser on the Second Closing.
2.1.34 Purchased Shares -- "Purchased Shares" means collectively the New Common Shares, the Preferred Shares and the SGBI Shares.
[49] JDIMI submits that its interpretation also makes commercial sense since there is no reason to restrict the reduction in the Purchase Price to the value of the Preferred Shares. JDIMI never believed that Safety would achieve the EBITDA that Palmer proposed and Crescent, therefore, must live with the ultimate result. [page606]
[50] Crescent, conversely, argues that the plain wording of the SPA clearly restricts the reduction in the Purchase Price to the amount paid for the Preferred Shares.
[51] Crescent primarily relies upon s. 3.2 of the SPA. Section 3.2 provides as follows:
3.2 Purchase Price of Purchased Shares -- The purchase price payable for the New Common Shares and the SGBI Shares (the "Base Price") shall be equal to the sum of Eighteen Million ($18,000,000.00)[^8] Dollars minus (a) Four Million, Five Hundred Thousand Dollars ($4,500,000.00), being the Pref Price, minus (b) the Shareholder Loan. The total purchase price payable for the Preferred Shares (the "Pref Price") shall, subject to the adjustments hereinafter set out, be equal to the sum of Four Million, Five Hundred Thousand Dollars ($4,500,000.00).
(Emphasis added)
[52] It is also worth noting, in support of Crescent's submission, that s. 3.5.4 of the SPA in part reads as follows:
3.5.4. Further, if the Aggregate Warranty Period EBITDA is less than the Target EBITDA and the aggregate Redemption Amount of the Preferred Shares is reduced . . . pursuant to s. 3.5.3.
To continue with the example set out in Section 3.5.3 (a) above, if the Aggregate Warranty Period EBITDA is $7,120,000.00 and the aggregate Redemption Amount of the Preferred Shares is reduced by $90,000.00, being the Aggregate Redemption Amount Reduction, then the aggregate Redemption Amount of the Preferred Shares shall be reduced as of last day[.]
(Emphasis added)
[53] As the parties negotiated the Purchase Price, the second amended agreement was entered into in which the Purchase Price was reduced, and the Target EBITDA was eventually set at $6,525,000.
[54] I prefer the interpretation submitted by Crescent and I restrict any reduction in the Purchase Price to the amount to be paid for the Preferred Shares.
[55] I have come to this conclusion for the following reasons:
Section 3.2 clearly stipulates that only the Preferred Shares shall be subject to adjustments. In my view, this is the critical section concerning this dispute. It specifically deals with the issue of the Purchase Price of the Preferred Shares and the latter adjustment, if any, if the Target EBITDA was not met.
All of the examples provided in s. 3.5.3 are restricted to [page607] downward adjustments with respect to amounts paid for the Preferred Shares.
When one reads all of the aforementioned sections together in a harmonious fashion, it is my view that the preferred interpretation is that the Purchase Price and Preferred Price are subject to a reduction, but only with respect to the amount paid for the Preferred Shares. Otherwise, a combined reading of ss. 3.2 and 3.5.4 would not make commercial sense. Commercial sense can be maintained, however, by interpreting s. 3.5.3 to include a downward amount for the Purchase Price, which would include but be restricted to the Preferred Price.
[56] In my view, this also more accurately reflects the views of the parties at the time the contract was undertaken. Safety obviously had a concrete value, but the parties could not agree on the total Purchase Price. A formula was, therefore, introduced to deal with a discrete dispute regarding how much would be paid upfront and how much would be subject to the EBITDA calculation. Absent clearer language in the SPA to support JDIMI's submissions, I do not believe its interpretation can stand.
[57] The remainder of the disputes between the parties concern discrete issues that affect the Target EBITDA and thus, the price to be paid, if any, for the Preferred Shares.
[58] I will now deal with each in turn.
McIntyre's and Skinner's employment with Safety
[59] One of the most significant disputes between the parties is whether McIntyre and Skinner, two of Safety's salespeople, were constructively dismissed. The issue is particularly important with respect to McIntyre. As noted, he was a significant producer, so much so that s. 4.1.18 of the SPA specifically stated that Crescent and Palmer were to use their best efforts to extend his employment agreement for the entire Warranty Period. They did so, and he executed a written contract in this regard.
[60] Both McIntyre and Skinner were also important enough that they were included in the Safety employees described as Designated Producers. Section 3.5.6 of the SPA stipulated that should a Designated Producer be terminated without cause or constructively dismissed the EBITDA Target would be reduced accordingly. The section read as follows:
3.5.6 The Purchaser agrees that it will not, during the Warranty Period, terminate, without cause, or "constructively dismiss" the employment of any of the Designated Producers. In the event that the Purchaser does terminate, without cause, or constructively dismiss any of the Designated Producers [page608] during the Warranty Period, the EBITDA relating to the commission income projected to be generated by such terminated Designated Producer for the remainder of the Warranty Period (based upon the commission income generated by such Designated Producer during the 12-month period prior to the First Closing Date) shall be deducted from the target EBITDA for the purpose of the calculation and potential adjustment of the Purchase Price, Pref Price and the aggregate Redemption Amount of the Preferred Shares as set out in Sections 3.5.1, 3.5.2, 3.5.3, and 3.5.4.
(Emphasis added)
[61] Crescent submits that both McIntyre and Skinner were wrongly terminated by JDIMI.
[62] I agree. I find that McIntyre and Palmer were constructively dismissed, and Crescent is entitled to the remedy set out in s. 3.5.6 of the SPA. First, I will review McIntyre's situation.
McIntyre
[63] McIntyre was a critical cog in the Safety business. Notwithstanding the fact that McIntyre agreed to stay for the Warranty Period and executed an employment agreement to this effect, that guaranteed him a base salary of $100,000 per year plus associated commissions and benefits, JDIMI saw fit to approach McIntyre in February 2010 to renegotiate his compensation agreement.
[64] McIntyre testified at trial. I accept him as a forthright and honest witness. He was obviously upset by this turn of events and also at the way JDIMI was treating Palmer. He testified that he was contacted by Murray, who was given responsibility by Jones to manage the Safety producers. Murray told McIntyre that he was "required", as of June 2010, to move into a commission structure consistent with other JDIMI producers. This was in direct conflict with his employment agreement. McIntyre, as noted, pursuant to his written three-year employment agreement with Safety, was paid a guaranteed draw, plus commissions. He was also not responsible for bad debts. Murray wanted McIntyre to move into a different system, whereby, he would be paid commission only, receive no draw, and be financially responsible for his own bad debts. McIntyre saw this as a significant decrease in his compensation structure and, in particular, would render him ineligible to receive considerable commissions that were soon to come due to him. He did not believe that there was an upside, as suggested by Murray. He was upset.
[65] This meeting, which took place in February 2010, was preceded by an earlier, rather disastrous meeting (in McIntyre's opinion), wherein Murray and McIntyre discussed McIntyre's bonus for 2009. Murray had inaccurate information that showed [page609] that McIntyre had generated fewer premium dollars than was actually the case. Not surprisingly, that meeting also ended badly.
[66] Furthermore, McIntyre had become disenchanted with JDIMI, given the fact that he did not like the way they were treating Palmer, particularly with respect to a new opportunity that Palmer introduced to JDIMI called "New Sky". In McIntyre's view, Jones cut Palmer out of that deal and tried to deal directly with McIntyre. McIntyre saw this as being dishonourable, even though it would have resulted in McIntyre earning more money than would be the case if Palmer remained involved in the New Sky opportunity, should it have come to fruition.
[67] In cross-examination, McIntyre did not resile from the fact that he was required to change his remuneration structure. Nor did he resile from the fact that the new compensation scheme proposed by JDIMI would result in a significant decrease in his earnings. He did not accept Murray's position that it could result in him earning more money. I accept that McIntyre would have been in a far better position than Murray to make this determination given his long history with Safety and the fact that Murray never seemed to have a clear understanding as to McIntyre's earnings in the first place. Murray's proposal also included risks not present in McIntyre's written agreement.
[68] I accept that JDIMI's requirement that McIntyre renegotiate a settled employment agreement that was provided for in the SPA, constituted constructive dismissal in the above circumstances.
[69] It is true that McIntyre resigned after the February 2010 meeting and Jones contacted him to see if McIntyre would be prepared to continue negotiations. The evidence of both Jones and Murray, however, is that they wanted to move the Safety producers into a compensation plan that "closely mirrored" the compensation plan used for JDIMI's producers. Jones' affidavit is largely silent with respect to negotiations with McIntyre. Murray, on the other hand, refuses to accept "that McIntyre left because of the new proposed reimbursement scheme", but, in fact, "it was McIntyre himself who proposed a newer arrangement". I do not accept Murray's explanation. It is neither credible nor reliable. McIntyre's evidence at trial was much more detailed on this issue. It was clear that McIntyre saw JDIMI's new proposal as a required reduction in his long-standing employment agreement. Murray's evidence is also contradicted by Jones' evidence during which he testified that JDIMI wanted the Safety producers paid in line with the JDIMI producers.
[70] Murray's assertion that McIntyre proposed a newer arrangement is also contradicted in his own affidavit evidence [page610] wherein he deposed that after McIntyre expressed dissatisfaction with JDIMI's proposal, he agreed to compensate McIntyre as per his existing compensation arrangement. It does not accord with common sense that McIntyre proposed a new compensation scheme, and when this was not agreeable to Murray, he offered McIntyre his existing package, which, according to Murray, McIntyre was no longer satisfied with.
[71] Murray's testimony also does not accord with McIntyre's evidence, that after the botched meeting in February 2010, another senior JDIMI executive, Aaron Nantais, contacted him to try to start over on the basis that Murray "had screwed up". As noted, Jones also tried to re-engage McIntyre after McIntyre resigned following his meeting with Murray. Murray's evidence is neither credible nor reliable on this particular issue, or overall, concerning his dealings with McIntyre.
[72] I also do not accept Jones' evidence that McIntyre quit to pursue a better deal and that "it was a set up" by McIntyre. It was JDIMI that approached McIntyre requiring him to renegotiate his compensation package. It was JDIMI that proposed a new, riskier method of compensation. It was JDIMI that, after realizing the botched renegotiation would be ineffective, sought to retain McIntyre. This does not have any of the hallmarks of "a set up" and there was no corroborating evidence adduced by JDIMI to support Jones' view. Further, I do not take anything from the fact that most of McIntyre's clients followed him. He was obviously a good salesman and the parties generally agreed at trial, in the brokerage industry, clients will follow producers. He did not "steal" business as alleged by Jones.
[73] JDIMI puts much emphasis on the fact that McIntyre resigned to pursue another opportunity.
[74] I accept that McIntyre resigned after being presented with a demand to renegotiate an agreed-upon employment agreement. He did take most of his existing clients with him to a new employer. However, that does not change the fact that JDIMI attempted to unilaterally change the terms of his remuneration package, which I accept would have, very likely, resulted in a decrease in his remuneration. I also accept that the botched attempt to negotiate his bonus and his employment agreement, and the treatment of Palmer by Jones with respect to the New Sky meeting, overall resulted in a poisoned work atmosphere.
[75] I further accept that the requirement to renegotiate caused McIntyre to leave his employment. The requirement to renegotiate his employment agreement, in and of itself, was a significant change in the working arrangement, which constitutes constructive dismissal. The botched attempt concerning his [page611] negotiated bonus and his view of the treatment of Palmer at the New Sky meeting, which I accept, further bolstered his opinion that he could not carry on at JDIMI, justifiably led him to the conclusion that he had to resign.
[76] As stated by the Supreme Court of Canada in Potter v. New Brunswick Legal Aid Services Commission, [2015] 1 S.C.R. 500, [2015] S.C.J. No. 10, 2015 SCC 10, at para. 30, "[w]hen an employer's conduct evinces an intention no longer to be bound by the employment contract, the employee has the choice of either accepting that conduct or changes made by the employer, or treating the conduct or changes as a repudiation of the contract by the employer and suing for wrongful dismissal". Given all of the above, McIntyre was justified in treating the required changes to his employment agreement as a repudiation of that contract and, thus, justified in resigning.
[77] Furthermore, as noted above, JDIMI's intention not to be bound by the existing employment agreement, even in the absence of a specific finding as to whether any offer JDIMI may have ultimately made was more lucrative, coupled with the poisoned work atmosphere was, in my view, behaviour that would make McIntyre's continuing employment intolerable. This, too, would justify his resignation: see Potter, at para. 33. It is clear that the parties to the SPA recognized his value to Safety. Nonetheless, Jones and Murray treated him shabbily, to the detriment of Crescent, who relied on him as a motivated salesperson.
[78] It also bears noting that subsequent to McIntyre's leaving, JDIMI commenced a lawsuit against McIntyre and his new employer. McIntyre counter-claimed for the breach of his employment agreement. Ultimately, the lawsuit settled on the basis that McIntyre and his new employer paid JDIMI the all-inclusive amount of $2,125,000 that, in large part, reflected a value with respect to the book of business that McIntyre took with him.
[79] On a superficial level, this may support JDIMI's position that McIntyre was not constructively dismissed but rather quit and "stole" clients as Jones alleges. I do not see it that way. McIntyre testified that it is typical in the insurance brokerage business that a departing producer will pay the ex-employer money for the book of business that is being taken. JDIMI did not dispute this contention. McIntyre was clear in his testimony that he was not all that pleased with the settlement. His new employer, however, supported it, and McIntyre was only asked to contribute 40 per cent of the amount. Ultimately, it also allowed him to move on with his new employment while keeping the bulk of his book of business and putting Safety/JDIMI behind him. [page612]
[80] It is also important to note that the constructive dismissal of McIntyre would not have given him a right to corporate clients but merely a right to contractual damages. Thus, the fact that McIntyre and his new employer made a payment to JDIMI has no bearing on whether he was constructively dismissed. The issue as to who has ownership rights to the client is separate and apart from the constructive dismissal issue.
[81] Alternatively, if I am in error and McIntyre was not constructively dismissed, I would still find that JDIMI breached the SPA and acted oppressively towards Crescent. Crescent is a security holder of JDIMI by virtue of its ownership of the Preferred Shares. Accordingly, it has standing to bring an oppression claim. As set out in s. 3.5.5, Crescent and Palmer were to be provided with some flexibility to achieve the Target EBITDA, which would include generating higher income.
[82] In my view, even if McIntyre was not constructively dismissed, the behaviour of JDIMI, in particular Jones and Murray, exhibited a callous disregard for the interests of Crescent. They were fully aware that McIntyre was integral to Safety's business. Notwithstanding this fact, it is my view that the aforementioned evidence demonstrates that the reasonable expectations of Crescent and Palmer were breached by the way in which McIntyre was treated. The breach of that expectation was oppressive to them; it was unfairly prejudicial and unfairly disregarded their interest in trying to maximize the Target EBITDA.
[83] Oppression is an equitable remedy which seeks to ensure fairness: see BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, at para. 71. In this regard, it gives a court broad, equitable jurisdiction to force not only what is legal, but also what is fair. In considering the business realities of the SPA, and not merely the narrow legalities, JDIMI acted oppressively: see BCE, at paras. 58-59. The SPA should be interpreted purposively. JDIMI's approach to Crescent, Palmer and McIntyre (and Skinner) undermined one of the essential parts of the SPA -- the ability of Palmer and Crescent to try to reach the Target EBITDA by ensuring relative stability of the Safety business during the Warranty Period.
[84] In reaching this conclusion, I do not accept JDIMI's submission that JDIMI should be exonerated because it is entitled to make errors in the way it handled personnel, and it is entitled to exercise its business judgment and occasionally make mistakes.
[85] In my view, the treatment of McIntyre went far past the exercise of reasonable business judgment and crossed over into callous disregard of McIntyre, and thus, the interests of Crescent. Business judgment is traditionally a defence that may be raised [page613] by directors or officers to avoid personal liability for acts that allegedly fall short of their in these roles. It does not insulate corporations against liability for breach of their obligations. If it otherwise, a corporation would be able to invoke business judgment as a reason for breaching a contract. Corporations, such as JDIMI, are liable for breach of contract even if breaching the contract was in the best interests of the corporation and amounted to exemplary business judgment.
[86] Although decisions of corporate management are generally not subject to oppression claims, they can found the basis of an oppression claim where the decision breaches a specific reasonable expectation: see Markus Koehnen, Oppression and Related Remedies (Toronto: Carswell, 2004), at p. 123.
[87] Insofar as damages are concerned, Crescent seeks to increase the EBITDA calculation by the amount paid to JDIMI in satisfaction of the lawsuit -- $2,125,000. JDIMI submits that, if I was to find that there was a constructive dismissal, then damages ought to be awarded pursuant to s. 3.5.6, produced above, which specifically deals with instances of constructive dismissal.
[88] I agree with JDIMI. As noted, I accept Crescent's position that JDIMI's actions would be considered to be a breach of the SPA and oppressive. While I accept that JDIMI's actions (or Safety as the case may be), were oppressive to, and unfairly disregarded, the interests of Crescent, the parties specifically turned their minds to the remedy when they agreed to the provisions of s. 3.5.6.
[89] In these circumstances, that remedy ought to be employed to correct the wrong but go no further. To award damages on the basis of the payment to JDIMI of $2,125,000 would not be appropriate. Safety could have protected itself. It could have included some provision in the SPA that, should McIntyre be constructively dismissed, or for any reason leave, and ultimately pay for his book of business (which would result in a payment to JDIMI), that the amount paid could be used in the calculation of the Target EBITDA. This was not done. Rather, the parties agreed to the formula in s. 3.5.6. Further the $2,125,000 settlement figure was broken down in various components with a significant amount being allotted to costs. It would be difficult to determine what portion of this amount would constitute reasonable damages.
Skinner
[90] My analysis with respect to Skinner's resignation from Safety is very similar to my analysis concerning McIntyre. Skinner, too, was contacted by Murray to renegotiate his compensation package. Skinner, too, had an agreement with Safety to be paid on the basis that he would receive a base income plus [page614] commissions and benefits. While Skinner's book of business was not as significant as McIntyre's book of business, he was the only producer in Alberta and generated premiums of approximately $3 million per year.
[91] After Palmer left Safety (due to what Skinner believed to be the unprofessional manner in which he was treated) Murray began to manage Skinner. Skinner testified that Murray provided no support, was apathetic towards the business in Alberta, and in the fall of 2009, threatened to reduce Skinner's compensation by over 40 per cent. Skinner felt abandoned and believed that the working environment was not healthy for him and his style of doing business. He resigned in April 2010 and joined the same employer as McIntyre. He, too, was sued, although he did not pay anything towards the settlement with JDIMI.
[92] Once again, I believe the treatment of Skinner constituted constructive dismissal. Alternatively, I am of the view that JDIMI's conduct towards Skinner was oppressive for very similar reasons set out above concerning McIntyre.
[93] While Skinner agreed in cross-examination that the decision to leave was "mutual", he also coloured his response by stating that he felt "forced out to some degree". He elaborated by stating that although he agreed that he used the word "resigned" in his affidavit he felt that he had "just cause". I accept this evidence given the fact that Skinner felt that he had a "carved in stone" deal for three years in the same fashion McIntyre did. Skinner's agreement was not reduced to writing. I accept, however, that it represented a valid contract of employment upon which he could rely. JDIMI does not dispute this and he was not challenged in cross-examination.
[94] In the fall of 2009, when Murray entered the scene, Skinner testified that Murray told him that he was being paid "way too much". As noted, Murray suggested a compensation scheme that would result in an approximate 40 per cent reduction in his remuneration, the end of his expense account and car allowance, along with Skinner being responsible for bad debts. This is in keeping with Jones' affidavit evidence that JDIMI wanted the Safety producers to be in line with JDIMI producers. It is also similar to McIntyre's recollection of the deal that was put to him, which I have accepted.
[95] JDIMI seeks to characterize Skinner's departure as one that took place during salary negotiations and therefore, he simply resigned. I do not see it that way. JDIMI had a stated intention to change the remuneration structure of the Safety producers. They took the view that Skinner was overpaid and proposed a compensation scheme that, I accept, would put Skinner at a financial [page615] disadvantageous. The elimination of the car allowance alone would have cost him approximately $10,000 per year. It is possible that his existing remuneration structure would have diminished if commission revenues decreased -- which may have happened given the economic downturn. The complete overhaul of his remuneration package, however, was not designed to simply take that into account. Rather, I find, it was to remedy Murray's impression that Skinner was paid "way too much" and to drastically reduce his overall income.
[96] This was the same type of attitude Murray expressed toward McIntyre. Not surprisingly, Skinner, who was also a forthright witness, was as equally offended as McIntyre and chose to leave. As with McIntyre, I am satisfied that JDIMI's conduct evinced an intention to no longer be bound by the employment agreement which Skinner had with Safety. Skinner had the right to resign since he reasonably saw the changes as a repudiation of his existing agreement. This, along with the much less supportive fashion way in which he was being treated, constituted constructive dismissal.
[97] I further accept that Skinner left his employment as a result of this change in remuneration, which was also influenced by Murray's general disregard for the Alberta office operated by Skinner and Skinner himself.
[98] Alternatively, as in the case of McIntyre, I accept that JDIMI's attitude towards Skinner was oppressive.[^9] Once again, Skinner was important to Safety as a producer and, as such, had been selected as a Designated Producer. Notwithstanding this fact, he was treated callously and without regard to his best interests and more importantly, the reasonable interest of Safety. In this regard, I find that Crescent's and Palmer's reasonable expectations were breached, and the breach of that expectation was oppressive. JDIMI's actions were unfairly prejudicial and unfairly disregarded Crescent's ability to reasonably achieve the Target EBITDA.
[99] With respect to the issue of damages, Crescent seeks damages as per s. 3.5.6 of the SPA and I agree that, for the same reasons above concerning McIntyre, that damages ought to be based on the formula set out therein.
[100] As I earlier indicated, the parties will have to re-attend before me to provide submissions with respect to the proper calculation of the reduction of the Target EBITDA. [page616]
The CN transportation account
[101] Crescent claims that in the 2009 year, it earned $250,000 in commissions from the CN Transportation account.[^10] It submits that it was not properly credited with this amount.
[102] The only evidence adduced by Crescent in this regard is the bald statement made by Palmer at para. 28(b) of his affidavit that Safety was not credited with the CN commission in the 2009 fiscal year. Crescent has adduced no supporting documentation, but rather submits that the evidence upon which JDIMI relies, is tainted by virtue of its faulty record keeping.
[103] I do not accept Crescent's submissions. As I have noted above, in 2008-2009, Safety maintained its records within the Signassure system and therefore, cannot point to JDIMI for the alleged faulty record-keeping. These would have been plainly available to Safety. Furthermore, this litigation has dragged on for several years. Crescent has had every opportunity to produce some form of expert evidence or obtain documentation to support its position in this case, where in excess of 12,000 documents have been produced.
[104] Furthermore, in the production report,[^11] maintained by JDIMI for Safety, the CN commissions were attributed to Safety in the first fiscal year. The amount of $39,000 in commissions, based on premium amounts of $260,000, is noted in the production report. Crescent did not produce any evidence to contradict or call into question the posting of this commission amount in the first fiscal year, or any reason as to why $39,000 was not an appropriate amount.
[105] As noted, Palmer has made a bald assertion that does not accord with the production report. Jack testified that the production report was based on Safety records. The Safety records were ultimately imputed into the TAM system, partially under the guidance of McCarthy, who, as previously noted, testified that the changeover was properly done. In these circumstances, Crescent has simply not met the burden of proof in establishing that JDIMI failed to credit Safety with the $260,000 commission.[^12] [page617]
AXA commissions
[106] This dispute involves a rather complex problem that arose after JDIMI purchased Safety.
[107] Prior to the purchase, Safety acted as the exclusive underwriter for AXA with respect to its trucking program. In the usual course, brokers, such as JDIMI, could place business with AXA through Safety. In these cases, Safety would get an 8 per cent commission and the placing broker would get 9 per cent commission, for a combined premium of 17 per cent. In fact, JDIMI did place business with AXA, through Safety, prior to the sale.
[108] Subsequent to the sale, AXA took the position that Safety/JDIMI should no longer receive a combined 17 per cent commission as they were, in essence, one company. AXA reduced the commission to a total of 12.5 per cent. This occurred approximately one year into the Warranty Period, so for approximately two years, the reduced commission rate of 12.5 per cent was paid to JDIMI/Safety for business they placed with AXA.
[109] Of significance is the fact that JDIMI no longer allocated any portion of the 12.5 per cent commission to Safety and kept the entire amount. I do not accept JDIMI's position that it was entitled to keep the entire 12.5 per cent. Specifically, I do not accept Murray's testimony that there "was nothing about the new business which was attributable to Safety and Safety should not get credit for such sales". JDIMI purchased Safety, presumably, in some part, for the value it brought in being the exclusive broker for AXA's trucking accounts. To thereafter cut Safety out of the 12.5 per cent commission, is contrary to the provisions of the SPA. First, there is nothing in the SPA that would allow JDIMI to keep the entire commission. Second, s. 3.5.5 provides that Safety "shall be permitted to some flexibility to achieve the Target EBITDA" which included generating higher income. And, s. 2.1.9 of the SPA stipulates that contingent profits, which would include the AXA commission, should be separated. JDIMI's retention of the entire commission amount runs contrary to the stated intention to allow Safety flexibility and separate commissions. It does not assist JDIMI's position that it did not notify Palmer of this change.
[110] A second problem that arose, according to McCarthy, is that commissions booked on behalf of Safety, as a result of the AXA program, became confused and commingled by JDIMI. She concludes that this "significantly impacted the AXA book of business insofar as Safety was concerned".
[111] The parties have struggled to try to quantify this loss. [page618]
[112] Crescent submits that since AXA premiums for 2009 were approximately $2 million, a fair way of compensating Safety would be to calculate a 12.5 per cent premium for approximately 1.5 years on the $2 million annual premium, for a total of $375,000, less approximately 40 per cent for a total of $142,400. I have a great deal of concern with respect to this calculation since it does not seem to be grounded in any real, understandable formula. For example, the 40 per cent adjustment does not accord with the ratio of the commissions paid to JDIMI/Safety before the purchase, which were 9 per cent and 8 per cent, respectively, for a proportionate distribution of 53 per cent versus 47 per cent.
[113] JDIMI submits that, should I accept Crescent's argument that is entitled to a portion of the commissions, its formula is preferable.
[114] JDIMI's accountant, Jack, has created a formula to purportedly deal with this issue. Jack, in attempting to tackle this problem, calculated total commissions earned on all AXA's transactions that were calculated at 12.5 per cent during the year before JDIMI started tracking the AXA program in TAM. This amount totals $329,652.84. He contrasts this with the year before JDIMI started tracking the AXA program accounts in TAM where total commissions earned on all AXA transactions at 12.5 per cent totalled $274,259.59. He concludes that the difference -- approximately $55,000 per year -- constitutes the total commissions earned on the JDIMI AXA program accounts. Extrapolated over a two-year period, this would total $110,000. Thereafter, JDIMI submits that based on the split in commissions when they were calculated (53 per cent for JDIMI and 47 per cent for Safety), Safety should be entitled to a credit of 47 per cent of the $110,000 or $51,700.
[115] While this formula is mathematically more sensible than the formula put forth by Crescent, it does not account for McCarthy's concerns that there were other losses incurred. Furthermore, it is my view that JDIMI should not get the benefit of the doubt with respect to a problem it created in failing to advise Palmer of the fact that it was retaining the entire amount of the 12.5 per cent commissions, a problem that was exacerbated by a failure to keep proper accounting records.
[116] In these circumstances, I award Crescent the entire $110,000 calculated by Jack, to account for both the failure to split the commissions and any errors that may have arisen, as McCarthy believes occurred. I appreciate that this is a difficult head of damage to calculate. In the absence of better accounting records, however, it generally accords with a common-sense application of the loss likely suffered by Safety given its own calculation [page619] of approximately $140,000, which, was based on a very unscientific calculation, and the $110,000 number calculated by Jack (before he employed certain deductions).
AXA contingent profit commissions ("CPCs")
[117] Generally speaking, CPCs are annual payments made to brokerages to reward them for high sales volumes and low loss ratios. AXA (and Markel Insurance for that matter, which will be discussed below) made annual calculations as to what Safety would be entitled to by way of a CPC payment. As was seen at the trial, the payments could vary from being paid nothing, to receiving several hundreds of thousands, depending on the volume of premium dollars booked through the brokerage and the resulting loss ratios.
[118] Safety takes the position that Safety was not allocated any CPCs from AXA during the Warranty Period.
[119] There are all sorts of evidentiary problems with respect to the evidence adduced by both sides concerning this issue.
[120] First, Palmer's evidence is that there was an agreement between Safety and JDIMI to equally share the AXA CPCs. There is not, however, any documentation to support this allegation. Conversely, with respect to Markel's CPCs, there was a specific written agreement to share CPCs. JDIMI hotly contests that any agreement existed. In these circumstances, I cannot accept that any form of deal existed.
[121] Second, Palmer's assertion that Safety was not allocated any CPCs from AXA for the 2009 year is not borne out by the evidence.
[122] Jack testified that in the 2009 year, given a high level of incurred losses, Safety received an AXA payment in the amount of $5,492. Jack produced a cheque from AXA payable to JDIMI (who was receiving CPC cheques on behalf of Safety by this point) in this amount, as well as a calculation provided by AXA setting out why the CPC payment was that low.
[123] In the same year JDIMI received a CPC payment from AXA in the amount of $426,565 along with a similar type of explanation. Crescent did not call any evidence to suggest that any of the money paid to JDIMI should have been allocated to Safety. In fact, Crescent's evidence on this point was vague and inconsistent. On the one hand, Crescent alleges that it was inappropriate that nothing was paid to Safety, thus ignoring the aforementioned cheques and explanations from AXA. On the other hand, it provides no explanation for the cheque that was received in the amount of $5,492. [page620]
[124] Conversely, I simply do not accept JDIMI's explanation that no AXA CPCs were paid in 2010 and 2011 to either JDIMI or Safety, which is evidenced by the fact that there is no documentation whatsoever from AXA in 2010 or 2011 concerning CPCs. Murray, in his evidence, admits that CPC documents should have been received by AXA annually to explain the calculation of the CPC or why a CPC payment was not being made.
[125] In my view, this is inconsistent with the practice that seems to have been implemented by AXA and Markel, wherein explanations were provided on a yearly basis notwithstanding the amount of the CPC. Further, in the case of Markel at least, the statement was provided even if there would be no payment, so that the broker would clearly understand why that was the case.
[126] Based on the filed record, it is premature to conclude that in years where AXA was not paying a CPC, it would simply not provide any documentary analysis to the broker, thus leaving the broker to wonder what occurred. While this may be the case, neither side attempted to elicit any evidence from AXA by way of summons to witness or a summons to compel the production of documents. Each side points the finger at the other for this failure.
[127] I am, therefore, left with the situation where it is not possible to assess this claim in a meaningful way based on the record before me. Palmer agreed that the damages estimate provided by Crescent of approximately $100,000 per year is a guess.
[128] I am also left with the unfortunate situation where even if I was to decide the issue in favour of Crescent, it would be difficult to meaningfully determine damages.
[129] There is reason to believe that JDIMI, at least at one point in time, had correspondence from AXA setting out the amount of the CPCs in 2010 and 2011, or a reason why none was being paid. Further, AXA may still have this information.
[130] In order to decide this issue in a fair and just fashion, I am directing that the parties re-appear to determine the issue. I will initially provide directions as to what parties ought to attend, including witnesses which, very likely, will include a representative of AXA. Upon the return of the matter, I will, on a preliminary basis, hear submissions from the parties as to what evidence ought to be called. I will also want full argument on the issue of the burden of proof to determine this issue.
[131] It is unfortunate that I cannot decide this issue at this time. For the reasons above, however, it is not possible to do so in a fair and just fashion. Given that the parties will have to return to make further submissions with respect to the formula concerning the McIntyre and Skinner terminations, as well as the overall [page621] revised Target EBIDTA, I am of the view that it is preferable and will lead to a fair and just result, if further submissions on the AXA CPCs are made at that time. I see no prejudice to either party, and Crescent suggested this approach in closing argument.
Markel CPCs
[132] In closing argument, Crescent abandoned its claims for any CPC payments in 2009 and 2010, and further abandoned its claim with respect to the "clawback" issue.
[133] The only issue, therefore, that remains in dispute between the parties, is the Markel CPC paid in 2011.
[134] Jack testified that Markel did not make any CPC payment in 2011. This is supported by the document produced by Jack included at Tab AA of his affidavit.
[135] A second document in the same tab, however, the "Northbridge Insurance 2011 Profit Sharing Statement"[^13] discloses that JDIMI received $618,802 for the calendar year 2011 and other related bonuses. Crescent submits that it is entitled to a portion of this amount.
[136] In my view, this bonus scheme is in keeping with s. 3.5.5 of the SPA, in which Safety would be permitted some flexibility to achieve the Target EBITDA. When one reviews the statement, it is clear that the transportation commercial policies that would have been attributed to the Safety transportation business far exceeded the non-transportation policies attributable to JDIMI. Counsel for JDIMI concedes that the policies attributed to "transportation" fall under the Safety umbrella. These policies factored into the $618,802 payment.
[137] The ratio of premium dollars seems to be approximately 85-15 in Safety's favour.
[138] It has to be kept in mind, however, that the $618,802 payment is for the entire 2011 calendar year and the Warranty Period only covers the first six months of 2011. It expired on June 30, 2011.
[139] There is no evidence to determine exactly what premiums were earned in the first or second half of 2011. In the absence of any evidence, however, I am prepared to assume that the flow of premium dollars was relatively equal throughout the year. There is no evidence to the contrary. At this late date I have no confidence that the parties will be able to come up with such evidence and it is reasonable to assume an even flow of payments over the calendar year. [page622]
[140] I am, therefore, prepared to calculate Crescent's share of the profit sharing on the following basis: $618,802 divided by two multiplied by 85 per cent, which equals to $262,990.85, which I have rounded up to $263,000.
[141] In my view, this is the fairest way to compensate Safety for the profit-sharing payments made by Northbridge Insurance. It is in keeping with the terms and spirit of the SPA, the expiry of the Warranty Period at the end of June 2011, and the ratio concerning the Safety and JDIMI premium dollars.
Add-back of McCarthy's salary
[142] McCarthy testified at trial that, on average, during the three-year Warranty Period she worked 80 per cent for JDIMI and 20 per cent for Safety.
[143] Jack testified that during the Warranty Period, 86.5 per cent of McCarthy's salary was charged to JDIMI in keeping with the fact she was performing the majority of her duties for JDIMI. JDIMI accepts that this was the fair way to deal with McCarthy's salary.
[144] McCarthy recalls earning $130,000 per year. The records disclose she in fact, made $128,800 per year, which is generally in keeping with her recollection.
[145] At trial, JDIMI produced records that in part, disclosed that it credited Safety for 86.5 per cent of her salary. The problem with the records is that they only run from September 28, 2009 to June 30, 2010 (approximately a nine-month period within the three-year Warranty Period).
[146] In my view, it was incumbent upon JDIMI to produce the records for the other years to establish that McCarthy's salary was in fact reimbursed during the rest of the Warranty Period. They have failed to do so without explanation.
[147] In normal circumstances, I would find that Safety is entitled to reimbursement for the remainder of the Warranty Period not covered by the aforementioned payments at a rate of 86.5 per cent. This is in keeping with JDIMI's own acceptance of the sharing arrangement it had with respect to McCarthy's salary with Safety.
[148] Since the parties will be re-attending to make submissions with respect to the various deficiencies in the evidence and calculations noted above, it is my view, that it is fair and reasonable to allow JDIMI to review its records one last time, to determine if it has any further documentation with respect to any credits it may have made to Safety relating to McCarthy's salary. It is premature to foreclose this issue, given the necessary circumstances in which this trial is now being conducted. [page623]
Restructuring costs
[149] At the conclusion of trial Safety abandoned its claim for restructuring costs with the exception of costs associated with the severance package paid to JDIMI's former CFO. The amount of the severance was not known at the time of trial.
[150] In my view, Safety ought not to be responsible for any portion of the severance package. The former CFO worked for JDIMI, not Safety. Further, Safety paid a 13.5 per cent management fee to JDIMI. To the extent that Safety should have been responsible for any portion of the severance package, it should have been accounted for within the management fee.
[151] The parties have agreed to determine this number and re-attend before the court if necessary.
Bad debts
[152] Crescent seeks reimbursement of $260,000 with respect to the bad debts attributed to Climan Transport. There is no dispute that this debt was not paid by Climan. Palmer's complaint is that he was not consulted. This is of no regard.
[153] The better question is whether the bad debt should be a factor in calculating Target EBITDA during the Warranty Period. Both Jack and Thomas Gaskell, the external accountant, testified that such a deduction was appropriate and in keeping with the SPA and proper accounting practices. Safety called no evidence to the contrary.
[154] The evidence of Jack and Gaskell seems to accord with common sense -- that bad debts would be reasonably deducted in calculating revenues, which were a key component of the Target EBITDA.
[155] I would, therefore, dismiss this claim. It bears repeating that, initially, additional submissions were made by Crescent with respect to other bad debts. These were abandoned in closing argument. They, too, would be affected by the same analysis above.
Estimated unreported commission revenue
[156] Palmer points to the Production Report, and in particular, the last page of that report, which purports to show the agency commission payable to Safety in the amount of $234,639.01. Crescent submits that the amount should be added into the Target EBITDA calculation. Crescent argues that there is no evidence that this amount was ever credited back to Safety. The problem with Crescent's submission, and the related submissions that also disclosed JDIMI income with respect to [page624] Safety policies (Exhibit B, p. 2, item 40761), is that there is no context that I can rely upon to determine the exact nature of these amounts, and whether they were credited to Safety. I accept JDIMI's submissions that these are simply business records recording the amounts. If Crescent seeks to establish that the amounts in question represent amounts that were not transferred to Safety, then Crescent bears the onus. It should have called an accounting evidence, or at the very least, additional evidence to determine this issue.
[157] Crescent failed to do so and as such, I would dismiss this portion of the Crescent's claim.
Costs
[158] There are also outstanding costs issues that will have to be resolved when the parties re-attend. These costs submissions will include the costs arguably payable to the board members against whom the action was discontinued at the commencement at trial, and the costs paid by JDIMI with respect to the derivative action. I will also want submissions with respect to the costs charged to Safety and costs incurred in pursuit of the action against McIntyre.
Disposition
[159] For the reasons above, I find as follows:
(i) Any reduction in the Purchase Price is limited to the $4.5 million attributable to the Preferred Shares. The defendants' counterclaim in this regard is dismissed.
(ii) McIntyre and Skinner were constructively dismissed and JDIMI breached the SPA and acted oppressively towards Crescent with respect to JDIMI's treatment of McIntyre and Skinner.
(iii) Damages concerning McIntyre and Skinner's dismissal should be calculated in accordance with s. 3.5.6 of the SPA.
(iv) Crescent's claim for $250,000 with respect to the 2009 CN commissions is dismissed.
(v) The amount of $110,000 is to be credited to Safety with respect to the AXA commissions.
(vi) The parties will re-attend with respect to the issue of AXA CPCs to make further submissions.
(vii) Crescent is entitled to credit of $263,000 with respect to the Northbridge profit sharing statement. [page625]
(viii) The parties will re-attend to determine the issue of the add- back of McCarthy's salary.
(ix) Crescent is entitled to a credit with respect to the payment made to JDIMI's former CFO. The parties will re-attend to determine the issue.
(x) Crescent's claim with respect to bad debts is dismissed.
(xi) Crescent's claim with respect to unreported commission revenue is dismissed.
(xii) The issue of costs is reserved.
[160] The parties can contact the Commercial List Office to set up a one-hour case conference to discuss next steps.
Oppression action allowed in part.
[^1]: No allegations were raised at trial against the co-defendant Belvins & Associates Insurance Agency Inc.
[^2]: It should be noted that at the commencement of trial the action discontinued as against the defendant directors Daniel Sgro, Cory Struck, Lori McDougall and Aaron Nantais.
[^3]: SGBI does not form the basis of any of this litigation.
[^4]: For future reference, I will refer to JDIMI as opposed to 6993354 Canada Inc. for convenience's sake, since the numbered company was wholly owned by JDIMI. The parties referred to the purchasing entity as JDIMI throughout the trial and JDIMI is the named corporate defendant.
[^5]: The Warranty Period ran from June 30, 2008 to June 30, 2011.
[^6]: These include the "Elson claim"; the claim for loss of income with respect to SGBI; the alleged 2010 incorrect allocation concerning Markel CPCs; the alleged Markel unearned clawback; all restructuring cost with the exception of the claim concerning the CFO; the loss of the CN transportation account; the claim for commissions paid to JDIMI producers who serviced Safety accounts after Safety producers left; and the claim for excess expenses.
[^7]: The term "Purchase Price" is not defined.
[^8]: Later reduced to $16,687,500 in the second amended agreement.
[^9]: Although Skinner was a less-critical employee, he was an important producer for Safety and the analysis is the same as in para. 82 above.
[^10]: At the conclusion of trial, Crescent abandoned any and all other claims with respect to the CN Transportation account.
[^11]: The production report is a comprehensive JDIMI document setting out Safety's clients, premiums paid and commissions collected.
[^12]: It should be noted that Crescent concedes that it bears the burden of proof.
[^13]: By this time Northbridge had purchased Markel.