Reasons on Application

COURT FILE NO.: CV-1900-619664-00CL and CV-19-006227932-00CL DATE: 20200218

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Illumina Holdings Inc. Applicant – and – BrandAlliance Inc. and A Brand Company Inc. Respondents

COUNSEL: Brendan van Niejenhuis and Emily Quail, for the Applicant Rohit Kumar, for the Respondents

HEARD: February 12, 2020

BEFORE: C. Gilmore, J.

Overview

[1] The Applicant, Illumina Holdings Ltd. (“Illumina”) is an Ontario corporation owned by Upkar Arora (“Arora”). Illumina seeks immediate payment of $254,195 from the Respondents. Illumina also seeks interest at 5% on the principal amount, compounded annually from January 10, 2015 plus pre and post judgment interest.

[2] In its Counter-Application, BrandAlliance Inc. (“BrandAlliance”) and A Brand Company (“ABC”) seek rectification of the November 1, 2013 Letter Agreement (“the Letter Agreement”) for the shares purchased by BrandAlliance from Illumina, and a declaration that Arora breached his fiduciary duties to BrandAlliance. In the alternative, BrandAlliance seeks an order consolidating the two Applications and directing that they proceed to trial as an action. In the further alternative, BrandAlliance seeks an order staying Illumina’s Application and directing that both Applications be submitted to arbitration.

Factual Background

[3] In May 2010, Illumina’s subsidiary, Integrus Brand Solutions (“Integrus”), merged with four other companies to form BrandAlliance. All five merging companies became minority shareholders in BrandAlliance. Arora became the Chief Financial Officer and the Chief Operating Officer of BrandAlliance from 2010 to early 2012.

[4] The five companies that merged to form BrandAlliance remained independently operated with the goal to eventually integrate. On May 1, 2010 the shareholders signed a Unanimous Shareholders Agreement (the “2010 USA”). The 2010 USA provided for a right to re-purchase the shareholders’ shares by BrandAlliance if they became “inactive.” Inactive was defined to mean that a Principal of a shareholder resigned as an employee or from the Board of BrandAlliance.

[5] Once inactive, the shareholders were deemed to make an offer for the re-purchase of their shares using a valuation method set out in the 2010 USA. The valuation was determined based on the earnings of BrandAlliance before interest, taxes, depreciation, and amortization (the “EBITDA”) for the 12-month period ended as the most recently completed fiscal quarter.

[6] In 2011 a sixth shareholder merged with BrandAlliance (“iCrank”). This prompted the signing of a new USA on January 22, 2011 (the “2011 USA”). One of the changes from the 2010 USA to the 2011 USA was a normalized figure for management compensation to ensure shareholders received fair value if they exited BrandAlliance. This included a new EBITDA.

[7] On January 17, 2012 Arora provided notice of his resignation as CFO of BrandAlliance with an effective date of March 31, 2012. As a result of his resignation, Arora became “inactive” and triggered the share purchase provisions of the USA.

[8] In September 2012, BrandAlliance provided Arora with a draft Share Purchase Agreement offering to pay Illumina $828,016 for its shares. Although the share purchase remained unresolved by November 2013, BrandAlliance delivered the Letter Agreement dated November 1, 2013 to Arora. The offer was for payment of $517,216 for the shares and a further $118,271 on account of further amounts owing under the Shareholder Agreement. The offer included a provision that 50% of the total amount owing would be paid on the closing date of January 10, 2014 with the rest payable within five years of January 10, 2014 with interest payable on any unpaid portion at the rate of 5% per annum above the prime lending rate of the company’s bankers, compounded annually.

[9] The Letter Agreement valuing Illumina’s shares at $517,216 stated that it was based on a share valuation pursuant to the 2010 USA and a copy of the 2010 USA was attached to the Acceptance Letter. However, BrandAlliance actually used the valuation methodology from the 2011 USA.

[10] While Arora did not agree with BrandAlliance’s share valuation and wanted a higher amount, ultimately Arora accepted the terms of the Letter Agreement. A cheque for $317,471.88 representing 50% of what was owed to Illumina was paid on January 10, 2014.

[11] On January 8, 2015 BrandAlliance sent Arora a letter confirming that the outstanding balance owing to Illumina was $317,743.50 and provided a cheque for $88,968. BrandAlliance’s CEO confirmed that this represented 1/5 of what was owed to Illumina inclusive of interest. The calculation used the valuation terms in the 2011 USA.

[12] On January 12, 2016 counsel for Illumina wrote to BrandAlliance seeking a second 1/5 instalment. BrandAlliance responded that it was entitled to but not required to make yearly instalment payments prior to the entire amount coming due on January 10, 2019.

[13] On August 22 and November 30, 2016 there was correspondence between BrandAlliance and Illumina confirming the amount outstanding and owing to Illumina inclusive of interest.

[14] On February 7, 2018, the Vice President of BrandAlliance wrote to Arora confirming that the balance owing to him, inclusive of interest, was $317,820.

[15] In 2018 BrandAlliance reorganized and was now under the auspices of a new parent company, ABC.

[16] On April 11, 2018, ABC sent Arora a letter indicating that the shares purchased from Illumina by BrandAlliance had been overvalued. ABC calculated that the outstanding balance owing to Illumina was $19,889.50. This was a reduction of $234,305 on the principal amount owing, exclusive of interest. ABC offered to provide Illumina with a cheque for $19,889.50 in exchange for a final release (attached to the letter) so long as their offer was accepted within 14 days.

[17] Arora rejected the offer on behalf of Illumina on April 26, 2018. On January 20, 2019, counsel for ABC provided Arora with a cheque for $27,216.26. The cheque was not cashed. The outstanding balance based on the Letter Agreement was due on January 10, 2019. Arora calculates the total amount owing to Illumina inclusive of interest up to May 6, 2019 was $355,709.

[18] Illumina’s counsel issued this Application on May 9, 2019. The Respondents issued their Counter-Application on September 24, 2019. The Respondents raise a number of new issues in their Counter-Application as follows:

a. Arora, as the former CFO of BrandAlliance, should have recognized the calculation error in the valuation of the shares and made it known to BrandAlliance. b. The 2011 USA was not the governing USA. Witnesses for the Respondents claim they do not recall signing the 2011 USA and that the signature page on the 2011 USA appears to have a different format than the rest of the document. c. Audits performed in 2015, 2016 and 2017 revealed that BrandAlliance was not as profitable as originally believed. A 2015 Stub Period Audit revealed a loss of $2.4 million in comparison to the profit reflected in BrandAlliance’s unaudited financial statements. d. In 2015 Blackberry demanded BrandAlliance pay $3M for the sale of handheld devices. Those remittances were not reflected as a liability on the 2012 financials despite the January 2011 contract between BrandAlliance and Blackberry.

The Positions of the Parties

The Applicant

[19] Illumina presents this as a simple contract case. The Respondents must be held to the agreement they made in January 2014. The Letter Agreement is clear and binding on both parties. The terms of the Letter Agreement were partially performed. The Respondents valued the shares and controlled the terms of the Letter Agreement which were not what Arora wanted but he accepted the terms in order to move forward. The Respondents cannot now re-negotiate those terms.

[20] Illumina submits that the Respondents’ claims in their Counter-Application are all statute barred as the share purchase closed on January 10, 2014 and the limitation period therefore expired on January 10, 2016.

[21] In the event that the Respondents’ claims are not statute barred, the EBITDA definition used in the Acceptance Letter was chosen by BrandAlliance and all the related financial information was available to it. Arora on behalf of Illumina did not participate in the share valuation exercise.

[22] In terms of the remedies sought by the Respondents, Illumina submits that neither common mistake nor unilateral mistake apply in this case. There was no common mistake with respect to the share valuation because at the time of the Letter Agreement because the 2011 USA was in force. The fact that the 2010 USA was referenced or even attached to the Letter Agreement is of no consequence. As for unilateral mistake, there is no evidence that Illumina or Arora knew that BrandAlliance had mistakenly used the formula from the 2011 USA.

[23] The remedy of unjust enrichment is also not available to the Respondents. BrandAlliance is a sophisticated business entity which contracted to pay a stated dollar amount in accordance with a USA. Neither party was forced into the agreement. In fact, Arora was not pleased with the lowered share valuation from the original share purchase agreement presented in 2012 but accepted the lower amount anyway.

[24] As for allegations that Arora breached his fiduciary duty by accepting a Transfer Price he knew or ought to have known was incorrect, that remedy is also not available to the Respondents. By the time the Letter Agreement was sent to Arora on November 1, 2013 he had been gone from the company for more than a year (since March 31, 2012). Arora’s evidence was that because of BrandAlliance’s structure at the time he was CFO, the five independent companies would review and prepare their own financial statements. Arora simply consolidated them. While the objective was to centralize the accounting procedures over time, that had not happened by the time Arora left BrandAlliance. In short, there was no evidence that Arora knew about the Blackberry liability nor could he have anticipated the losses reported in 2015, 2016 or 2017.

The Respondents

[25] The Respondents submit that the preponderance of evidence supports that the 2010 USA applied to the Illumina Share Purchase. However, since the 2011 USA EBITDA calculations were used, normalization of management compensation and an incorrect Proportionate Share was included in the valuation thereby inflating the share price.

[26] BrandAlliance engaged Jo-Ann Durand, a CPA who reviewed the Illumina share purchase in January 2018. She estimated that the errors in the EBITDA resulted in a share price that was mistakenly inflated by $175,811.

[27] No financial audits took place during the time that Arora was CFO of BrandAlliance. Arora gave evidence that this would have been impossible given the financial structure of the company at that time. BrandAlliance’s unaudited financial statements showed a profit of $914,000 as of March 31, 2015 whereas an audit completed in July 2016 showed a loss of $2.4M. The 2016 audit also revealed internal control weakness including failures to properly document, review and report financial transactions.

[28] Due to the above-mentioned errors, ABC initiated an indemnification claim and BrandAlliance shareholders took significant reductions in their Proportionate Shares and bonuses where applicable.

[29] The Blackberry debt of approximately $3M was outstanding as of the date of the Illumina Share Purchase and Arora was aware of it. However, it did not appear in the 2012 Financials. Arora’s explanation that as CFO he was not responsible for recording this debt because it was incurred by a BrandAlliance operating company owned by Ian McLearon, should not be accepted.

[30] The Respondents argue that rectification applies in this case because the Letter Agreement does not accord with the true agreement it was intended to record. It was intended to be completed in accordance with the 2010 USA but it was not. The Letter Agreement should be rectified to account for the correct EBITDA definition based on accurate 2012 financial data.

[31] As the CFO, COO and a Director of BrandAlliance, Arora knew or ought to have known that the Letter Agreement used the incorrect EBITDA, Proportionate Share and financial data. Arora cannot be permitted to rely on mistakes by way of a disingenuous denial of knowledge and responsibility. Arora was intimately familiar with the differences between the 2010 and 2011 EBITDA definitions. He was the one who proposed the changes. Therefore, the Letter Agreement should be rectified based on either common or unilateral mistake resulting in a share valuation of $282,911 rather that $517,216.

[32] The Respondents allege that Arora breached his fiduciary duty to BrandAlliance in that he fell below the requisite standard of care as CFO of BrandAlliance. He failed to ensure consolidated financial reporting for BrandAlliance including undertaking a consolidated financial audit.

[33] The within applications should be combined into an action and a trial scheduled. The Respondents submit that this is not an appropriate case to be determined by way of Application. The issues that require a trial are as follows:

a. The effectiveness of the 2010 USA and whether it governed the share purchase. b. The significance of the errors in BrandAlliance’s 2012 financial statements and their relation to the Share Valuation; and, c. The extent of Arora’s responsibility for those errors.

[34] Finally, the Respondents argue that Section 4.1 of the 2010 and 2011 USA requires that “any dispute, difference or question arising between the parties hereto concerning the construction, meaning or effect of this Agreement or any part thereof shall be settled…[by a single arbitrator or a panel of arbitrators].”

[35] The Respondents’ position is that this Court should grant a stay where it is “arguable” that the dispute falls within the terms of an arbitration agreement. The Illumina Share Purchase falls within the scope of the Arbitration Clause.

Analysis

[36] It is this court’s view that the November 1, 2013 Letter Agreement is binding and enforceable. I agree with the Applicant that this is a straightforward contract case in which there was an offer, acceptance and partial performance.

[37] The Respondents, after repeated confirmation of the amounts payable under the terms of that contract including interest payments and due date, now raise issues which are either statute barred or without merit.

[38] The factual history set out above shows ongoing contact between Illumina and BrandAlliance with respect to the outstanding balance. As late as April 2018, Arora asked for confirmation of the amount owing to Illumina and offered to receive a discounted payment if made early. Mr. Fred Parker, the CFO of ABC responded to Arora and advised that he would be responding to Arora within the week.

[39] As well, notes to the Consolidated Financial Statements for BrandAlliance (and later ABC) as of June 30, 2015, 2016 and 2017 show the amount owing to Arora due by January 2019. The first time Arora is given notice of any issue with the share purchase is the letter from the President of ABC dated April 11, 2018 in which a history of BrandAlliance’s financial problems are set out and a drastically reduced payment is offered to Arora.

[40] Addressing the Respondents’ arguments in turn, I find that their argument that 2011 USA was not signed, to be implausible. It is clear that a new USA was signed, likely in early January 2011, in order to account for iCrank joining BrandAlliance. The evidence of the Respondents’ witnesses that they cannot remember signing the 2011 USA may be true, but it does not change the fact that the 2011 USA existed. Further, the 2011 USA was the Agreement in force at the time of the acceptance of the Letter Agreement. It would not make sense to use a valuation formula for the Share Purchase based on a USA that was no longer in effect.

[41] I note as well that the corporate solicitor who prepared the 2011 USA produced his file for the Respondents who were seeking support for their contention that the 2011 USA was not signed. The Reply affidavit of Jo-Ann Durand, sworn after production of the file makes no reference to the 2011 USA. This supports an inference that the 2011 USA was signed, otherwise, Ms. Durand’s affidavit would have made reference to it having no force or effect.

[42] I do not accept the Respondents’ contention that Arora must now take responsibility for financial problems which came to light in 2015 and 2016. There may well be a basis for concern about a lack of internal controls, an overvaluation of inventory, or a miscalculation of the cost of goods sold but these problems cannot now be laid at the feet of Arora. Further, Ms. Durand’s suggestion that there should be a backward spreading of accounting adjustments is not an expert opinion. This court is left with evidence of the Respondents’ financial issues in 2015 and 2016 but no evidence to connect those issues to Arora or the Share Valuation.

[43] As for the remedies sought by the Respondents, I do not find that they can be grounded in the applicable law. In Canada (Attorney General) v. Fairmont Hotels Inc. [2016] 2 S.C.R. 702. Fairmont sought to avoid an unexpected tax liability by rectification of certain directors’ resolutions. The Supreme Court of Canada overturned the Ontario Court of Appeal which had granted rectification. The court held that rectification is a “potent remedy” because it allows courts to rewrite what parties intended to be their agreement. The court held that rectification is not available “where the basis for seeking it is that one or both of the parties wish to amend not the instrument recording their agreement, but the agreement itself. The court is not to “rectify a belatedly recognized error of judgment by one party or the other” (para 13).

[44] Similar to the Fairmont case, the Respondents seek rectification based on information which had been available to them from the start of the negotiating process. It must be re-emphasized that in this case, BrandAlliance was in complete control of the corporate and financial information used in the negotiations, all of which were done long after Arora’s departure. They had access to the 2010 and 2011 USAs, and the financial documents. In fact, they reduced the amount offered to Illumina in the Letter Agreement by $192,529 from their original share purchase offer in September 2012. Negotiations went on for more than a year after that. The Respondents then confirmed the amount owing and paid amounts against the outstanding balance over the ensuing years.

[45] Further, I do not accept that the Respondents are entitled to rectification based on a notion that Arora took advantage of them because of information available to him as CFO. As the 2011 USA governed, there was nothing nefarious about what happened. The references to the 2010 USA were inadvertent or typographical errors. The 2010 USA could never have applied in any event. This also addresses any argument raised by the Respondents in terms of rescission. That is, there was no mutual error of fact because the valuation formula set out in the 2011 USA was the formula which had to apply, by operation of law.

[46] Finally, it is no longer open to the Respondents to dispute what formula was used to calculate the share purchase. The offer was accepted by Arora despite his dissatisfaction with the amount offered.

[47] With respect to any alleged breach of fiduciary duty by Arora I am uncertain of the connection between the newly discovered financial issues from 2015 and 2016 and how those can be attributed to Arora as CFO in 2012. In any event, even if Arora breached his fiduciary duty to BrandAlliance, that would not affect Illumina’s entitlement to receive the share purchase price in the Letter Agreement.

[48] If I am wrong with respect to the remedies sought by the Respondents, I find that they are statute barred. Any claims would have to have been brought by January 2016. Both the Blackberry debt and the 2015/2016 financial problems were known to the Respondents by that time.

[49] With respect to the question of whether this matter should be referred to mediation, I do not find that the questions raised in this application relate to any interpretation of either the 2010 or the 2011 USA. This case is about enforcement of an agreement and not about the meaning of either USA. As such, I find that it would not fall under the arbitration clause in the USA.

[50] Finally, this matter does not require a trial. There would be nothing tendered at trial that differs from the current record before the court. The fact that certain executives employed by the Respondents do not remember signing the 2011 USA is not a credibility issue. This is a straightforward contract issue which does not merit a trial, from the standpoint of either outstanding credibility issues or the amounts at stake.

Can Relief Be Sought Against ABC?

[51] The Title of Proceedings in this matter names both BrandAlliance and ABC as Respondents. The Respondents submit that they are two separate legal entities and that ABC is not liable to Illumina.

[52] The Respondents also submit that the declarations sought by Illumina in its Application are sought solely against BrandAlliance and not ABC. Arora, in his May 6, 2019 affidavit refers to ABC as the parent company of BrandAlliance thereby acknowledging their separateness as legal entities.

[53] Illumina argues that the Notes to the Consolidated Financial Statements of ABC refer to a “transaction” on June 30, 2015 which resulted in BrandAlliance becoming a wholly owned subsidiary of ABC. Those same notes describe ABC and its subsidiaries (including BrandAlliance) as collectively, the “Company.” Further, Illumina’s representatives did not cross-examine on the corporate relationship because it was never raised as an issue until it appeared in the Respondents’ counsel’s factum for this hearing.

[54] At paragraph 9 and 10 of Ms. Durand’s affidavit sworn September 24, 2019, she refers to the June 30, 2015 transaction as a “merger.” As well, Mr. McLearon’s affidavit sworn September 24, 2019 refers to the “merger” of ABC and BrandAlliance on June 30, 2015.

[55] The Financial Statements of ABC as of June 30, 2016 show the outstanding debt owed to Illumina at $216,715.

[56] I do not find that the fact that Illumina did not seek a declaration against ABC in its application to be fatal to any liability on the part of ABC for the Illumina debt. The companies have merged as of June 30, 2015. Their own witnesses refer to the “merger” and the financial statement produced the following year records the debt owing to Illumina. Further, the letter to Arora in April 2018 informing him of the “recalculation” of what was owed to him is from Mr. Fred Parker, President and CEO of ABC. The draft release attached to that letter is between Arora and ABC. Clearly Mr. Parker has the authority to make offers and bind ABC in relation to the debt owed to Illumina.

Orders and Costs

[57] Counsel each provided a Bill of Costs at the conclusion of argument. The Applicant has had success and should have its costs. This is not a case for substantial indemnity costs considering the issues at stake.

[58] Given all of the above, I make the following orders:

a. The relief sought in the Application is granted as against both Respondents. b. The Counter-Application is dismissed. c. The Respondents are jointly and severally liable to pay costs to the Applicant in the amount of $40,000.

C. Gilmore, J.

Released: February 18, 2020