COURT FILE NO.: CV-19-629301-00CL DATE: 20200221 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Rahul Kuckreja Applicant – and – Smiling Pond Inc., Parmantid Inc., Carol Coleman-Trotter and 2180366 Ontario Limited Respondents
COUNSEL: Jordan Goldblatt and Eleanor Vaughan for the Applicant Denise Sayer and Liam McNeely, for the Respondents Smiling Pond Inc., Parmantid Inc., and Carol Coleman-Trotter, and Julian Binavince for 2180366 Ontario Limited
HEARD: February 11, 2020
C. Gilmore, J.
Judgment on Application
Overview
[1] The Respondents Smiling Pond Inc. (“SPI”), Parmantid Inc. (“PI”), and Carol Coleman-Trotter (“Ms. Coleman-Trotter”) and the Applicant are aligned in their position on this application. They seek a declaration that the Respondent 2180366 Ontario Limited (“218”) failed to properly exercise the Right of First Refusal (“ROFR”) contained in the Partnership Agreement (“the PA”) between PI and 218 dated May 12, 2016. That declaration will then permit the sale of shares from PI to the Applicant as per the Share Purchase Agreement (“the SPA”) dated June 21, 2019.
[2] 218’s position is that it gave clear notice on August 23, 2019 of its intention to exercise the ROFR. In doing so, 218 reserved certain rights to itself. Those rights are not conditions and do not take away from 218’s unequivocal exercise of the ROFR.
Factual Background
[3] Ms. Coleman-Trotter owns all of the shares of SPI. SPI owns all of the shares in PI, which controls a 51% interest in its partnership with 218. That partnership is called the “Butternut Partnership” and is governed by the PA referred to above. The Butternut Partnership owns Butternut Manor Uxbridge Inc. (“BMUI”), which operates a retirement home business. As related parties, Ms. Coleman-Trotter, SPI, and PI are referred to in this judgment as “the Vendors.”
[4] The Applicant is a third party who offered to buy SP’s shares of PI by way of the June 2019 SPA.
[5] The ROFR is set out in the PA between PI and 218. The selling party is required to provide a Notice of Sale containing certain information to trigger the possibility of the ROFR. Upon receipt of the Notice of Sale, the other partner has 60 days to accept the Offer in writing. If there is no acceptance of the Offer by the other partner, the selling partner has 90 days complete the sale to the third party.
[6] The SPA signed between the Applicant and the Vendors contained certain requirements including a purchase price of $3.25M, assumption of the first mortgage and the liabilities of PI and Ms. Coleman-Trotter, a term that the SPA would become null and void if 218 exercised the ROFR, and other terms not germane to this Application.
[7] On June 25, 2019, 218 received a letter from the Vendors with the required information in the PA and a copy of the SPA. This triggered the 60-day period for 218 to exercise its ROFR.
[8] On August 20, 2019, counsel for 218 wrote to the Vendors’ counsel indicating that it was interested in exercising the ROFR but required certain materials by way of due diligence as well as particulars of a possible claim against BMUI by Edgecon Inc. 218 alleged that Edgecon was claiming fees owed to it by BMUI of approximately $500,000. 218 took the position that if those potential claims were not disclosed to an Offerer, SPI would be unjustly enriched.
[9] The Vendors responded on August 22, 2019 indicating they were willing to provide certain requested materials to 218. They denied the existence of any claims by Edgecon. The Vendors made it clear they were willing to enter into a SPA with 218 on the same terms and conditions of the SPA dated June 21, 2019 with the Applicant. However, the Vendors were not prepared to enter into any renegotiation of the terms of the SPA.
[10] 218 responded on August 23, 2019 confirming its wish to exercise the ROFR and its willingness to enter into a SPA with the Vendors subject to the terms and conditions of the SPA with the Applicant, the terms and conditions of the PA, and “all other rights of 218”. 218 indicated that it had funds available for a $50,000 deposit. The Vendors requested that 218 signs a new SPA. 218’s position was that the PA did not require this and that attempting to enter into a new SPA would have led to further disputes.
[11] As a result of 218 refusing to enter into a new SPA, Ms. Coleman-Trotter instructed her counsel to advise 218 that the Vendors were proceeding to complete the sale transaction with the Applicant.
[12] 218 responded that it was ready, willing, and able to close. The Applicant has also provided a $50,000 deposit and indicated it was ready to close. The stand-off has continued and necessitated this litigation.
Legal Issues and Positions of the Parties
[13] The Vendors claim that the ROFR was not properly exercised by 218 because it was not unequivocal.
[14] All parties agree with Blair J. in GATX Corp. v. Hawker Siddley Canada Inc., 1996 CarswellOnt 1434, that the general purpose of an ROFR is to:
[P]rotect the parties’ respective interests by ensuring that if one party decides to dispose of all or a portion of its shares to a third party the other party has the pre-emptive right to acquire those shares first, on the same terms and conditions, including price, as that being offered by the third party. In this way, a party is protected against having an unwanted co-shareholder foisted upon it (at para. 36).
[15] An ROFR is to be exercised on the same terms and conditions as the third-party offer. In Southland Canada Inc. v. Zarcan Equities Ltd., 1999 ABQB 831, 254 A.R. 59, the court held that a ROFR had not been properly exercised when Southland attempted to assert a right it did not have by matching an offer on land to which the ROFR did not apply.
[16] The Vendors and the Applicant take the position that 218 purports to reserve its right to claim for unjust enrichment and a set-off of expenses. 218’s representative, Mr. Mizzi, deposed in his cross-examination that Edgecon’s claims had to be dealt with before closing and could affect the purchase price, and that it is not necessary for 218 to buy the shares on the same terms as the third-party offer. The Vendors and the Applicant rely on that evidence as a clear indication that 218 intends to renegotiate rather than exercise the ROFR on the terms set out in the SA.
[17] In contrast, the Applicant has become aware of the Edgecon claims and agreed they came as a surprise to him. However, those claims do not affect his willingness to abide by the SPA he signed with the Vendors.
[18] The Applicant and the Vendors further submit that 218 has been invited to close the deal and was asked if more time was needed (as recently as December 2019). However, the deal was never concluded because 218 insisted that the price be revisited due to the potential Edgecon claim.
[19] 218 relies on evidence by way of emails between its counsel and counsel for the Vendors between September 10 and October 1, 2019, which related to 218’s purchase of the shares. None of those emails mention a change to the purchase price. On October 1, 2019, counsel for 218 requested a closing date. Counsel for PI responded on October 1, 2019 indicating that “this sounds positive” and requested a meeting time to discuss the matter further. In addition to the deposit, 218 has had $3.25M available to close the transaction since October 8, 2019.
[20] 218’s position is that the Notice given on August 23, 2019 was clear and unequivocal. It does not mention any change to the purchase price. Once the Applicant discovered that 218 had given Notice of its intention to exercise the ROFR (which it did not discover until October 2019), it commenced this application and threatened to bring an injunction if the Vendors attempted to close the transaction.
Did 218 Unequivocally Exercise the ROFR?
[21] It is this court’s view that 218’s exercise of the ROFR is valid. The important distinction in this case is whether the reservation of rights by 218 was a renegotiation of the purchase price to account for the potential Edgecon claims.
[22] First, it should be made clear that the Edgecon claims are not ephemerous. A claim for $662,525 in liquidated damages was issued on December 4, 2019 by Edgecon Inc. against BMUI and the Butternut Partnership.
[23] Second, it is this court’s view that a reserved right is not a condition or an attempt to renegotiate. It is simply notice of an entitlement which may or may not be exercised. In this case, 218 reserved the right to either claim unjust enrichment or set-off in the event that it purchased the shares and then discovered that Edgecon was owed almost $700,000. If a judgment was obtained by Edgecon, it reserved the right to pursue its claim against the Vendors.
[24] As per The Canadian Encyclopedic Digest (online), Contracts (Ont.), “Breach Justifying Repudiation – Anticipatory Breach” at 866: “A purchaser’s reservation of rights may not amount to repudiation, rather than only putting the vendor on notice that the purchaser would seek redress in court at a later time.”
[25] It is clear that the Applicant took somewhat the same view, but stated it differently. In his affidavit at paragraph 33, the Applicant stated, “the Sale Agreement contains no disclosure of the Edgecon Claims, and so the question of whether those claims should have been disclosed is between me and Ms. Coleman-Trotter.”
[26] I find that neither 218 nor the Applicant attempted to renegotiate the sale or any terms of it. I further find that the August 23, 2019 letter is valid notice of 218’s intention to exercise the ROFR, and that the notice was provided within the required time under section 7.3(c) of the SPA. 218 paid a deposit, which has not been returned, was in funds, and has been ready, willing, and able to close since October 8, 2019. Given those findings, the Applicant’s SPA becomes null and void as per s. 2.1(b) of the SPA.
Orders and Costs
[27] The application is dismissed.
[28] All inclusive partial indemnity costs are payable to 218 by the Applicant and the remaining Respondents, jointly and severally, in the amount of $19,000.