SUPERIOR COURT OF JUSTICE - ONTARIO
RE: RISHI GUNESS CHADEESINGH, TRANSFORMATION NETWORKS INC., AND RDEL TECHNOLOGIES, Applicants
AND:
CARLOS DAVID FLORES, Respondent
BEFORE: Schabas J.
COUNSEL: Shahzad Siddiqui, Counsel for the Applicants
Christopher G.T. Tan, Counsel for the Respondent
HEARD: August 27, 2020
Reasons for judgment
Background
Background
1This application arises out of an ongoing arbitration involving a shareholder dispute over the value of a business founded by the principal applicant, Rishi Chadeesingh (“Rishi”), and his former business associate, Carlos Flores (“Carlos”). Rishi wishes to buy the shares of Flores in the company they founded, Transformation Networks Inc. (“TNI”), the business of which is now carried on by a company owned by Rishi, RDEL Technologies Inc. (“RDEL”).
2Founded in 2010, TNI designed and installed large-scale wi-fi services in commercial locations, such as office towers, hospitals, and airports. In 2014 Carlos was convicted of sexual offences against his daughter and was sentenced to five years in prison. He began serving his sentence on September 5, 2014 and was released on parole at the end of February 2016, but his parole restrictions prevented him from working in the technology sector until May 30, 2016. While in custody, Carlos received $111,000 in compensation from TNI.
3Also while Carlos was incarcerated, Rishi incorporated RDEL in January 2015 and, it appears, moved the business of TNI into RDEL. Following Carlos’ release in March 2016 the parties entered into buy-out negotiations which failed in June, 2016. The following year, in April 2017, Carlos commenced an application in the Superior Court, which then led to the arbitration. Ms. Valerie Edwards was appointed as arbitrator.
4The arbitration commenced in November 2017, when the parties entered into an Arbitration Agreement. The parties agreed that the arbitration should proceed in two phases, as the arbitrator needed to first establish a valuation date and appoint an expert in business valuations. Ms. Nancy Rogers was appointed as the valuation expert.
5In a decision dated December 20, 2018, based on submissions from the parties the arbitrator set out an Arbitration Protocol (‘the Protocol”) listing the issues to be addressed in two phases of the arbitration. The arbitrator addressed issues in Phase 1 in a decision dated July 10, 2019.
6Phase 1 involved determining liability issues arising from the end of Carlos’ employment and whether Rishi oppressed Carlos in closing down TNI and continuing the business as RDEL. Phase 1 also required the arbitrator to determine the appropriate valuation date for Carlos’ shares in two circumstances: first, where there was no oppression; and secondly, where there was oppression. The arbitrator was also to determine what credits, if any, Rishi should receive for payments made to Carlos while he was incarcerated, and was to provide any additional, or “special” instructions to the valuation expert for consideration in Phase 2 of the arbitration.
7The Protocol provided that the valuation expert could assist the arbitrator in determining the valuation date. It also provided that the valuation expert would, prior to the completion of Phase 1, meet with the parties’ own experts to hear their views on the appropriate valuation date, among other things.
8In Phase 2, the valuation expert is to report on the value of the shares on the valuation date, the amount of compensation, if any, to which Carlos is entitled arising from the end of his employment, and how the value of Carlos’ shares should be adjusted to reflect actions taken by Rishi, TNI and/or RDEL prior to the valuation date, if any, which reduced the value of Carlos’ shares or caused losses to him. The Protocol specifically provides that the parties are not bound by the valuation expert’s findings and reserve/exercise their rights under s. 28 of the Arbitration Act to have a hearing following the report of the valuation expert.
9In her Phase 1 decision, dated July 10, 2019, among other things, the arbitrator determined that Carlos had no claim for damages arising from the termination of his employment, and deferred Rishi’s request for the return of the $111,000 which, it was argued was paid to Carlos because Carlos told Rishi he was unable to work for medical reasons and did not disclose the fact that he had been convicted of a serious criminal offence. Carlos, for his part, has alleged that Rishi made improper withdrawals from TNI while Carlos was in jail, for which he seeks credits. The arbitrator stated that she wished to receive a “more complete picture of TNI’s finances and Rishi’s withdrawals” and will decide these issues as part of Phase 2.
10The arbitrator also found that Rishi had breached his fiduciary obligations to Carlos and oppressed him by “folding TNI into RDEL, without first buying out Carlos’ interest,” and that Rishi had also committed oppression by failing to provide Carlos with access to books and records of TNI and RDEL.
11The arbitrator concluded that the valuation date should be December 31, 2016, based on her finding of oppression. If there had not been oppression, she would have picked June 15, 2016 as the valuation date. The arbitrator then provided “special instructions,” as contemplated by the Protocol, to the valuation expert to determine various payments made by TNI and RDEL prior to the valuation date.
12On September 27, 2019, at the request of Ms. Rogers, the arbitrator ordered the applicants to produce their 2017 financial records. The following month, on October 23, 2019, the arbitrator issued an endorsement ordering production of RDEL’s 2018 Financial Statements, which were sought by Carlos’ counsel “in order to determine whether or not to make submissions as to the appropriateness of Ms. Rogers using hindsight information in her valuation.”
13Subsequently, counsel for Carlos asked the arbitrator to instruct Ms. Rogers to consider the 2017 and 2018 Financial Statements as hindsight evidence, relying on a report from Carlos’ expert, Alan Zysman. In an endorsement dated November 27, 2019, the arbitrator held that Ms. Rogers “may, if she deems appropriate, use the 2017/2018 financial results as a ‘reality check’” in preparing her report on valuation.
14In her November 27, 2019 endorsement the arbitrator rejected the submission that Zysman’s report should not be admitted. Counsel for Rishi had argued that the report constituted improper advocacy contrary to the role of an objective and independent expert as it included reference to case law and legal principles. The arbitrator also did not accept Rishi’s argument that a comment Zysman had made to Rishi about settling the case many months earlier affected his independence.
15In a further endorsement dated December 16, 2019, the arbitrator responded to Carlos’ request, made pursuant to s. 40(1) of the Arbitration Act, 1991, S.O. 1991, c. 17, for an explanation of her ruling regarding the use of hindsight evidence, including why she did not ask the valuator to adopt a “lost profits” approach. No request was made to provide a further explanation of the arbitrator’s selection of a valuation date, although this was commented upon in her response to the question about the lost profits approach. The arbitrator also stated in this endorsement that “Nancy Rogers may also use the 2017 and 2018 financial statements as she deems appropriate as a business valuation expert.”
Issues
Issues
16The applicants raise four issues on this application:
(a) Did the arbitrator provide adequate reasons for her valuation date of December 31, 2016?
(b) Did the arbitrator act unfairly when she directed the valuator to assess the effect of Rishi’s actions on the value of the business but not the effects of Carlos’ absence?
(c) Should the valuator consider hindsight evidence from 2017 and 2018?
(d) Should evidence/or submissions from Carlos’ expert, Alan Zysman, be struck due to his comments made to Rishi and for preparing a report for Carlos’ counsel that cited case law and legal principles?
The standard of review
17This application was brought pursuant to section 46(1) of the Arbitration Act, 1991, which provides that a court may set aside an award made by an arbitrator on specific grounds. The applicants appear to rely on the ground in subparagraph 6, that “[t]he applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given proper notice of the arbitration or of the appointment of an arbitrator.”
18Although the applicants suggest that the standard of review on at least some of the issues is correctness, in my view the presumptive standard is one of reasonableness, as the Supreme Court recently stated in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. Indeed, in a detailed analysis with which I agree, Kane J. recently concluded that the reasonableness standard specifically applies to applications under s. 46(1)6 of the Arbitration Act, 1991: Freedman v. Freedman Holdings Inc., 2020 ONSC 2692 at paras. 126-128. This is a deferential standard in which I must determine whether the arbitrator’s decision is within a range of reasonable decisions, not whether it is “correct” in the sense that it is the same decision I would have made. So long as the decision is reasonable, it stands.
19Further, although the applicants argue that their concerns raise issues of procedural fairness to which a correctness standard should apply, the issues are not procedural in nature, but are rulings made by the arbitrator that she was asked to make and did so following full submissions by both sides.
The valuation date and the duty to give reasons
The valuation date and the duty to give reasons
20The applicants argue that the arbitrator failed to provide adequate reasons for choosing a valuation date of December 31, 2016, which, it is said, was arbitrary. I disagree. In her July 10, 2019 decision the arbitrator addressed the competing positions of the parties. Rishi submitted that the date should be September 2014, when Carlos went to prison and was no longer active in the business. Carlos argued for a date no earlier than April 26, 2017, when he commenced legal proceedings. He also requested that the valuator consider subsequent financial performance, which suggests that the business was continuing to grow, as it apparently did.
21The arbitrator rejected both these dates. September 2014 was inappropriate, she concluded, “as Rishi knew that Carlos would be away on a lengthy absence and paid his compensation until the end of February 2016 on the assumption that he would be returning to the business.” She noted that Carlos trained employees to assume some of his job functions. Consequently, “[t]he mere absence of Carlos from the business during his incarceration is not a basis for finding in favour of an early valuation date.”
22As to the April 2017 date suggested by Carlos, the arbitrator did not accept that Carlos’ delay in commencing litigation should be used to his advantage, after he had made a demand for arbitration some 11 months earlier.
23The arbitrator considered whether to use March or June 2016 as that was when the parties attempted to negotiate a buy out. However, the arbitrator rejected those dates and instead selected December 31, 2016 as the valuation date, explaining that she “would have been inclined to pick June 15, 2016 as a valuation date, in the absence of my finding that Rishi oppressed Carlos by shutting down TNI and continuing its operations in RDEL.” Accordingly, the arbitrator decided that Carlos should be entitled to the benefit of an additional 6 months of the growth in value of the TNI/RDEL business due to the oppressive acts by Rishi against him.
24The applicants argue that it was incumbent on the arbitrator to explain why she selected December 31, 2016, and specifically “why Rishi’s oppression warranted an additional six-month period being added to the June 2016 valuation date that she was inclined to pick.” However, as Abella J. stated in Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board), 2011 SCC 62, at para. 14, the adequacy of reasons is not a “stand-alone basis for quashing a decision.” Rather, “the reasons must be read together with the outcome and serve the purpose of showing whether the result falls within a range of possible outcomes.” Further, as she noted at para. 16:
Reasons may not include all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred, but that does not impugn the validity of either the reasons or the result under a reasonableness analysis. A decision-maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion (Service Employees’ International Union, Local No. 333 v. Nipawin District Staff Nurses Assn., 1973 CanLII 191 (SCC), [1975] 1 S.C.R. 382, at p. 391). In other words, if the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes, the Dunsmuir criteria are met.
25In my view, the arbitrator’s reasons were sufficient. The arbitrator has broad discretion to frame a remedy for oppression, and it was open to her to extend the valuation date to Carlos’s benefit as a remedy for Rishi’s oppressive acts. Indeed, in submissions to the arbitrator the applicants stated that it would be open to her to make adjustments to valuation on the basis of oppression. She did this in two ways – by treating TNI and RDEL as a single, continuous, business entity, and by extending the valuation date by 6 months.
26I recognize that the arbitrator is not aware of the precise financial impact of selecting December 31, 2016 as the valuation date, as that must await the report of Ms. Rogers, and so to some extent the selection of that date may seem arbitrary. However, the arbitrator must still consider a number of other financial issues relating to the dispute; indeed, she has deferred some findings she was to make in Phase 1 until she has “a more complete picture of TNI’s finances,” at which time she will receive more submissions before making a final decision. In this context, while the full impact of selecting December 31, 2016, is not clear, the arbitrator has yet to make a final decision on the dispute.
27Further, if there were any doubt about why the arbitrator selected December 31, 2016, she provided further elucidation in her November 27, 2019 endorsement where she stated that “in arriving at a valuation date, I specifically made adjustments to take into account Rishi’s oppressive conduct, specifically, by directing Ms. Rogers to treat TNI and RDEL as a single, continuous business entity, and extending the valuation date by six months.” She discussed this again in her subsequent endorsement of December 16, 2019:
I have found that Rishi oppressed Carlos by transferring TNI’s business to RDEL. I have therefore ordered that they be valued as a single, continuous business entity. In my Reasons, I indicated that I would have been inclined to pick June 15, 2016 as the valuation date, but for Rishi’s oppression. It is difficult to know what opportunities Rishi was exploring in late 2015 or the first half of 2016 which might not be reflected in sales and profits as of June 15, 2016, and Carlos is entitled to the benefit of the doubt on this point. By extending the valuation date to December 31, 2016, it is more likely that these will be captured. Nancy Rogers may also use the 2017 and 2018 financial statements as she deems appropriate as a business valuation expert.
28The applicants take issue with these expansions of the arbitrator’s reasons in subsequent endorsements, saying they support the submission that her earlier reasons were inadequate. However, I do not read them that way, but simply cite her later comments as confirmation of what she had already reasonably decided, and adequately explained, in her July 10, 2019 decision. As noted, reasons do not have to say everything, but are sufficient if they provide enough information for the reader to understand why the decision was made.
Carlos’ absence from the business
Carlos’ absence from the business
29In her July 10, 2019 decision the arbitrator also gave the valuator specific instructions to determine what payments were made to Rishi and his wife, Dolly, or to their benefit (such as paying legal fees and personal expenses), by TNI and RDEL from January 1, 2013 forward. This information is sought, the arbitrator stated, so that she can determine “what credit if any Carlos should receive in respect of payments made to Rishi and Dolly.” The arbitrator also asked Ms. Rogers to determine “[w]hat amounts were paid to Carlos including salaries, bonuses and management fees (including those to related companies), for the period September 5, 2014 to March 1, 2016.” However, the arbitrator did not ask the valuator “to attempt to quantify the impact of Carlos’ absence from the business in determining value,” finding this to be “too speculative.”
30Rishi argues on this application that this constitutes differential treatment contrary to s. 46(1)6 of the Arbitration Act, 1991, which permits an applicant to seek to set aside an award where “[t]he applicant was not treated equally and fairly, was not given an opportunity to present a case or to respond to another party’s case, or was not given proper notice of the arbitration or of the appointment of an arbitrator.”
31The applicants’ position is that TNI was a two-man team in which Carlos dealt with the technical aspects of the business and, had he not been incarcerated, he could have continued in his technical role and his presence might have grown the business, although I note that Rishi’s evidence also suggested that Carlos may actually have been hurting the business. Further, had Carlos not misled Rishi about his absence the applicants argue that TNI would not have paid him $111,000 in salary while in prison, and that money could instead have been used as capital to grow the business.
32In my view, the applicants’ complaint is not with procedural fairness but with the substantive decision the arbitrator has made on this point. The arbitrator has instructed Ms. Rogers to report to her on a range of actual, quantifiable payments, including the $111,000, or more, paid to Carlos while he was incarcerated, and has left it open to determine, following the report, “what credit if any” either party will receive. In giving these instructions the arbitrator has provided direction to the valuator as contemplated by the Protocol for Phase 1 of the arbitration, and her questions are directed to issues specifically set out in Phase 1. The arbitrator has also decided not to instruct the valuator to attempt to place a value on something that is not listed in the Protocol for Phase 1 which in her view is “too speculative.” This is a reasonable decision for the arbitrator to make, and she did so after giving the applicants an opportunity to make submissions on the scope of the work to be done by the valuator, and there is no unfairness to the applicants that would give rise to a breach of s. 46(1)6 of the Arbitration Act, 1991.
Hindsight evidence
Hindsight evidence
33It is common ground between the parties that “in the process of valuing shares as at a particular date, hindsight information is generally inadmissible.” This is to prevent it from being used as a method for determining value. However, there are two exceptions to this prohibition: “firstly, to compare actual results achieved after the valuation date against projected or forecasted corporate results; and secondly, to challenge the reasonableness of assumptions made by the valuators”: Ford Motor Company of Canada v. OMERS, 2000 CarswellOnt. 1530 at paras. 5-6. Put another way, “hindsight may be applied as a ‘reality check’ of sorts when assessing the proposed valuation”: Teranet Inc. v. Canarab Marketing Corporation, 2008 CarswellOnt 6009 (S.C.J.) at para. 29
34In this case, the arbitrator has explicitly limited the use of hindsight evidence by Ms. Rogers, should she choose to use it at all, to be a “reality check.”
35The applicants’ argument on this issue seems to be that the arbitrator should not have provided this option to the valuator as she has not requested the 2018 financial statements, which it is said are too remote from 2016, nor indicated that she wishes to use hindsight evidence at all. Further, it is submitted that the use of hindsight as a “reality check” is meant to be a tool for the arbitrator in reviewing the valuator’s conclusions, not a tool for the valuator herself.
36I see no basis to interfere with the arbitrator’s rulings on this issue. The valuator sought the 2017 financial statements, it seems in order to ensure that profit for 2016 was not inappropriately deferred to 2017, which is relevant to the valuation as of December 31, 2016. Counsel for Rishi then sought production of statements for 2018 which show, as did 2017, that TNI/RDEL’s business – revenues and gross profits – grew significantly in both years.
37There is nothing unreasonable in giving the valuator the option, should she wish, to use 2017 and 2018 results as a reality check, should she wish to do so. The concern that looking two years out is unreasonable is something that has not happened yet, and it will be up to the valuator, and potentially the arbitrator, to decide whether to use just 2017 or both 2017 and 2018 as reality checks, if they use any of them at all. I note, however, that hindsight information up to 4 years later has been used for a reality check, albeit in the context of assessing the sale price of real property: Plese v. Herjavec, 2018 ONSC 7749 at para. 123.
38Nor have the applicants been treated unfairly within the meaning of s. 46(1)6 of the Arbitration Act, 1991 on this issue. The applicants have made submissions and the arbitrator has made her decision. In any event, there is an element of prematurity to this complaint, as the parties’ valuators will have an opportunity to address the use of hindsight, if any, with Ms. Rogers, and she may or may not use it at all. In any event, should she use the hindsight information or not, the parties will have a further opportunity to address the issue with the arbitrator herself.
39As to the submission that only the arbitrator, or judge, can use hindsight evidence as a reality check, I see no support for that in the jurisprudence; indeed, it seems to me important to have the expert consider it as well, in order to provide any insights into how reliable and useful it might be and what use, if any, should be made of it by the ultimate decision maker. Further, and in conclusion on this issue, I note that the Arbitration Agreement provides that the arbitrator is not bound by the rules of evidence and “may receive and consider any and all evidence she considers trustworthy and credible.”
Should Zysman’s evidence and submissions be excluded?
Should Zysman’s evidence and submissions be excluded?
40The applicants submit that evidence and submissions by Carlos’ expert should be struck out. They give two reasons for taking this position: first, they say that Zysman had an improper conversation with Rishi in which he made a comment about settling the dispute; and, second, that Zysman has improperly assumed the role of an advocate in his evidence and submissions.
41In her endorsement dated November 27, 2019 the arbitrator rejected the applicants’ position on this issue, stating:
Mr. Zysman has simply summarized available approaches to damages, and his reference to case law in that context is appropriate. This is not the unauthorized practice of law, nor does it taint Mr. Zysman’s objectivity. I also do not accept that Mr. Zysman’s comment to Rishi about settlement affects his independence. Although it would have been preferable for him not to have made the comment, it was a relatively innocuous statement in the larger scheme of things.
42The arbitrator’s findings on this issue are findings of mixed fact and law and entitled to deference unless they are unreasonable and constitute a palpable and overriding error. In my view, they are not unreasonable and I decline to grant the relief sought by the applicant.
43Dealing first with the discussion between Zysman and Rishi, on March 12, 2018 Zysman attended at Rishi’s home to pick up materials for review. Zysman had a brief discussion with Rishi at the entryway of the home regarding the materials. Prior to leaving, Zysman stated what he said he thought was obvious, that if he were in Rishi’s shoes, he would want to determine the value of the shareholding as soon as possible because it was likely to increase in value. Zysman said that Rishi’s response was that “he was never going to pay Carlos for any amount for his shares,” although Rishi denies this.
44The alleged impropriety of this conversation was not raised by the applicants until May, 2019, even though Rishi swore affidavits in June and July 2018 when it could have been raised. There is no evidence that Zysman’s comments had any impact on Rishi, nor do they suggest bias or advocacy by Zysman. While I agree with the arbitrator that “it would have been preferable for him not to have made the comment” it was not unreasonable of the arbitrator to have found the comment to be “relatively innocuous,” and Zysman did not stray from his function as an independent and unbiased expert.
45The applicant’s complaint about Zysman becoming an advocate and “practising law” stems from his reference to case law regarding the use of hindsight in a letter he wrote to Carlos’ counsel that was relied on to support the argument that financial statements be made available to the valuator. Although Zysman does refer to some case law and summarizes legal principles in his letter, this does not turn him into an advocate or a lawyer. To do their job, forensic accountants must be familiar with legal principles and case law dealing with accepted approaches to damages, and Zysman’s discussion is confined to summarizing those principles, as found by the arbitrator. In my view, having read the impugned statements, Zysman was simply acting as a professional accountant, not acting as an advocate or practising law, as is contemplated by the Law Society Act, R.S.O. 1990, c. L.8, s. 1(8)1.
Conclusion
Conclusion
46Accordingly, I see no basis to interfere with or set aside the arbitrator’s decisions, and the application is dismissed. Should the parties be unable to agree on costs, the respondent may provide me with written submissions not exceeding 3 pages double-spaced, not including supporting materials, within 21 days of the release of these reasons, and the applicant may respond in similarly limited submissions 14 days after the receipt of the respondent’s submissions.
Paul Schabas J.
Date: September 15, 2020