Court File and Parties
COURT FILE NOS.: CV-19-633087 & CV-20-00637815 DATE: 20210323 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: SUDHIR THOMAS, in his capacity as the SELLER REPRESENTATIVE Applicant – and – ACCENTURE INC. and FASKEN MARTINEAU DUMOULIN, solely in its capacity as ESCROW AGENT Respondents
AND BETWEEN: ACCENTURE INC. Applicant
- and - SUDHIR THOMAS, in his capacity as SELLER REPRESNTATIVE, TANIA PRSA and FASKEN MARTINEAU DUMOULIN, solely in its capacity as Escrow Agent Respondents
COUNSEL: Neil Rabinovitch, for the Applicant/Respondent Sudhir Thomas Alan Merskey, for the Respondent/Applicant Accenture Inc. William Gale, for Tania Prsa
HEARD: January 24, 2021
J. Steele J.
Endorsement
[1] This matter commenced with two applications that were heard together arising out of a share purchase transaction that closed on August 23, 2017:
a. An application by Sudhir Thomas, in his capacity as the Seller Representative, (the “Escrow Application”) for, among other things, an order requiring the Escrow Agent to deliver the Indemnity Escrow Account, with interest to the applicants; and
b. An application by Accenture (the “Indemnity Application), including Ms. Tania Prsa as a party, seeking certain relief including a declaration that Mr. Thomas, in his capacity as Seller Representative, is responsible to indemnify Accenture for certain damages that may be awarded in the Prsa Claim (defined below) and a declaration that the indemnification obligations are to be paid out of the Indemnity Escrow Account.
[2] The two applications were heard together on July 21, 2020. At that time Tania Prsa, a party to the Indemnity Application, through her counsel, was served with notice of these proceedings, but did not attend nor file materials.
[3] The applications could not be determined without the determination of certain issues related to claims raised by former shareholder and employee, Tania Prsa. Accordingly, I ordered a mini-trial, which was held on January 24, 2021.
[4] Accenture and Mr. Thomas, in his capacity as the Seller Representative, seek a declaration that:
a. The amounts previously paid to Ms. Prsa as a bonus are not to be included as part of any alleged wrongful dismissal compensation calculations; and
b. Ms. Prsa is not entitled to be reimbursed for any business expenses prior to the share sale.
[5] Mr. Thomas, in his capacity as the Seller Representative, further seeks a declaration that there has been no breach of the representations and warranties contained in the SPA and accordingly that the Escrow Agent pay the Indemnity Escrow Amount, plus interest.
[6] Ms. Prsa seeks an order:
a. Finding and declaring that amounts previously paid to Ms. Prsa as a bonus, shareholder or otherwise, are to be included as part of any alleged wrongful dismissal compensation calculations; and
b. Ms. Prsa is entitled to be reimbursed $63,307.78 for business expenses that she incurred prior to the share sale.
[7] In terms of procedure, the parties filed affidavits with exhibits for the witnesses in advance of the mini-trial. At trial there was cross-examination of 3 of the witnesses and reply. The parties were extremely well-prepared and the mini-trial proceeded efficiently. I note the embracing of the shift in culture that the Supreme Court of Canada noted in Hryniak v. Mauldin, 2014 SCC 7, 1 S.C.R. 87:
“Increasingly, there is recognition that a culture shift is required in order to create an environment promoting timely and affordable access to the civil justice system. This shift entails simplifying pretrial procedures and moving the emphasis away from the conventional trial in favour of proportional procedures tailored to the needs of the particular case. The balance between procedure and access struck by our justice system must come to reflect modern reality and recognize that new models of adjudication can be fair and just.”
Background
[8] A share purchase agreement was entered into among Tania Prsa, 2592092 Ontario Inc. (“Ms. Prsa’s Holdco”), Anadi Shrivastava, 2592091 Ontario Inc. (“Mr. Shrivastava’s Holdco”), Sudhir Thomas, 2592090 Ontario Inc. (“Mr. Thomas’ Holdco”) (collectively, the “Sellers”) and Accenture Inc. (“Accenture”) for the sale of all of the issued and outstanding shares of Verax by the Sellers to Accenture, dated as of August 23, 2017 (the “SPA”). Mr. Thomas was named as the Seller Representative. Accenture purchased all of the shares of Verax for approximately $23 million.
[9] Immediately prior to the purchase of the Verax shares by Accenture, the shareholdings were:
| Shareholder | Number | Share Class |
|---|---|---|
| Sid Thomas | 835,000 | Special |
| Mr. Thomas’ Holdco | 600 | Class 1 Common |
| Mr. Shrivastava | 835,000 | Special |
| Mr. Shrivastava’s Holdco | 200 | Class 2 Common |
| Ms. Prsa | 835,000 | Special |
| Ms. Prsa’s Holdco | 200 | Class 3 Common |
[10] The SPA provided for an indemnification escrow fund (the “Indemnity Escrow Account”), which was to be held in escrow for eighteen months (plus one business day) following closing and was to be released on February 25, 2019, provided that there were no pending claims at such time.
[11] Ms. Prsa was on maternity leave commencing July 31, 2016 through the share sale transaction. Accordingly, Ms. Prsa did not have a material role in the negotiation of the sale or the drafting of the SPA. Ms. Prsa had been the president of Verax.
[12] On December 6, 2017, while still on leave and before negotiating any new employment terms with Accenture, Ms. Prsa’s employment was terminated. As a result of this termination, Ms. Prsa commenced a wrongful dismissal claim against Verax (the “Prsa Claim”).
[13] Ms. Prsa’s annual salary at Verax at the time of the sale transaction was $150,000.00 plus “bonus”, which was a distribution of a portion of the EBITDA (earnings before interest, taxes, depreciation and amortization) among the Verax shareholders.
[14] Accenture asserted an indemnity claim under the SPA arising from the Prsa Claim. Accenture took the position that certain allegations made under the Prsa Claim are contradictory to the representations and warranties made in the SPA, which contained specific representations regarding Ms. Prsa’s employment income, among other things.
[15] The SPA contains a basket clause pursuant to which an indemnity claim cannot be asserted until the losses exceed $136,250.00 (the “Basket Clause”).
[16] At the time of closing of the sale of the Verax shares, $2,200,000 of the purchase price was set aside by the Sellers into the Indemnity Escrow Account. Since that time, some of the Indemnity Escrow Account has been released to the Sellers in accordance with section 2.6 of the SPA. Currently, there is $1.4 million (plus interest) remaining in the Indemnity Escrow Account.
[17] Mr. Thomas, on behalf of the Sellers, seeks to have the remaining escrow funds released. There is, however, uncertainty regarding the Prsa Claim, specifically with regard to (i) the issue of “bonuses” previously paid to Ms. Prsa by Verax and whether these are to be included as part of any alleged wrongful dismissal calculations, and (ii) her entitlement to certain unreimbursed expenses.
[18] Accenture and Mr. Thomas were aligned on their position before the Court related to the issues of Ms. Prsa’s bonus entitlement and expense reimbursement entitlement.
[19] Verax was dissolved by articles of dissolution dated February 12, 2018.
[20] The SPA contained an “Entire Agreement” clause, stating:
This Agreement (including the Schedules, Annexes and Exhibits hereto), the other Transaction Documents and the Confidentiality Agreement constitute the entire agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, whether written or oral, relating in any way to the subject matter hereof or thereof.
Analysis
[21] The remaining funds that are in the Indemnity Escrow Account have not been released due to the uncertainty surrounding the Prsa Claim. Under the SPA, Accenture, as purchaser, is entitled to be indemnified by the Sellers to the extent that the Sellers have breached the representations and warranties given in the SPA. Accordingly, Accenture’s position was that the amount remaining under the Indemnity Escrow Fund should not be released to the Sellers due to the pending Prsa Claim and the alleged breach of the representations and warranties related to Ms. Prsa’s salary and expenses, by the Sellers.
[22] There are two issues in dispute related to the Prsa Claim:
a. Whether amounts previously paid by Verax to Ms. Prsa as a bonus, shareholder or otherwise, are to be included as part of any alleged wrongful dismissal compensation calculations.
b. Whether there are any unreimbursed business expenses to which Ms. Prsa has entitlement related to her employment with Verax prior to the share sale, and if so, the quantum.
[23] By way of background, Verax, Mr. Thomas, Mr. Shrivastava and Ms. Prsa entered into a shareholders’ agreement related to Verax, dated September 2, 2004 (the “Verax Shareholders Agreement”).
[24] Article 4.2 of the Verax Shareholders Agreement contemplated that while Mr. Thomas, Mr. Shrivastava and Ms. Prsa (the “Selling Shareholders”) were shareholders of Verax, the company would contribute into an Employee Profit Sharing Plan (an “EPSP”) an amount equal to the amount by which Verax’s income exceeded the amount of income that was eligible for the small business deduction for income tax purposes. The funds in the EPSP would then be distributed pro-rata based on their equity percentage to the shareholders. Each of the shareholders would then lend Verax 40% of the amount they received from the EPSP as shareholders’ loans.
[25] As set out below, the EPSP was never implemented. Instead profits of Verax were distributed on a quarterly basis to the shareholders through a tax-oriented bonus program, known as “bonusing down”.
Characterization of the Verax “Bonus” payments
[26] It is undisputed that while Ms. Prsa, Mr. Shrivastava and Mr. Thomas owned the shares of Verax certain “bonus” payments were made to the three shareholders. What is disputed is the characterization of these payments. Ms. Prsa argues that she would be entitled to compensation in respect of these “bonus” payments in respect of her alleged wrongful dismissal claim in her employment capacity. However, Mr. Thomas and Accenture argue that these “bonus” payments were distributions of shareholder profits and not bonuses in respect of employment.
[27] Ms. Prsa correctly points out that where a business is sold pursuant to a share transaction (as opposed to an asset sale), the corporate identity of the employer is unaffected and the terms and conditions of an employee’s employment remain the same. However, where the employee is also a shareholder, like Ms. Prsa, the entitlement to share in the profits of Verax in the capacity of shareholder of the business are sold with the shares.
[28] Ms. Prsa argues that had her employment with Verax not been terminated, some new bonus plan would have been put in place to replace the “bonus plan” under the Verax Shareholder Agreement. However, this argument presumes that the plan was an employee bonus program that was terminated by her employer. That is not the case here. In this case, Ms. Prsa ceased to be a shareholder when she sold the shares. The Court of Appeal has established that once an employee has transferred their shares, shareholder bonuses or dividends do not form part of wrongful dismissal compensation. The right to such payments ceases when the shareholder ceases to be a shareholder: (Evans v. Paradigm Capital Inc., 2018 ONCA 952).
i. Evidence of Stephen Rosenberg, Verax’s Accountant
[29] Mr. Rosenberg is a chartered accountant, certified public accountant and partner at RSP, LLP. He provided accounting services to Verax since June 17, 2003. He was not tendered as a Rule 53 expert. Rather, he gave a factual account of the arrangements that had been made by Verax with respect with the bonus structure to shareholders. I found him to be a forthright witness who was knowledgeable about the circumstances giving rise to the company’s bonus structure. I give his evidence substantial weight.
[30] Mr. Rosenberg’s evidence was that article 4.2 of the Verax Shareholders Agreement was not implemented, and the Verax shareholders instead implemented a more tax efficient means of distributing profit out to the shareholders. Specifically, surplus income above the small business limit was distributed to the Verax shareholders by bonusing down (as opposed to through the payment of dividends). Mr. Rosenberg’s evidence was that this method of bonusing down was commonly used as means to avoid punitive double taxation from dividends and had been “blessed” by Revenue Canada (the predecessor to Canada Revenue Agency). Under this technique, the distribution of profit to shareholders of the company was done as “bonuses” to the shareholders, and not as dividends. He stated “[s]imply put, CRA allowed taxpayers to implement a different means for profit distribution to shareholders in order to avoid double taxation from dividends and the resulting effective 56% tax rate. This was done by permitting the distribution to occur as a bonus to the shareholders and not as a dividend”. The effect of this method of distributing profits to the shareholders was to reduce the tax burden on such distributed profits by approximately 10%.
[31] Mr. Rosenberg’s evidence was that on a monthly basis his office would review Verax’s internally prepared financial statements and provide Mr. Thomas with a statement of net income. Those monthly net income calculations were used to calculate the quarterly “bonus” that was paid to each of Mr. Thomas, Mr. Shrivastava and Ms. Prsa in their capacity as shareholders. Each quarter, Verax’s profit would be calculated and 60% of the previous quarter’s net income would be paid to the shareholders (based on their percentage ownership of the company) as a bonus to avoid the double taxation issue that would have occurred if the same profits had been distributed as dividends to the Selling Shareholders.
[32] Mr. Rosenberg indicated that on February 6, 2017 he met with Accenture’s due diligence team to explain that “Verax had been bonusing out profit to the shareholders in order to tax effect distributions in excess of the small business limit”.
[33] Mr. Rosenberg was consistent in his evidence that the “bonus” payments were made quarterly to the Verax shareholders and were in fact distributions of profit made based on the proportional shareholdings of the 3 Verax shareholders. This is also consistent with Mr. Thomas’ evidence. Mr. Thomas stated in his affidavit that “[a]t all times the manner in which these distributions were characterized was driven solely by the most tax efficient manner of distributing these profits to the three of us, which was determined by Verax’ accountant, Mr. Rosenberg”.
[34] Ms. Prsa’s evidence was that she understood that the distributions were made under a bonus plan. Ms. Prsa’s position is that the quarterly payments were made under the employee profit sharing plan as employment income. In this regard, Ms. Prsa points to the fact that the payments were taxed at source as employment income and included in her T4s as employment income. The fact that these amounts were taxed as employment income is not disputed. As mentioned above, Mr. Rosenberg’s evidence is that the EPSP was not implemented and instead shareholder quarterly payments were structured in this manner for tax efficiency purposes. The end result of this tax structure was that the profit distributions made to the shareholders had to be captured on the T4 of the recipient. Although the distributions were treated and taxed as employment income for tax purposes, the bonusing down structure was used as more tax efficient means of distributing profits to the shareholders in order to avoid the double taxation that would have resulted had corporate dividends been paid instead.
[35] I prefer Mr. Rosenberg’s evidence over that of Ms. Prsa on the subject of whether these quarterly distributions were employee bonuses. Mr. Rosenberg is a professional with knowledge of the facts. He was able to explain, fully and adequately, both why and how the “bonus” structure was put into place. I accept his evidence on the characterization of these distributions to the shareholders. There is no evidence of the EPSP contemplated in the Verax Shareholders Agreement having been established. The evidence shows quarterly payments made to the Selling Shareholders in proportion to their shareholdings.
ii. The Verax Shareholders Agreement
[36] Mr. Thomas and Accenture point to the provisions of the Verax Shareholders Agreement that required the Selling Shareholders to be shareholders in order to receive a payment pursuant to the agreement. They submit that because Ms. Prsa was no longer a shareholder at the time of her termination of employment, having sold her shares to Accenture, any plan applicable pursuant to the Verax Shareholders Agreement would not apply. Specifically, section 4.2 of the Verax Shareholders Agreement provides:
The Corporation shall, during the term of each Shareholder’s employment hereunder, pay to the Shareholder an annual bonus.
[37] They submit that the express language used in the Verax Shareholders Agreement required Ms. Prsa to be a Shareholder in order to be entitled to a “bonus”. I agree.
[38] Mr. Thomas and Accenture further submit that the Verax Shareholder Agreement and any entitlements thereunder terminated when the shares were sold to Accenture. Article 18 of the Verax Shareholders Agreement provides that the agreement terminates when there is only one remaining shareholder of the corporation. After the sale of the Verax shares by the Sellers to Accenture, there was only one shareholder, Accenture. Therefore, the Verax Shareholders Agreement was terminated under Article 18.
[39] Further, Mr. Thomas and Accenture submit that any future entitlement to distributions of Verax profits was sold by the Sellers when they sold the shares to Accenture. On the closing of that transaction, Ms. Prsa received a total of $4,548,727.00 partly in her personal capacity and partly through her personal holding company as shareholder.
[40] Ms. Prsa argues that the fact that the bonus plan was located in the Verax Shareholders Agreement is not determinative of whether the plan is properly considered a shareholder or employee plan. In this regard, Ms. Prsa points to Heslop v. Cooper’s Crane Rental Ltd., [1997] 30 C.C.E.L. (2d) 279 (ONCA) (at para. 8) where the Court of Appeal determined that an employee’s rights contained in a share purchase agreement formed part of his employment contract. In Heslop, the shareholders’ agreement contemplated that the minority shareholders would be employees of the company. Mr. Heslop was a minority shareholder and under the shareholders agreement, the share purchase arrangement formed part of the employment contract between Mr. Heslop and the company. The Court of Appeal stated:
“…As an employee, he purchased a minority shareholder’s position in a private company for a considerable sum of money. Employee participation in share purchase arrangements may form part of the employment contract… Cooper’s Shareholder’s Agreement contemplated that the minority shareholders would be employees, and we conclude that, in this case, the share purchase arrangement formed part of the employment contract between Heslop and Cooper’s. On his termination without cause and without adequate notice, Heslop was entitled to damages for this wrongful act. Part of those damages includes compensation for this minority shares which have now no value in his hands. In the unique circumstances of this case, Heslop should be compensated for the value of those shares as of the date of his termination. (emphasis added)
[41] Heslop is entirely distinguishable from the instant case. In Heslop the shareholders’ agreement contemplated that the minority shareholders, including Mr. Heslop, would be employees of the company. When Mr. Heslop was terminated there was no ability for him to force the company to purchase his shares from him (although the company could have forced him to sell). He requested that the company buy his shares and was asked to submit an offer, which he did. The parties could not come to an agreement due to a sticking point over a release. The court ensured that Mr. Heslop received compensation for these minority shares. In contrast, in the instant case, Ms. Prsa was one of three individual shareholders (plus their holdcos) who received compensation for the sale of her shares.
[42] Ms. Prsa also argues that the test set out by the Supreme Court of Canada in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, 449 D.L.R. (4th) 583 should be applied here. The two-part test set out in Matthews is used to determine whether an employee is entitled to bonus compensation over their reasonable notice period. In that case the court considered whether the dismissed employee was entitled to compensation for a lost LTIP (long term incentive plan) payment. In my view the test set out in Matthews is not applicable in the instant case. In order for that test to be applicable, the payment in question would have to be an employee bonus or benefit. As set out above, the payments made to the 3 shareholders were distributions of profit structured as a “bonus” for tax purposes.
[43] Furthermore, even if the test in Matthews applies, Ms. Prsa was not eligible at the time of her termination for the “bonus” under the Verax Shareholder Agreement, as she was not a shareholder at the time. The agreement is clear that the bonus or EPSP applies to shareholders.
iii. The SPA
[44] Ms. Prsa took issue with her representation during the negotiation of the SPA. She relied on Mr. Thomas as the seller representative to protect her interests. In her affidavit, Ms. Prsa stated that she “had no role in the negotiation of the sale or the drafting of the SPA and relied upon Mr. Thomas as Seller Representative to protect [her] interests”. In his testimony, Mr. Thomas acknowledged that Ms. Prsa was dependent on him as the seller representative. The SPA also confirms Mr. Thomas’ role as the representative of the Sellers.
[45] Ms. Prsa stated that information about the SPA was routinely withheld and, despite Mr. Thomas and Mr. Shrivastava negotiating lucrative new employment contracts for themselves with Accenture prior to the close of the transaction, Ms. Prsa did not receive a new employment agreement (so the terms of her Verax employment contract continued). Mr. Thomas’ evidence was that Ms. Prsa was provided with any documents she requested. Although Ms. Prsa was not involved in the negotiations, and only received incomplete versions of the SPA through most of the negotiations, she did receive a finalized SPA with all the schedules two days prior to closing. Ms. Prsa executed the SPA. She sold her Verax shares to Accenture on the terms set out in the SPA for consideration. I note parenthetically that if there was an issue with Mr. Thomas’ representation of Ms. Prsa in the negotiation of the SPA, this would presumably be an issue as between Mr. Thomas and Ms. Prsa.
[46] Pursuant to article 3 of the SPA, the Sellers provided certain representations and warranties to Accenture. Under article 6 of the SPA, the Selling Shareholders agreed to indemnify Accenture and Verax for any breach or inaccuracy of such representations and warranties. Ms. Prsa, as one of the Selling Shareholders, made these representations and warranties to Accenture and agreed to indemnify Accenture. Under Section 3.15(a) of the SPA, the Selling Shareholders and Verax represented to Accenture that:
a. Schedule 3.15(a) sets forth a list of, as of the date hereof except as set out below, (i) all Employees and contractors of the Company…, (ii) the position, date of hire, current annual remuneration…, including any bonus, contingent or deferred compensation, and estimated or target annual incentive compensation of each such person,… (vii) the total annual compensation for each officer of the Company during the fiscal year ending May 31, 2017, (including any bonus, contingent or deferred compensation), and (v) the current total annual compensation of each director or manager of the Company (including any bonus, contingent or deferred compensation).
[47] Schedule 3.15(a) to the SPA discloses a chart listing Ms. Prsa’s salary as $150,000. The schedule also states that “Profit sharing for the shareholders excluded from the report”. In Schedule 3.15(a) there is another chart entitled “Total Annual Compensation for the Officers” (FY2017), which discloses Ms. Prsa’s total annual compensation of $393,242.75, of which $150,000 was on account of regular salary and $243,242.75 on account of bonus (which when read together with the earlier chart is the profit sharing for the shareholders).
[48] In addition, in the course of due diligence prior to the closing of the transaction, Verax disclosed to Accenture the monies received by the three shareholders in their capacity as shareholders in addition to their salaries from employment. Ms. Prsa in her affidavit notes that the figures provided in the data room match the employment income listed in her T4s. However, as discussed above, there is no dispute that the “bonus” amounts paid under the bonusing down structure were taxed as employment income.
[49] Further, the Sellers and Verax represented in section 3.16 of the SPA that Schedule 3.16 listed “a true, complete and correct list of each… equity or equity-based compensation, stock option, stock purchase, employee stock ownership, bonus or other incentive compensation, employment, consulting, profit sharing… plan, program, arrangement or policy and each “Employee Benefit Agreement” (as defined in the SPA). There was no executive bonus plan or other benefit plan of the nature alleged by Ms. Prsa listed in Schedule 3.16. Presumably this was because the “bonuses” paid to the shareholders were profit distributions in their capacity as shareholders.
[50] The representations and warranties set out in the SPA and the due diligence disclosure provided to Accenture by Verax and the Sellers is consistent with the position of Accenture and Mr. Thomas that the “bonus” payments made by Verax to the Selling Shareholders prior to the sale were distributions of profit to the Verax shareholders and not bonuses in their capacity as employees of Verax. The representations and warranties and the due diligence disclosure is also consistent with Mr. Rosenberg’s evidence that the EPSP was never established and the shareholders used the tax preferred method of “bonusing down” to distribute profits to the shareholders through bonuses instead of dividends.
[51] Accordingly, based on the evidence of Mr. Rosenberg, the terms of the Verax Shareholders Agreement and the SPA, I conclude that the “bonus” distributions paid to Ms. Prsa while at Verax were shareholder distributions of profit and not compensation from employment.
Ms. Prsa’s Expenses
[52] Ms. Prsa also claims that she is owed $63,307.78 in unpaid business expenses. Ms. Prsa submitted these business expense claims on September 5, 2017 shortly after the closing of the transaction. The expenses go back several years, some as far back as 2010. The expenses are generally golf membership, fitness, telecommunications, restaurants, coffee, taxi and travel/conference expenses.
[53] While at Verax the procedure for submitting expenses was to provide the receipts to the assistant who would prepare the expense report, which was reviewed and approved by Mr. Thomas. Ms. Prsa testified that expenses were discussed at regular meetings so that Mr. Thomas was generally aware of the nature of the expenses.
[54] There was no formal expense policy at Verax. There were emails from Mr. Thomas requesting that expenses be submitted on a regular basis; however, his requests were not consistent. He stated in various emails that expenses must be submitted monthly, within two months, and only in the months of February, April, June, August, October and December. Mr. Thomas stated that the management of expense reimbursement at Verax was reasonably fluid.
[55] In an email to Verax management on January 7, 2016, Mr. Thomas wrote that all expenses are to be filed by the end of February, April, June, August, October and December, and that “[e]xpenses that are not filed by these dates will not be reimbursed”. He further pointed out that it is not a time-consuming process for them to give their weekly receipts to their assistant. In another email from Mr. Thomas to Ms. Prsa and Mr. Shrivastava, Mr. Thomas reminded them that all expenses over $500 must be pre-approved or else they will not be reimbursed. In addition, he reminded them that he will not be entertaining expenses that are more than two months old.
[56] Ms. Prsa’s evidence was that after these emails she and Mr. Thomas had discussions regarding her expenses. Her evidence was that they decided that she could catch up on her expenses in August prior to going on maternity leave. In addition, Ms. Prsa’s evidence was that as she was a key sales/marketing person at Verax, her expenses were generally in excess of the $500 pre-approval limit and Mr. Thomas was aware of this.
[57] Ms. Prsa was candid in her evidence that she forgot about these older receipts in her desk drawer. As set out above, there was some fluidity in the expense reimbursement timing at Verax. Further, as Verax was a closely held company, many items were addressed through informal discussions among Ms. Prsa and Mr. Thomas.
[58] Ms. Prsa stated that Mr. Thomas knew that she had unpaid business expenses that were yet to be submitted when the transaction closed. Ms. Prsa’s evidence was that she made Mr. Thomas aware of her unsubmitted expenses prior to her maternity leave and that Mr. Thomas asked her to submit them before she commenced her leave. However, Ms. Prsa gave birth six weeks early, before she had an opportunity to submit her expenses. Ms. Prsa stated that she also advised Mr. Bleiwas, counsel to Mr. Thomas, of the outstanding expenses and Mr. Bleiwas told her that he would inform Mr. Rosenberg so that money could be put aside for the reimbursement of these expenses. In the cross examination of Mr. Rosenberg, he testified that he received one email related to the expenses that he sent along to the lawyer; however, his evidence was that he was not asked to set aside money at closing for Ms. Prsa’s expenses. Mr. Thomas’ evidence was that he knew that Ms. Prsa had unreimbursed expenses and that he had asked her to submit them. He was unable to recall a conversation regarding setting aside money for Ms. Prsa’s expenses.
[59] Mr. Thomas was aware of Ms. Prsa’s outstanding business expenses. I accept Ms. Prsa’s evidence that she understood that these expenses would be reimbursed and that there was to be money set aside for such expenses on closing of the transaction. However, this was not done, nor does the SPA account for this.
[60] Accenture argues that Ms. Prsa’s outstanding business expenses were not disclosed to Accenture under the SPA, contrary to the Sellers’ representations that Verax had no material undisclosed liabilities.
[61] In addition, section 7.4 of the SPA provides for a comprehensive release by each of the Sellers in favour of Verax. The release references a variety of claims, including expenses:
As a material inducement to Buyer to enter into this Agreement, each Seller hereby,… agrees not to sue and fully releases and forever discharges the Company [Verax] and each of its directors, officers, employees, members, managers, shareholders, agents, assigns and successors, past and present… with respect to and from any and all Proceedings, demands, rights, liens… Liabilities, debts, expenses… and Losses of whatever kind or nature in law, equity or otherwise, whether now known or unknown, and whether or not concealed or hidden…
[62] Accenture argues that this is a complete bar to Ms. Prsa now claiming these expenses. Accenture submits that Ms. Prsa has received the consideration under the agreement in exchange for her Verax shares and a release.
[63] Ms. Prsa’s evidence was that she had her own counsel involved only at certain points in the period leading up to the execution of the SPA. She had counsel when the SPA was executed. She argues, however, that she was pressured into signing the agreement. In addition, she submits that this is not the type of expense she would have thought she was releasing by signing the SPA. Her understanding was that these out of pocket expenses would be reimbursed. She understood that money was being set aside to cover her expenses.
[64] As between Ms. Prsa and Accenture, I agree that Ms. Prsa is bound by this release and the entire agreement clause. In the course of determining whether to purchase Verax, Accenture conducted diligence, and then included representations and warranties in the SPA, including that there were no material undisclosed liabilities, to give Accenture certainty in the transaction. Accenture was entitled to know the assets, liabilities and risks of the company it was buying. Ms. Prsa, one of the selling shareholders, executed the SPA, which contained the release, and she received consideration. Ms. Prsa was the president, had counsel at the time she executed the SPA and had 2 days to review the final agreement. She did not ask for more time – she executed the SPA. She cannot now claim these amounts from Accenture.
[65] The applications before me address certain rights under the SPA as between the various parties and the potential interplay with the Prsa Claim (which is against Accenture). Ms. Prsa’s evidence was that she informed Mr. Thomas of these outstanding expenses and was informed that they would be addressed. To the extent that Ms. Prsa is of the view that her interests were not represented by Mr. Thomas in the negotiation of the SPA, as mentioned above, this would be an issue as between Mr. Thomas and Ms. Prsa. In addition, although I have not relied on this to come to my conclusion, I do not find that she has provided a satisfactory explanation for why she did not submit claims in a more timely way over a period of seven years.
Indemnity Escrow Account
[66] As set out above, Mr. Thomas seeks an order requiring the Escrow Agent to deliver the Indemnity Escrow Account with interest to Mr. Thomas in his capacity as the seller representative. Given that I have determined that Ms. Prsa’s salary from employment would not have included the shareholder “bonus” distributions, there is no breach of the applicable representation and warranty in the SPA. Similarly, as I have determined that Ms. Prsa does not have recourse as against Accenture for the expense claims, there is no breach of the applicable representation and warranty in the SPA. Accordingly, the Indemnity Escrow Account should be released in accordance with section 2.6 of the SPA.
Disposition and Costs
[67] In the result therefore:
a. The “bonus” distributions paid to Ms. Prsa while at Verax were distributions of shareholder profits and therefore are not to be included as part of any alleged wrongful dismissal compensation calculations.
b. Ms. Prsa has unreimbursed business expenses related to her employment with Verax prior to the share sale in the amount of $63,307.78. However, due to the release in the SPA executed by Ms. Prsa, she cannot now claim these expenses from Accenture.
c. The remaining funds in the Indemnity Escrow Account shall be released to the applicant Mr. Thomas, subject to any further orders needed to distribute those funds in accordance with the SPA.
[68] If any other orders are sought, the parties must notify me within 7 days and we will convene a case conference.
[69] If the parties are unable to agree on costs by April 19, 2021, they may deliver written submissions by delivery to my judicial assistant according to the following schedule: (i) any party seeking costs, shall, on or by April 30, 2021, serve and file their Cost Outline, together with any supporting material and their written submissions of no more than 3 pages with authorities hyperlinked; (ii) any party against whom costs are sought shall, on or by May 12, 2021, serve and file their responding written submissions of no more than 3 pages with authorities hyperlinked.
J. Steele J.
Released: March 23, 2021