COURT FILE NOS.: CV-16-112592-00CL

CV-16-11592-00CL

DATE: 20210315

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: TRENT LEIS, Applicant/Respondent in CV-16-112592-00CL

AND:

JEI LEE, Respondent/Applicant in CV-16-11592-00CL

AND:

CERINE TSO, MAXPHERUS CONSULTING INC., and MODOSECURITY INC., Respondents in CV-16-11259-00CL

BEFORE: Justice Cavanagh

COUNSEL: Jean-Alexander De Bousquet, for Trent Leis

Lars Brusven for Jei Lee and other respondents in Leis application

HEARD: March 12, 2021

ENDORSEMENT

Introduction

[1] There are two applications before me.

[2] Trent Leis (“Leis”), the applicant in one application, and Jei Lee (“Lee”), the applicant in a separate application, were the only two shareholders in (3S) Salient Security Solutions Inc. (“Salient”), a company they set up together to provide information technology security services to clients. There was a falling out between the two shareholders, and they entered into a dialogue about their differences, including in relation to a proposed a sale of shares under a unanimous shareholders agreement. Each shareholder took actions to protect his interests and to undermine the interests of the other shareholder. Ultimately, Salient stopped carrying on business. It is a dissolved corporation.

[3] Each shareholder brings a separate application for relief under the oppression remedy in s. 241 of the Canada Business Corporations Act, R.S.C., 1985, c. C-44 (“CBCA”).

[4] For the following reasons, each application is dismissed.

Factual background

[5] Salient was incorporated on October 23, 2013. Lee was designated as the sole director and officer and he was issued 51 of the 100 shares of Salient. Leis was issued the remaining 49 shares. The two shareholders signed a Unanimous Shareholders Agreement on November 1, 2013 (“USA”). The shareholders agreed that as Salient entered into contracts to provide consulting services, each shareholder who provided services would be compensated by Salient for work billed to clients at a rate of $100/hour. Salient would invoice clients for services performed.

[6] Leis’ evidence is that Lee would be primarily responsible for marketing activities and Leis would be responsible for activities including creating policies and procedures, negotiating contracts and agreements, and overseeing the preparation of accounting and financial records.

[7] Each shareholder was required to contribute $15,000 US to Salient to fund a $30,000 US payment that needed to be made to the Payment Card Industry Council (“PCI Council”). The PCI Council is an organization formed by credit card companies to regulate security measures taken by merchants and financial institutions to protect the confidentiality of cardholder information. Accreditation by PCI Council enabled Salient to offer services in validating the adherence of merchants and financial institutions to the PCI Council’s Data Security Standard.

[8] In early 2014, Salient successfully bid on a number of projects and Leis and Lei began to perform work for clients on behalf of Salient.

[9] Each of Lee and Leis made contributions to Salient towards payment of the amount needed to fund the $30,000 US payment to be made to PCI Council. Lee contributed $15,000 US. Leis’ evidence is that he had already performed work for which Salient had received payment from its clients but for which he had not been paid and it was agreed that the value of this work would be credited against his portion of the funds to be paid to the PCI Council. His evidence is that he paid the remaining portion of $10,500 US.

[10] Each of Leis and Lee made withdrawals from Salient’s account over the following months which were said to have been in repayment of capital start-up loans and in payment for consulting services. The two shareholders disagree about the propriety of these transactions.

[11] On January 22, 2015, Salient received a deposit of retainer funds from a client, VersaPay Corporation, in the amount of $10,500. On February 23, 2015, Leis withdrew $10,000 from Salient. This withdrawal reduced the amount in Salient’s account to an amount less than the deposit. Leis’ evidence is that the withdrawal was partial payment of the remaining $12,000 he was owed under an agreement made in August 2014 that each would be entitled to withdraw $17,000 (CDN) from Salient’s account in compensation for client work they had performed but for which they had not been paid. Lee disputes this agreement. Leis sent Lee an email notifying him of the withdrawal. Lee’s evidence is that he became alarmed when Leis told him that Salient was unable to make its upcoming HST payment and that he became even more alarmed when Leis told him that he planned to withdraw $10,000 which would involve accessing client retainer funds contrary to the terms upon which the funds were held.

[12] Lee’s evidence is that he took steps to obtain Salient’s full financial records and, as a result of his review of these records, he had serious concerns about Leis’ management of the corporate accounting of Salient. On April 6, 2015, Lee sought to bring the partnership to an end by invoking the “Shotgun” provision in the USA and offering to buy Leis’ shares, or sell his own shares, for a stated price per share. Email communications followed. On April 17, 2015, Leis sent an email accepting Lee’s offer to purchase his shares. Further emails were exchanged in relation to the share purchase. Leis took the position that he was owed approximately $30,000, in addition to payment for his shares, as payment for consulting services to clients. Lee objected to this demand.

[13] On April 26, 2015, Leis objected to Lee’s refusal to pay him the additional $30,000 for client work. He proposed arbitration. Lee did not agree to arbitration which, under the USA, was not mandatory. The two shareholders were at a standstill. The “Shotgun” share purchase did not proceed as Lee withdrew the offer.

[14] On April 30 and May 1, 2015, Lee and Leis exchanged emails about Leis’ withdrawal of $10,000 from Salient which had encroached on money received by Salient from its customer, VersaPay, as a retainer. Leis disputed that he had acted improperly, and reminded Lee that he was owed money by Salient.

[15] On May 2, 2015, Leis reviewed Salient’s financial records and discovered that he had overstated the amounts owing by Salient to him and to Lee. He disclosed this information to Lee. The actual amount was substantially less than the $30,000 which Leis had required to be paid as part of the share purchase. In the course of this review, Leis discovered that his access to Salient’s bank account had been terminated. Lee justified taking this action on the basis that Leis had misappropriated client retainer funds.

[16] On May 6, 2015, Leis informed Lee that he had exercised rights under the USA to nominate himself as a director, purchase one of Lee’s shares for one dollar, and purchase one additional share from Salient at a cost of one dollar. Leis advised Lee that he was now the majority shareholder and a director of Salient.

[17] On June 8, 2015, Leis notified Lee by email that pursuant to the USA, Lee was no longer authorized to work for Salient or to withdraw any amounts from Salient without his review and approval. Leis relied upon a provision in the USA which states:

Except as expressly permitted by this Agreement, no officer, director, Shareholder or persons related thereto as defined by the Income Tax Act (Canada) shall be employed by the Corporation or be paid any salary, wage, commission, bonus or other remuneration by the Corporation except upon the unanimous consent of the directors;

[18] Leis took steps to remove Lee as the designated contact for Salient with PCI Council. Leis also removed Lee’s access to his Salient email account after June 8, 2015. Lee asked to have this access reinstated on June 26, 2015, but Leis denied this request.

[19] On August 13, 2015, Lee held a shareholders’ meeting and passed a resolution dissolving Salient. Lee did not give Leis notice of this meeting. Lee took the position that Leis’ shares were subject to a corporate lien because of the alleged misappropriation of corporate funds and refusal to return those funds.

[20] On September 22, 2015, Industry Canada issued a Certificate of Dissolution pursuant to the CBCA certifying that Salient is dissolved pursuant to section 210 (3) thereof.

[21] On May 20, 2015, Lee’s spouse, Cerine Tso, who is also named as a respondent to Leis’ application, incorporated Modosecurity Inc. (“Modosecurity”), also named as a respondent to Leis’ application. On or about June 11, 2015, Modosecurity undertook to provide certain services for one of Salient’s former clients, Xerox. Lee was designated to perform the services. Leis provided evidence that Modosecurity provided services for former clients of Salient between September 17, 2015 and September 16, 2016 on six separate occasions. Invoices pertaining to those contracts resulted in income to Modosecurity in the amount of $103,081.75.

Analysis

[22] Each of Leis and Lee contends that the other acted oppressively towards him and each seeks remedies under s. 241 of the CBCA.

[23] Oppression is an equitable remedy which seeks to ensure fairness - what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair. Courts considering claims for oppression should look at business realities, not merely narrow legalities. Oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another. See BCE v. 1976 Debentureholders, 2008 SCC 69, at para. 58.

[24] The claimant must identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held. Factors that are useful in determining whether a reasonable expectation exists include: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders. See BCE, at paragraphs 70-72.

[25] Leis submits that Lee acted oppressively towards him in the following ways:

a. Lee refused to complete the purchase of Leis’ shares pursuant to the “Shotgun” share purchase transaction.

b. Lee unilaterally dissolved Salient without authority.

c. Lee performed services for Modosecurity and Maxpherus Consulting Inc. which delivered services to former clients of Salient in contravention of a restrictive covenant in the USA.

[26] Leis seeks the following remedies:

a. Payment of $103,081.75 representing the gross income received by Modosecurity for services provided through Lee to Salient’s former clients for which, Leis submits, Lee should be personally liable.

b. Alternatively, (i) payment of $31,229 as compensation for the value of his shares in Salient calculated based on the price offered by Lee under the “Shotgun” share transaction and using a valuation date of September 22, 2015, the date of dissolution of Salient; and (ii) payment of $22,000 representing Leis’ share of the profits which would have been earned by Salient on work done by Modosecurity for Salient’s former clients has these opportunities not been misappropriated.

c. Punitive damages against Lee in the amount of $100,000.

d. Punitive damages against the other respondents in the amount of $50,000 jointly and severally.

[27] Lee denies that he acted oppressively towards Leis and submits that Leis acted oppressively towards him. Lee submits that Leis violated his reasonable expectations by:

a. Breaching the USA by:

i. improperly drawing on funds paid to Salient by its customer as a retainer.

ii. Accepting Lee’s “Shotgun” offer and then refusing to deliver the shares.

iii. Purporting to terminate Lee’s position with Salient, removing his licence designation with PCI Council, and removing access to his Salient email account.

iv. Refusing to continue performing work under contracts with Salient’s clients.

v. Failing to provide access to Salient’s books and records.

[28] Lee seeks the following remedies:

a. A declaration that Salient was properly dissolved or, alternatively, an order under s. 241(3)(1) of the CBCA dissolving Salient effective September 15, 2015.

b. An order directing Leis to pay to Lee $945 representing one-half of the amount Lee paid for wind-up insurance for Salient when it was dissolved.

[29] The evidence on the applications before me shows that from a very early stage in the life of Salient, Leis and Lee had serious disagreements with each other in relation to its business. They had conflicts with each other about amounts advanced to and withdrawn from Salient’s accounts which led to distrust and acrimony. By the time that Lee exercised the “shotgun” provision in the USA, it was unlikely that the two shareholders would be able to resolve their differences and carry on together with Salient’s business. The purchase of Leis shares of Salient was a route toward separation on terms acceptable to both shareholders.

[30] Unfortunately, the transaction was not completed. Each shareholder blames the other for the fact that the transaction was not completed. I do not agree that Lee acted oppressively or unfairly toward Leis by not completing the share transaction. Leis’ insistence on receiving payment of $30,000 as a condition of transferring his shares was the main cause of the share transaction not being completed. Leis was not entitled to receive the amount he demanded and, although Leis later clarified that his calculation of the amount owing to him was incorrect, by this time the share purchase had failed.

[31] Following the failure of the share purchase transaction, Lee’s conduct in terminating Leis’ access to Salient’s bank account and his action to purport to lien Leis’ shares contributed materially to the destruction of a working relationship between the two shareholders. Lee justified taking this step based on his position that Leis had misappropriated money from Salient by withdrawing $10,000 when this withdrawal substantially encroached on money held by Salient as a deposit provided by VersaPay. Although this money was paid by the client according to contractual terms, it was not designated as trust money and I do not agree that, because of Leis’ $10,000 withdrawal, Lee was entitled to cause Salient to place a lien on Leis’ shares. These actions escalated the conflict between the shareholders.

[32] Leis’ response was to call a shareholder meeting and, in the absence of Lee at the meeting, to terminate Lee’s right to work for Salient, purportedly based on the USA. Leis also cut off Lee’s access to his corporate email account and took steps to notify the PCI Council that Lee accreditation should be removed. These actions made it impossible for Lee to continue to work for Salient. The conflict had reached the point where, at least from Lee’s perspective, the business could no longer operate going forward. This led to the next step in what Leis’ counsel described as a “war of attrition” between the two shareholders.

[33] Lee’s action in unilaterally passing a resolution to dissolve Salient was the final one in a series of actions which culminated in Salient’s dissolution. The shareholders’ meeting called by Lee was not properly constituted, and no notice was given to Leis. By this time, Salient was not functioning as an operating business and Leis had purportedly removed Lee, who had been primarily responsible for marketing activities, from the business. The business operations of Salient had effectively ended. I regard it as noteworthy that Leis, upon being notified of the dissolution, took no steps to try to revive Salient so that it could continue to operate and preserve the value of any goodwill.

[34] Each applicant asks me to find that the other shareholder acted oppressively towards him. When I look at the evidence as a whole, and consider the sequence of events which culminated in Salient’s dissolution, I conclude that the actions of each shareholder were influenced by those of the other shareholder. The description of the series of escalating events as a “war of attrition” is apt. The mistrust between the two shareholders began at an early stage of Salient’s business, and each must bear responsibility for their failure to resolve their disagreements. I am unable to place the fault more on one shareholder than the other. I consider the conduct alleged by each shareholder against the other in the context of the remedies that each seeks.

[35] Leis seeks as his primary remedy an order requiring Lee to pay the sum of $103,081.75 representing the amounts received by Modosecurity from former clients of Salient. Leis contends that Lee, by his actions, caused Modosecurity to misappropriate opportunities for Salient in breach of the restrictive covenant in the USA which provides:

15.1 None of the Shareholders will, without the prior written consent of the other Shareholders, at any time while a Shareholder of the Corporation or for a period of one (1) year after he ceases to be a Shareholder of the Corporation, directly or indirectly, provide or attempt to provide (or advise others of the opportunity to provide) any services similar to those provided by the Corporation to any client or former client of the Corporation.

[36] In my view, the remedy requested by Leis is not one that should be imposed against Lee in Leis’ application under s. 241 of the CBCA. By June 2015, Leis had notified Lee that his right to provide services for Salient was terminated. Leis has not proven that Salient was capable of providing ongoing services to its clients or that it was deprived of doing so by the operations of Modosecurity for former clients of Salient through which Lee provided services.

[37] I am also unable to find that Leis suffered damages in the amount claimed for another reason. Even if services for customers of Salient had been provided by Lee through Salient, these customers would have been charged by Salient, and Lee would have been entitled to compensation at an hourly rate of $100. The higher hourly rate charged by Salient (there was evidence that it charged a usual rate of $175/hour) would have resulted in some income to Salient, however, Leis, as a shareholder of Salient, would not have been entitled to receive all the surplus funds in its hands. I am not satisfied on the evidence before me that Leis has proven that he suffered any damages that were caused by oppressive conduct on the part of Lee in providing services through Modosecurity.

[38] Leis claims, in the alternative, payment of $31,229 as compensation for his shares. This is the amount that Lee offered for Leis’ shares when he made the offer to purchase in April 2015. Leis submits that a proper valuation date for his shares in Salient is the date of its dissolution. By September 2015 when the Certificate of Dissolution was issued, Salient was not functioning as a business and the shareholders had been actively undermining each other. Leis has not shown that his shares in Salient had any value on this date.

[39] Leis also seeks, as part of his alternative relief, an order directing Lee to pay him $22,000 representing the amount that he contends he would have received from the profits of Salient from work done for its former clients, had these opportunities not been misappropriated by Lee and Modosecurity. As I have explained, Leis has not proven that Salient would have been able to provide these services in the circumstances which existed when Lee, through Modosecurity, provided the services. Leis had terminated Lee’s ability to perform services through Salient, and Leis has not proven that he suffered any damages that were caused by actions taken by Lee or Modosecurity.

[40] Leis also claims punitive damages. I do not agree that the conduct upon which Leis relies in his application is sufficiently egregious to justify an award of punitive damages, particularly having regard to the fact that both shareholders took actions to harm the interests of the other in the period of time leading to the dissolution of Salient.

[41] I now turn to the remedies requested by Lee.

[42] There is no need to issue a declaratory order to address the dissolution of Salient. Neither applicant seeks an order reviving Salient.

[43] Lee claims payment of $945 representing one-half of the amount paid for wind-up insurance at the time of Salient’s dissolution. Lee took this step without consulting Leis and paid the full amount without asking Leis to contribute. In these circumstances, Lee is not entitled to this remedy for any conduct on the part of Leis directed towards him.

[44] I conclude that each applicant has failed to show that he should be given a remedy for any conduct by the other shareholder which was oppressive, or which was unfairly prejudicial to or unfairly disregarded the interests of the other shareholder.

Disposition

[45] Leis’ application is dismissed.

[46] Lee’s application is dismissed.

[47] If the parties are unable to resolve costs, each applicant may make written submissions within 10 days not to exceed 3 pages (excluding any costs outline). Each applicant may make responding submissions within 10 days thereafter, not to exceed 2 pages. No reply submissions without leave.

Cavanagh J.

Date: March 15, 2021