[CITATION](http://intra.judicialsecurity.jus.gov.on.ca/NeutralCitation/): Ninth Square Capital v. Boyes et al., 2021 ONSC 3878
COURT FILE NO.: CV-20-00649440-00CL
DATE: 20210528
SUPERIOR COURT OF JUSTICE – ONTARIO (Commercial List)
RE: NINTH SQUARE CAPITAL CORPORATION Plaintiff
AND:
W. SCOTT BOYES, JEREMY S. BUDD and MICHAEL ARNKVARN Defendants
BEFORE: Koehnen J.
COUNSEL: Alexander Rose, Isabelle Eckler, for the moving party defendants Philip Anisman, Howard Wolch Counsel, for the respondent plaintiff
HEARD: March 26, 2021
ENDORSEMENT
[1] There are two motions before me. The first is by the defendants to strike the statement of claim in this proceeding as disclosing no cause of action. The second is by the plaintiff for an order consolidating this action with another action against corporate defendants based on similar facts.
[2] For the reasons set out below, I dismiss the defendants’ motion and grant the plaintiff’s motion.
I. The Facts
[3] This action is against three individual defendants who were directors and/or officers of some of the corporations involved in the alleged wrongdoing. The facts set out below were either undisputed before me or are taken from the statement of claim which, on a motion to strike, are to be taken as capable of being proven.
[4] The plaintiff, Ninth Square Capital Corporation, was originally a 50% shareholder in Spartan Wellness Corporation, a privately held cannabis company that focused its business on providing cannabis to veterans for medicinal purposes.
[5] In September 2018, the plaintiff entered into an agreement under which it sold its shares in Spartan to MPX Bioceutical Corporation in return for shares and warrants of MPX. The MPX shares and warrants were publicly traded on the Canadian Securities Exchange.
[6] The MPX shares and warrants were to be issued to the plaintiff in five tranches; the first on closing; the latter four based on milestones related to sales attributable to Spartan products.
[7] Unbeknownst to the plaintiff, when MPX was negotiating to purchase the plaintiff’s Spartan shares, MPX was also negotiating the sale of itself and the Spartan shares it was about to acquire to iAnthus Capital Holdings Inc.
[8] Although iAnthus was also a publicly traded company, its acquisition of MPX was structured so that MPX was amalgamated with a wholly-owned subsidiary of iAnthus known as MPX ULC. The non-US assets of MPX, including Spartan, were spun out into a new corporation, MPX International Corporation (“MPXI”). MPXI is a private corporation which would be owned by MPX’s existing shareholders.
[9] As part of the iAnthus transaction, MPX assigned to MPXI the share purchase agreement for the Spartan shares. Ninth Square alleges that its consent to any assignment of the share purchase agreement was required and was not obtained.
[10] The iAnthus transaction was to be completed on January 31, 2019. On the same day, the defendant Jeremy Budd (an officer of MPX and an officer and director of MPXI) sent the plaintiff the agreement assigning the Spartan share purchase to MPXI as well as a consent to that assignment which he asked the plaintiff to sign. The email delivering the two documents stated:
…if we do nothing, your client will be entitled to receive shares/warrants of iAnthus.
[11] The plaintiff did not consent to the assignment.
[12] Ninth Square did not receive shares in iAnthus for its Spartan shares as Mr. Budd apparently promised, but received shares in MPXI.
[13] The plaintiff’s core allegation is that it had contracted to sell its Spartan shares in exchange for shares in a publicly traded company but instead received shares in a privately traded company. The plaintiff alleges this is constitutes a breach of the duty of good faith and is oppressive.
[14] The defendants raise two objections to the statement of claim. First, they submit that oppression is not available to the plaintiff because its complaint is based on activities that occurred before the plaintiff became a shareholder in any corporation other than Spartan. Second, the defendants submit that the statement of claim does not plead sufficient facts to justify an action against the individual defendants as officers and directors.
II. The Legal Test to Strike a Claim
[15] The defendants bring their motion under Rule 21.01(1)(b) of the Rules of Civil Procedure. It allows the court to strike out a pleading on the ground that it “discloses no reasonable cause of action.” A claim should be struck out where it is “plain and obvious” that the pleading discloses no reasonable cause of action. That test is met where the plaintiff pleads allegations that do not give rise to a recognized cause of action; fails to plead a necessary element of a recognized cause of action; or makes allegations that are simply conjecture, assumption or speculation unsupported by material facts. Vague, conclusory or bare allegations in a statement of claim are also insufficient to avoid dismissal.
[16] In considering the impugned statement of claim, the motions judge must accept the factual allegations in the statement of claim as true for purposes of a motion to strike. However, the Court need not accept factual allegations that are patently ridiculous, incapable of proof, or contradicted by documents referenced in the pleading.
[17] In addition, the defendants submit that the plaintiff cannot lump the defendants together as a group without providing the necessary, separate, differentiating material facts that could support a claim against each individual.
A. Oppression Claims for Pre-Shareholder Conduct
[18] The defendants submit that the plaintiff’s complaint refers to conduct that arose before the plaintiff actually became a shareholder of any MPX entity. The defendants argue that the plaintiffs cannot complain about oppression in relation to conduct that arose before they acquired their status as security holders.
[19] In support of this proposition, the defendants argue that what was at stake during the negotiations were the plaintiff’s personal interests and not its interests as a shareholder of MPX. The defendants submit that oppression does not address personal interests.[^1] Applying that principle here, the defendants submit that any expectation on the part of the plaintiff that the defendants would disclose the iAnthus transaction to the plaintiff arose from the plaintiff’s status as a negotiating party and not as a shareholder.
[20] The defendants rely on Joncas v. Spruce Falls Power & Paper Co.[^2] for the proposition that the plaintiff must have the legal right to be a shareholder in order to have status to bring an oppression claim. I do not read the case quite as starkly as that. In paragraph 36 of his reasons, Cumming J. stated:
However, reasonable expectations must derive from corporate conduct affecting a protected category of person: namely, a creditor, director, officer or security holder. To be considered a security holder, a putative complainant must either be a registered owner or at the least a beneficial owner. I agree that "beneficial owner" should be interpreted broadly. Nevertheless, a putative complainant must have a legal right to become a shareholder before it can be asserted that the person is a "beneficial owner". Reasonable expectations must be tied to legal or equitable rights as a security holder, whether as a registered owner or as a beneficial owner. It is not enough to simply have reasonable expectations to become a shareholder based upon a general sense of fairness.
[21] Unlike the plaintiff in Joncas, Ninth Square does not base its claim on any expectation of becoming a shareholder based on a general sense of fairness but on a written contract. There is in fact no dispute between the parties that the plaintiff is a shareholder and is entitled to shares. The issue is whether the defendants were entitled to assign the benefit of the Spartan share purchase agreement to MPXI and whether the defendants were entitled to change the consideration the plaintiff received from publicly traded shares to shares in a private corporation. These issues all relate to the plaintiff’s status as a shareholder.
[22] The circumstances of this case put the plaintiff into the category of beneficial shareholder as described by Cumming J. in Joncas. Csak v. Aumon[^3] is to similar effect and held that a beneficial shareholder includes one who has an equitable claim to shares whether they have been issued or not.
[23] Although the defendants point to a provision of the share purchase agreement that allows the purchaser to assign any or all of its rights under the agreement to any other person, the plaintiff notes that the agreement does not give the purchaser the right to assign its obligations under the share purchase agreement to another party. The precise scope of the ability to assign and what that meant for the sort of shares the plaintiff would receive may be a defence in the action but is not a matter that warrants striking a claim on a pleadings motion.
[24] The statement of claim further alleges that the defendants understood that the Spartan share purchase agreement could not be assigned without the consent of the plaintiff. iAnthus and MPX announced their transaction on October 18, 2018. The press release indicated that shareholders of MPX would receive iAnthus shares for their MPX shares. The thrust of the plaintiff’s claim is that it was or should be considered to be a shareholder of MPX at the time, as a result of which it too should receive shares in shares in iAnthus, a publicly traded company, rather than shares in MPX, a private company. This is all the more so in light of Mr. Budd’s email to the effect that if the plaintiff did not consent to the assignment, it would get shares in iAnthus.
[25] If I am wrong in the foregoing analysis, I would nevertheless grant the plaintiff status as a “complainant” under the section 245 (c ) of the OBC which includes within the definition of complainant,
any other person who, in the discretion of the court, is a proper person to make an application under this Part.
[26] It strikes me that the essence of the plaintiff’s claim is so bound up with its right to shares that it ought not to be deprived of standing based on corporate technicalities that the defendants helped bring about and over which the plaintiff had no control or influence. Here, the plaintiff’s complaint is that the defendants used corporate technicalities to defeat its expectations to obtain a certain type of share. Without passing judgment on the merits of either side’s ultimate claim or defence, it strikes me that this is one of the sorts of issues that the oppression remedy was designed to address.
B. Are the Officers and Directors Appropriate Defendants?
[27] The second basis on which the defendants seek to strike the claim is that it does not plead sufficient facts to justify an action against the individual defendants as officers and directors of the corporations involved.
[28] A director or officer can face personal liability for oppression if:
(i) The oppressive conduct is attributable to the director or officer because of his or her action or inaction.
(ii) The order is fit in all of the circumstances.[^4]
[29] Significantly, this test is not limited to the circumstances in which directors and officers could face personal liability at common law but encompasses a broader range of potential liability.[^5]
i. Are Directors and Officers Implicated in Conduct?
[30] The defendants submit that they are not sufficiently implicated in the conduct to attract personal liability.
[31] The defendants rely heavily on paragraph 32 of Wilson v. Alharayeri[^6] where the Supreme Court of Canada set out the following five situations in which personal orders against directors might be appropriate:
(1) Where directors obtain a personal benefit from their conduct.
(2) Where directors have increased their control of the corporation by the oppressive conduct.
(3) Where directors have breached a personal duty they have as directors.
(4) Where directors have misused a corporate power.
(5) Where a remedy against the corporation would prejudice other security holders.[^7]
[32] The plaintiff submits that at least the first and third factors are present here: personal benefit and breach of a personal duty.
[33] With respect to personal benefit, the plaintiff underscores that courts have held that even minor personal benefits suffice to meet the test. By way of example, in Zeifmans LLP v. Mitec Technologies Inc.,[^8] the amounts at issue were as small as $10 for one shareholder and $1,000 for another. It does appear that at least two of the individual defendants here received financial benefits as a result of the transaction. Mr. Boyes received a payment of $775,000 and Mr. Budd received a payment of $273,000. All three defendants became shareholders, officers or directors of MPX.
[34] With respect to the third factor, breach of a personal duty, the plaintiff has pleaded that the failure to disclose the iAnthus arrangement during the negotiations for the Spartan share transaction and the implementation of the iAnthus arrangement amount to breaches of the duty of good faith.
[35] Moreover, before we rely too heavily on the presence or absence of the five factors on a pleadings motion, the warning of the Supreme Court of Canada in paragraph 50 of Wilson is worth bearing in mind. After setting out the five factors, the Court noted:
To be clear, this is not a closed list of factors or a set of criteria to be slavishly applied. And as explained above, neither a personal benefit nor bad faith is a necessary condition in the personal liability equation. The appropriateness of an order under s. 241(3) turns on equitable considerations, and in the context of an oppression claim, “[i]t would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise” (Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 at p. 379). But personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct.
[36] The defendants submit that they were merely following the directions of the independent committee that guided the overall process. They rely on cases like Mudrick Capital Management LP v. Wright[^9] for the proposition that a CFO, who was simply doing his job in reviewing financial options for a struggling company and receiving and following his marching orders from the Board, was not subject to personal liability.[^10] While this might amount to a valid defence for the defendants, it is not something to be determined on a pleadings motion. I note that Mudrick was a summary judgment motion, not a motion to strike.
ii. Is an Oppression Order Fit in All the Circumstances?
[37] The defendants raise two arguments in this regard. From the perspective of a pleadings motion, the defendants submit that:
Each defendant named in a statement of claim should be able to look at the pleading and find an answer to a simple question: What do you say I did that has caused you, the plaintiff, harm, and when did I do it?[^11]
[38] The defendants submit that the statement of claim does not rise to this level.
[39] Second, the defendants say that the plaintiff has not met the test in Wilson where the Supreme Court of Canada described the fit in all the circumstances branch of the test for personal liability as requiring something more of the directors and officers than mere involvement. In Wilson, a director’s “lead role” in the decision and a personal benefit to him resulting from the decision was sufficient to warrant personal liability. It should be kept in mind though that the decision in Wilson arose at the end of a trial, not on a motion to strike as disclosing no cause of action. Adapting this test to a motion to strike requires me to ask whether it is plan and obvious that the facts pleaded in the statement of claim could not lead a judge to conclude that an order for personal liability was fit.
[40] I am not satisfied that the claim should be struck under this branch of the test. On my reading of the claim, it discloses sufficient facts to tell the defendants what the claim is against them. Similarly, it discloses a sufficient factual matrix to enable me to say that it is not plain and obvious that the plaintiff could not succeed at trial.
[41] The statement of claim makes allegations against the defendants collectively and individually.
[42] The collective allegations are as follows:
(i) The individual defendants directed the negotiations relating to the Spartan share purchase agreement and determined MPX’s position with respect to the terms of that agreement. Mr. Boyes signed the Spartan agreement on behalf of MPX.
(ii) The terms of the iAnthus arrangement had substantially taken form before the Spartan share purchase agreement was signed. The defendants and MPX did not disclose that arrangement or the fact that it was negotiating it to the plaintiff before signing the Spartan share purchase agreement.
(iii) The defendants understood that the Spartan share purchase agreement could not be assigned without the plaintiff’s consent. Contrary to that understanding, the defendants organized a scheme in which the Spartan share purchase agreement was assigned without the plaintiff’s consent and which provided the plaintiff with consideration different from that which had been agreed upon.
(iv) The individual defendants directed MPXI’s participation in this unfair conduct.
(v) In negotiating the Spartan share purchase agreement and the iAnthus arrangement and in implementing the arrangement, the defendants conducted MPX's business and affairs and exercised their powers in a manner that was oppressive and unfairly prejudicial to Ninth Square and unfairly disregarded Ninth Square's interests.
(vi) The defendants personally benefited from the arrangement. They sold their shares in MPX to iAnthus at a premium, received severance payments from MPX and continued in identical or enhanced roles as directors and officers of MPXI with substantial annual compensation.
[43] As against Mr. Boyes, the claim alleges that he is the President, CEO and chair of MPX and MPXI, that he is identified as the contact within MPX to speak to about the Spartan acquisition and that he signed the iAnthus Arrangement Agreement on behalf of MPXI.
[44] As against Mr. Budd, the claim alleges that he is the Vice President, General Counsel and corporate Secretary of MPX, that he is Vice President, General Counsel and a director of MPXI and that he was part of the negotiating team for the iAnthus transaction.
[45] As against Mr. Arnkvarn, the claim alleges that he is the executive vice-president, sales and marketing and a director of MPX, that he is now the chief operating officer of MPXI, that he had responsibility for the conduct of the negotiations for the Spartan share purchase agreement and that he knew the iAnthus negotiations were being conducted.
[46] While I agree that the roles of the defendants are not distinguished from each other in the claim as precisely as they would be at trial, that is a reflection of the stage at which the action finds itself. It is the defendants who have knowledge of how their roles and knowledge might be distinct from one another.
[47] What matters for the defendants’ purposes is that they know the claim that is alleged against them. Put plainly, they knew of the iAnthus arrangement and despite that knowledge they entered into the Spartan agreement without disclosing that the plaintiff would not receive shares in a public company as the Spartan agreement promised.
[48] It is possible for a trial court to find that the combination of those factors amounts to oppression for which a director or officer should be held liable personally. By way of analogy, it has long been the case that directors and officers are personally liable for misrepresentations or other torts they commit on behalf of the corporation. It is not a particular stretch to find that a court could, depending on how the facts come out at trial, find oppression in similar circumstances. As for the failure to disclose, it is clear that oppression can be based on either an act or an omission.[^12]
[49] In Abdi Jama (Litigation Guardian of) v. McDonald's Restaurants of Canada Ltd.,[^13] Nordheimer J., as he then was, held that, at the pleadings stage, a claim against a corporate employee will be upheld if the employee “might reasonably be seen to have some connection or relationship to the central event complained of.”[^14]
[50] Here, the defendants might reasonably be seen to have some connection or relationship to the failure to tell Ninth Square that it would not receive publicly traded shares for its Spartan shares.
[51] There are no doubt a variety of defences that could be raised against that core allegation. Those defences may well end up succeeding. A pleadings motion is not, however, the time to consider defences or their likelihood of success.
[52] Finally, the defendants suggested in argument that the claim has no chance of success because the iAnthus arrangement was the subject of a court-approved arrangement in British Columbia. I do not think the issue is as simple as that, at least not on the face of the statement of claim. As part of that arrangement, shareholders of MPX were to get iAnthus shares. If Ninth Square is considered to be a shareholder of MPX, it is entitled to iAnthus shares. That will be a key issue for trial. The arrangement approved by the court in British Columbia did not do away with that issue, at least not in any way that was presented to me during the hearing.
III. The Motion to Consolidate
[53] If I dismiss the defendant’s motion to strike, the plaintiff asks that I consolidate this action with the action against the corporate defendants.
[54] The action against the corporate defendants raises substantially the same claim and issues as this action.
[55] Rule 6.01 of the Rules of Civil Procedure provides that the court may consolidate proceedings that have a question of fact or law in common or that claim relief arising out of the same transactions. That is clearly the case here.
[56] Consolidation of the two actions would avoid multiplicity of proceedings, the risk of inconsistent findings and would lead to the most efficient use of judicial and party resources.
[57] The defendants have advanced no reason not to consolidate other than to suggest that the second proceeding is abusive.
[58] I do not find that is the case. The plaintiff says that it commenced this action against the directors and officers shortly before the expiry of a limitations period in order to avoid procedural wrangling that it expected would arise if it tried to join the individual defendants to the corporate action. Given the presence of this motion, the plaintiff’s concern was not unfounded. It acted to avoid a clear risk it faced. There is no abuse in that.
IV. Disposition and Costs
[59] For the reasons set out above I dismiss the defendants’ motion to strike the statement of claim and grant the plaintiff’s motion to consolidate this action with the earlier action against the corporate defendants.
[60] Any party seeking costs of these motions may make written submissions by June 11, 2021. Responding submissions should follow by June 18, 2021 with reply due by June 23.
Koehnen J.
Date: May 28, 2021
[^1]: Wilson v. Alharayeri 2017 SCC 39 at para. 54; Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 481 at para. 23-26. [^2]: Joncas v. Spruce Falls Power & Paper Co. (2000), 48 O.R. (3d) 179; [2000] O.J. No. 1721 [^3]: Csak v. Aumon (1990), 69 D.L.R. (4th) 567 (Ont. H.C.) at p. 570 [^4]: Wilson at para. 31. [^5]: Wilson at para 30; Budd v. Gentra (1998) (ONCA) at para 31, 34-36, 40. [^6]: Wilson v. Alharayeri, 2017 SCC 39, paras. 30-31 and 47-48. [^7]: Wilson at para 32 citing M. Koehnen, Oppression and Related Remedies (2004), at p. 201. [^8]: Zeifmans LLP v. Mitec Technologies Inc., 2019 ONSC 3643 [^9]: Mudrick Capital Management LP v. Wright 2019 ABQB 662, [^10]: Mudrick at para. 111. [^11]: Burns v. RBC Life Insurance Company, 2020 ONCA 347 at para. 16 [^12]: Business Corporations Act, R.S.O. 1990, c. B.16 s. 248(2)(a); Wilson at para 42; Downtown Eatery (1993) Ltd. v. Ontario (2001), 54 O.R. (3d) 161 at para 61. [^13]: Abdi Jama (Litigation Guardian of) v. McDonald's Restaurants of Canada Ltd. 2001 CarswellOnt 939, [2001] O.J. No. 1068 [^14]: Abdi Jama (Litigation Guardian of) v. McDonald's Restaurants of Canada Ltd. 2001 CarswellOnt 939, [2001] O.J. No. 1068 at para. 12.