COURT FILE NO.: CV-20-224-00
DATE: 2021-01-28
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Sebastiano Foglia and Jacqueline Mason
Applicants
- and -
Grid Link Corp., 1928025 Ontario Ltd., and Jody Bernst
Respondents
Mr. N. Wainwright, for the Applicants
Mr. B. MacIvor, for the Respondents
HEARD: January 21, 2021, via Video Conference at Thunder Bay, Ontario
Mr. Justice F. Bruce Fitzpatrick
Judgment on Application to Strike Pleadings
[1] Grid Link Corp. (“GL”) and Jody Bernst (Bernst) move to strike the Application as against them.
Background
[2] GL is a full-service utility contractor that services major public and private infrastructure projects, including electrical transmission and distribution systems, oil and natural gas pipelines, and railroads. Bernst is the owner of the majority equity interest in GL. Sebastiano Foglia (Foglia) and Jacqueline Mason (Mason) are minority shareholders of the Respondent 1928025 Ontario Ltd. (hereinafter “192”). 192 is a holding company that owns a minority equity interest in GL.
[3] Bernst owns 70% of the issued and outstanding common shares in the capital of GL. 192 owns 30% of the common shares of GL. Neither of the Applicants owns, or has owned, any shares in the capital of GL. Foglia is a former employee of GL. Mason is the wife of a former employee of GL who held a senior management position. Mason is a passive investor.
[4] Foglia and Mason have commenced this matter by way of a Notice of Application. In substance, the Notice of Application alleges the misappropriation of GL’s corporate funds by Bernst for his personal benefit and seeks various oppression remedy orders pursuant to s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16, as amended (the “OBCA”).
Preliminary Issue
[5] Counsel filed factums on this motion. In making my determination on this matter, I relied on the representations and submissions made in the facta, as well as the oral submissions made by counsel. In this case, the relief sought in the notice of motion and the order sought in the factum of the moving party were different. They were different in what I see as a material way. This is because in the notice of motion, GL and Bernst stated they sought an order striking the pleading or dismissing the Application by both Applicants. This was contrasted with the “order requested” in the factum of GL and Bernst, where only an order striking or dismissing the Application as against Mason was sought. During submissions, counsel for GL initially agreed this was a concession which limited the scope of the motion. However, as the matter progressed, counsel “walked back” that concession, and made it clear that GL and Bernst were seeking to have the Application completely dismissed or the Application struck with leave to amend.
[6] This was significant in this matter because of the type of motion that is being brought. In the notice of motion, GL and Bernst indicated they were relying on rr. 14.06, 14.09 and 21.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[7] Rule 14.06 is as follows:
Title of Proceeding
14.06 (1) Every originating process shall contain a title of the proceeding setting out the names of all the parties and the capacity in which they are made parties, if other than their personal capacity.
(2) In an action, the title of the proceeding shall name the party commencing the action as the plaintiff and the opposite party as the defendant.
(3) In an application, the title of the proceeding shall name the party commencing the application as the applicant and the opposite party, if any, as the respondent and the notice of application shall state the statutory provision or rule, if any, under which the application is made.
[8] Rule 14.09 is as follows:
Striking Out Or Amending
14.09 An originating process that is not a pleading may be struck out or amended in the same manner as a pleading.
[9] In my view, it is plain and obvious that rr. 14.06 and 14.09 had zero applicability to the real substance of the issue raised by the moving parties GL and Bernst. I place no weight on the submissions of GL and Bernst in respect of the applicability of rr. 14.06 and 14.09, as these are directed at issues as to the form of pleadings and not of their substance.
[10] Rule 21.01(1) contains two subsections. The notice of motion did not specify under which subsection the motion was proceeding. In their factum, GL and Bernst referenced both subsections as well as r. 21.01(3)(b) as having applicability to this motion.
[11] I set all of this out as a preliminary matter because I see the moving party as taking a very technical approach to the matters at hand. While that is a perfectly acceptable approach to take in any civil proceeding, I note we are dealing with a case involving s. 245 of the OBCA. In my view, this section of the legislation is clearly remedial. It is to be given a broad and generous interpretation. It was enacted to deal with issues that minority shareholders encounter when asserting their economic rights in the context of the common law of corporations. Section 245 is designed to facilitate, as opposed to hinder, alleged oppressed shareholders in bringing forward their grievances in a corporate context.
[12] It was not disputed in the submissions of either party that when a litigant seeks to strike another’s pleadings at a preliminary stage, they face a very high bar. On a r. 21 motion, it must be plain and obvious to the Court that the matter will not succeed before the Court will exercise such a significant action as striking a pleading at a preliminary stage. Also, I see it as important, given the current pandemic and corresponding strain on judicial resources, that parties in civil matters, now more than ever, be encouraged to focus their submissions. Focused advocacy assists the litigants because the Court can concentrate on relevant issues. This reduces the amount of time spent in court, and out of court preparing materials for argument and preparing judgments. In this case, I observe that conceding a matter in a written argument and then resiling from that position in oral argument did not assist the process of persuading the court that, indeed, there was merit in the position that the Application should be struck at this point.
Positions of the Parties
[13] GL and Bernst point out that the Applicants are shareholders of 192 but not of GL. They argue the Applicants are perfectly able to recast their Application to seek leave to have 192 bring a derivative action against GL. In any event, GL and Bernst argue that the Application as currently constituted should not continue, as the Applicants are not proper “complainants” in respect of GL. “Complainants” is a defined term in s. 245 of the OBCA. It is common ground between the parties that Foglia and Mason do not qualify as complainants pursuant to either s. 245(a) or (b). The dispute is whether they qualify as complainants under s. 245(c).
[14] Section 245(c) of the OBCA defines complainant as:
Definitions
245 In this Part,
“complainant” means,…
(c) any other person who, in the discretion of the court, is a proper person to make an application under this Part.
[15] GL and Bernst argued in oral submissions that Foglia and Mason’s standing as “complainants” is a question of law. The moving parties argue they could find no reported Ontario decision where a minority shareholder of a corporation that in turn was a minority shareholder of another company brought a claim for oppression. As such, it is plain and obvious that Mason and Foglia would never be considered to be complainants under s. 245(c).
[16] Foglia and Mason have more particularly framed the issue on this motion as follows:
Have the Moving Parties met their burden to show that it is plain, obvious, and beyond doubt, at this early stage of the proceeding, that the Application contains a defect so radical that it is certain to fail?
[17] I agree this is an apt characterization of the issue at hand.
[18] Foglia and Mason argue they are proper complainants under s. 245(c). Foglia points to a letter he received while employed by GL. The letter is an offer to buy GL shares. Foglia and Mason argue the share structure at issue was done for tax purposes only. That share structure should now not be a basis to prevent them from pursuing their legitimate interests in a company they worked for and continue to have an interest in by way of their shares in the holding company. The Applicants argue their claim encompasses aspects of both a derivative claim and a claim for oppression. Claims of this nature frequently intersect. The claims of the Applicants and their status are not plainly and obviously without merit.
Disposition
[19] It is not plain and obvious to me that Foglia and Mason are not complainants within the meaning of s. 245(c) of the OBCA. At best, it is a question of mixed fact and law that ultimately requires a full evidentiary record to determine.
[20] In coming to this conclusion, I was persuaded by a number of factors. First, the court’s discretion to determine who is a complainant under section 245(c) is broad. It has been described by the Ontario Court of Appeal as “unfettered”. In Olympia & York Developments Ltd. (Trustee of) v. Olympia & York Realty Corp. (2003), 2003 CanLII 25511 (ON CA), 68 O.R. (3d) 544 (C.A.), at para. 45, the Court of Appeal stated:
The simple reason is that s. 245(c) confers on the court an unfettered discretion to determine whether an applicant is a proper person to commence oppression proceedings under s. 248. This provision is designed to provide the court with flexibility in determining who should be a complainant in any particular case that accompanies the court's flexibility in determining if there has been oppression and in fashioning an appropriate remedy. The overall flexibility provided is essential for the broad remedial purpose of these oppression provisions to be achieved.
[21] An “unfettered discretion” is the highest and best degree of discretion that can be exercised by an adjudicative body. Given the broad discretion granted to the court and the connections of the Applicants to GL, it is not plain and obvious to me that a court would not exercise its unfettered discretion in their favour and consider their claims for a finding of oppressive conduct by Bernst.
[22] Second, the clear concession made in the factum of GL and Bernst that Foglia “may” be a complainant within the meaning of the OBCA is significant. I cannot simply ignore this by recharacterizing the issue as a question of law, as urged upon me by counsel for the moving parties. Foglia was a former employee of GL. GL and Bernst concede he may have performed functions for GL similar to those of an officer of the company. This is a factual issue which is capable of being resolved in Foglia’s favour. Foglia has a connection to the company that is not tenuous or remote. It is therefore not plain and obvious that he cannot succeed as a “complainant” prosecuting a claim for oppression under the OBCA against GL and Bernst.
[23] Third, there appears to be a genuine issue as to why the share structure of GL and 192 was created. Ultimately, it will be a matter for trial if, indeed, Foglia’s and Mason’s holdings were structured for convenience and tax planning rather than expressly for the purpose of insulating GL and its officers from any claims by the shareholders of 192. Nevertheless, the Applicants assert their economic interests have been harmed by the actions of Bernst in his capacity as controlling shareholder of GL. They assert personal claims. The matter is complicated because of the corporate structure at issue. However, at this point in the litigation that is not sufficient to allow a finding that their claim has no chance of success.
[24] Fourth, in my view this matter is one where the derivative claims and the claims for oppression of these Applicants intersect. The law involving circumstances of this nature was recently summarized by Charney J. in Paul Shaughnessy Investments Inc. v Drain, 2018 ONSC 1850, 81 B.L.R. (5th) 93, at paras. 57 through 73. That case involved an unsuccessful attempt to strike a pleading at an early stage. At paras. 72 and 73, Charney J. stated:
These cases indicate that the distinction between derivative actions and oppression claims are sharpest when the corporation is both a widely-held and public corporation as in [Rea v. Wildeboer, 2015 ONCA 373, 126 O.R. (3d) 178]. There is more room for overlap when the corporation is a closely held private corporation as in [Malata Group (HK) Ltd. v. Jung, 2008 ONCA 111, 89 O.R. (3d) 36]. Where the corporation is more widely held, the courts insist on more personalized claims, such as a creditor claim, as in Malata, or the wrongful termination claim in [Mozas v. Medcan Health Management Inc., 2017 ONSC 1524]. Where there are only two or three shareholders, there may be no real distinction between a wrong to all shareholders generally and the loss or damage suffered by a particular shareholder, and a dispute between shareholders can be equated to an individualized personal claim. In addition, there is less reason to be concerned with the risk of frivolous lawsuits against the corporation if there are “relatively few shareholders” (Malata, at para. 39).
Moreover, shareholders of public companies, especially widely held ones, have an exit mechanism: they can sell their shares on the public market. Shareholders of private companies (no matter how many shareholders) have no such exit mechanism. Accordingly, the personal interests of a shareholder may be adversely affected in a private company in circumstances that would not qualify as personal in a widely-held public company. [Full citations added.]
[25] For Charney J., the fact that the corporation in Drain was closely held (like the corporations at issue in this matter) militated in favour of allowing the matter to proceed and not to be struck out pursuant to r. 21.01.
[26] The facts as alleged in the affidavit material filed on this motion disclose serious personal claims by the Applicants against Bernst. It is not plain and obvious either that the Applicants will not be found to be complainants or that their allegations have no air of reality such that it would be appropriate to strike their pleadings at this stage.
[27] For all these reasons, the motion is dismissed with costs.
Costs
[28] Counsel gave me a rough idea of their costs positions at the commencement of the hearing. I agree the range of quantum discussed was reasonable. I am inclined to award costs on a partial indemnity basis payable by Bernst personally to the Applicants. If the parties cannot resolve the issue of costs and who pays who exactly what, I will entertain written submissions on the issue of not more than two pages plus a bill of costs. The Applicants shall file their submissions within 15 days of the release of these reasons. The moving parties shall file their response seven days later.
Next steps
[29] I had the opportunity to conduct two case conferences prior to the hearing of this motion. I made an order on November 16, 2020, pursuant to r. 50.13 directing that any motions in respect of any pleadings, procedures or other matters between these parties will be heard by me until such time as any Application is set down for a hearing or, if the matter has been converted to an action, when the parties are ready to conduct a pretrial. I appreciate counsel’s candour in attempting to narrow the issues on the motion. I understand now that the moving parties have issued a statement of claim naming the Applicants as defendants. It seems to me, based on what I have reviewed to date in this matter, that the factual issues on this Application as presently constituted will be hotly contested. I am confident the matter will not ultimately lend itself to resolution on the basis of affidavit evidence and out of court cross examinations alone. The proceeding should be organized now and a clear timetable established in the interests of focusing the litigation and allowing these litigants the most effective way to resolve this dispute. Serious money is at stake for these people. The court is prepared to assist them in streamlining this process if for no other reason than to ensure they do not fall off into a morass of procedural motions which would unduly delay the matter being adjudicated.
[30] Therefore, once the issue of costs is resolved, before any party takes any further steps in any litigation involving these parties which touches on the issues raised in the affidavits before the court on these motions, counsel shall arrange a further case conference before me. At that conference, it will be expected that counsel will offer constructive and direct proposals on how to organize these various claims and see to it that they are dealt with in the most cost efficient and productive fashion possible.
“original signed by” The Hon. Mr. Justice F.B. Fitzpatrick
Released: January 28, 2021
COURT FILE NO.: CV-20-224-00
DATE: 2021-01-28
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Sebastiano Foglia and Jacqueline Mason
Applicants
- and -
Grid Link Corp., 1928025 Ontario Ltd., and Jody Bernst
Respondents
JUDGMENT ON APPLICATION TO STRIKE PLEADINGS
Fitzpatrick J.
Released: January 28, 2021
/lvp