Court File and Parties
COURT FILE NO.: CV-15-63529 DATE: January 29, 2021
SUPERIOR COURT OF JUSTICE – ONTARIO
BETWEEN: Marchand v 7104383 Canada Inc. et al
BEFORE: Honourable Mr. Justice Martin James
COUNSEL: Brett Hodgins, for the Applicant Peter Liston, for the Respondent Stuart Graham Cheryl Letourneau, for the Respondent David Harroch
DATE HEARD: September 14, 2020
REASONS FOR DECISION
James J.
Facts
[1] In this Application, the Applicant (“Marchand”) requests a remedy under the oppression provisions of the Canada Business Corporations Act, R.S.C., 1985, c. C-44. The Applicant and the two individual Respondents (“Graham” and “Harroch”, respectively) incorporated the corporate Respondent to carry out their business plan to operate an annual minor hockey tournament in Ottawa. The business was modelled on an existing tournament structure devised by the Harroch who operated a successful annual tournament called the Montreal Meltdown Tournament.
[2] A business outline for what was to become known as the Ottawa Meltdown Tournament was agreed to in August 2008. The parties initially contemplated a partnership structure, but this was changed into a corporate structure with each of the three partners owning 33.3% of the capital stock of the corporate Respondent. Harroch was to provide his know how, experience and contacts. Marchand and Graham shared operational responsibilities.
[3] The parties agree that, while it may not be legally binding, their Partnership Agreement accurately reflected the core agreements that were carried into the corporation, although no Shareholders Agreement was signed. At the hearing of this Application, all parties referred to certain aspects of the Partnership Agreement to support their positions. However, the fact remains that this was a corporation, not a partnership.
[4] The first Ottawa Meltdown Tournament occurred in 2009. However, for the purposes of this Application, the parties’ dealings in 2012, 2013 and 2014 inform the issues that are at the heart of the dispute.
[5] The parties agree that their “deal” included an arrangement to pay a departing shareholder “3 years net income based on previous tournament which will be discussed in Annual meeting 1st week of August.” The parties anticipated that by August of each year they would know the net income generated by the tournament (held in May) for that year. This clause is ambiguous. Did the parties intend that a departing shareholder would be paid his share of one-third of the net profits multiplied by 3 or did they intend that the total net profit of the corporation multiplied 3 would be paid? The latter interpretation appears to me to be more consistent with the words used, but the evidence suggests that all parties assumed that it was a shareholder’s share of the net profit that informed the calculation of the amount to be paid. The parties do not appear to have differentiated between the income of the corporation and the shareholders’ participation in income distribution by way of dividends.
[6] In 2012, the “Ottawa Meltdown 2012 Minutes” declared a “value” of $24,804.00. Although the terminology was not consistent, the parties agreed that the annual declared “value” equaled the “net income” referred to in the buy-out provisions of the Partnership Agreement.
[7] In 2012, the “value” was agreed to be $24,804.00, or $8,268 each. The income was derived from three sources:
a. Registration fees charged to the participating teams;
b. Ticket sales; and
c. Rebate or referral fees from the participating hotels that provided accommodation to the participants.
[8] Some portion of the ticket sales was in the form of cash, which was not reported to the Canada Revenue Agency.
[9] A document called “Ottawa Meltdown Minutes”, dated April 11, 2013, projected a reduced income for 2013 due to fewer teams participating, but did not declare a “value” for 2013. The 2013 tournament was scheduled to take place on the weekend of May 17-19, 2013.
[10] The Respondents became dissatisfied with Marchand’s performance and his share of the workload. It is to be noted that they did not draw salaries as employees; their only compensation was through the division of profit by way of dividends.
[11] The 2013 Minutes refer to the possibility of re-organizing their respective responsibilities and an alteration of their shareholdings to reflect the restructuring of responsibilities.
[12] The Minutes dated July 5, 2013, declared a “value” of $14,333.01.
[13] Marchand did not agree with the declared value. He contends that, unlike earlier years, the 2013 value did not include cash from the unreported ticket sales. There is no evidence to corroborate this contention.
[14] The parties agree that $4,777.67 was paid to each shareholder based on the 2013 “value” of $14,333.01.
[15] By email on July 24, 2013, the Respondents proposed to have the company acquire Marchand’s shares for $13,133.25 to be paid over five years. In the view of the Respondents, this was the adjusted value of the company. It is not clear how the “value” changed from $14,333.01 on July 5, 2013, as per the Minutes on that date, to $13,133.25 in the email of July 24, 2013.
[16] On July 29, 2013, the Respondents set a deadline of August 2, 2013 for Marchand’s acceptance of the Respondents’ proposal, failing which they indicated they intended to dissolve the company. A special meeting of the corporation was called for January 13, 2014 to vote on the dissolution proposal. Marchand says that insufficient notice of the meeting was provided, and he did not attend. The Respondents contend that the notice was adequate. Several emails were exchanged by the parties on the issue of notice leading up to the date of the meeting.
[17] On December 16, 2013, Graham sent an email to Harroch regarding the 2014 tournament, now called the Ottawa Madness. He referred to the need to close 7104383 Canada Inc. and to “make” a new company.
[18] Graham and Harroch obtained legal advice from Frederick Pinto. In a December 18, 2013 email, Graham asked Harroch if he could get the invoice from “Fred” in the name of Ottawa Meltdown so as to increase the expenses of the corporation and correspondingly reduce the profit to be divided and shared with Marchand.
[19] Technically speaking, a formal dissolution of the corporation could not occur because the company had liabilities that were never paid. A resolution of the company dated January 13, 2014, signed by the Respondents, declared the liabilities of the corporation to be $7,203.80 and provided that “immediately upon payment of the Liabilities, the Corporation be dissolved forthwith.”
[20] On January 15, 2014, Graham sent an email to Harroch. In that email, Graham told Harroch how hard he was working to get teams registered for the 2014 Ottawa Madness tournament and requested Harroch’s help to get teams from outside Ottawa. Harroch responded with a list of email addresses for prospective entrants and stated, “Stuart to avoid our friend Denis knowing we’re doing this together.. you email these people for the tournament. Here is the list please keep it confidential Thanks.”
[21] In an ambiguous email sent later the same day, Harroch advised Graham, “I make sure i (sic) don’t tell anyone my involvement because of you know who.”
[22] Around this time Graham’s girlfriend, Christine Denis, incorporated 8766177 Canada Inc., operating as Revsports. This entity conducted the May Madness events. Graham and Denis later married, then separated.
[23] The last tournament operated by 7104383 Canada Inc. was the 2013 Ottawa Meltdown event.
Issues
[24] Does the evidence support the reasonable expectations asserted by the Applicant as a stakeholder in 7104383 Canada Inc.?
[25] Does the evidence establish that the reasonable expectations of the Applicant, if found to exist, were breached by conduct that was oppressive or unfairly prejudicial to the Applicant?
Position of the Parties
i) Denis Marchand
[26] Firstly, Marchand says the Respondents improperly frustrated his reasonable expectations as an investor in the corporation including:
a. That the corporation would be managed in accordance with generally-accepted corporate governance practices;
b. That the corporation would be managed in accordance with its statutory obligations;
c. That Marchand would be included in the management of the corporation and would share in profit according to his ownership interest; and
d. That Graham and Harroch would act in the best interests of the corporation, would perform their duties in good faith and would not place their personal interests ahead of those of the corporation.
[27] Secondly, Marchand says that Graham and Harroch acted oppressively by:
a. Trying to push Marchand out of the corporation;
b. Offering a below-market price for his shares; and,
c. Threatening to dissolve the corporation if Marchand did not accept their offer.
ii) Stuart Graham
[28] The Respondent Graham says that by 2013 neither he nor Harroch wanted to be involved with Marchand in a business venture, largely because they believed that Marchand was not doing his share of the work.
[29] They made what they believed was a reasonable offer for his shares, which Marchand refused to accept.
[30] They asked Marchand to pay his share of the corporation’s liabilities so the corporation could be dissolved. Again, he refused.
[31] They offered to sell their shares to Marchand on similar terms, which established the reasonableness of their proposal to buy his shares.
[32] Graham provided advice to his girlfriend on how to run a hockey tournament, but she was the person who incorporated 8766177 Canada Inc. Graham did not have an interest in, and did not derive a benefit from that corporation.
[33] He did not appropriate any confidential information from the company. There was no non-competition agreement.
[34] Having been unable to arrive at an agreement with Marchand to continue the business, the parties were free to conduct whatever business they saw fit, whether it was an existing business (in Harroch’s case) or a new one (in Graham’s case).
iii) David Harroch
[35] Harroch agrees with Graham that, by 2013 neither he nor Graham wanted to continue in business with Marchand, because Marchand was neglectful of his duties.
[36] Marchand refused to attend the special meeting of shareholders called to vote on a resolution to dissolve the corporation, even though Marchand had adequate notice that a special meeting had been called.
[37] Harroch ceased to have any involvement with any tournaments in Ottawa after the 2013 tournament.
[38] All profits were disbursed equally.
[39] On November 15, 2015, the corporation was dissolved for non-compliance with section 212 of the Canada Business Corporations Act.
[40] Marchand has not provided any evidence of oppression by Harroch and the claims against him should be dismissed with costs.
Discussion and Analysis
[41] The oppression remedy focuses on harm to the legal and equitable interests of a wide range of stakeholders affected by oppressive acts of a corporation or its directors. This remedy gives a court broad jurisdiction to enforce not just what is legal, but what is fair. Oppression is also 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: BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008 SCC 69 at paras. 45, 58-59.
[42] Briefly stated, the remedy engages a two-step analysis: (1) was a reasonable expectation of a stakeholder breached, and; (2) if so, did the breach of the reasonable expectation amount to oppression, unfair prejudice or unfair disregard for the interests of the aggrieved party?
Marchand’s Reasonable Expectations Were Breached
[43] Turning to the particulars of the present case: while the parties sometimes refer to themselves as partners, the business was not organized as a partnership. Partnership law, to the extent that it varies from the law of corporations, does not apply in the context of this case. At the same time, the parties agree that there were elements of the initial Partnership Agreement that informed the expectations of the parties.
[44] A business corporation has a recognized legal identity with independent rights and obligations. In recognition of this fact it is sometimes referred to as a legal person, as differentiated from the natural persons who own and control it. A corporation is completely dependent upon, and at the mercy of, the people who run it. It is incapable of thought or decision-making and therefore relies on natural persons to do what is best for it. Its success or failure is completely in their hands. Out of this state of dependency has grown a set of obligations, such as good faith and loyalty that attach to the natural persons who control and manage its affairs: Canada Business Corporations Act, s. 122.
[45] There were a couple of features of this closely-held private corporation that deserve comment:
a. None of the principals of the corporation were in a relationship of employer and employee. The corporation had no employees. There was no “boss”.
b. There was no comprehensive Shareholders Agreement setting out their respective rights and obligations. Importantly, there was no mechanism to compel a shareholder to sell his shares or buy the shares of the other shareholders. The Partnership Agreement contained a heading entitled “Shot gun”. Usually this term relates to a compulsory buy or sell clause in a shareholders agreement. In the “agreement” involved in this case, the provision simply provided that “remaining partners get first right to buy back”, in other words, an option to acquire the shares of a departing partner before the departing partner would be entitled to sell his interest to a third party.
[46] Assuming, without deciding that Marchand was not doing his fair share of the work, or that the work he was doing was substandard, there were very few options available to the two other shareholders. They could not fire him. They could not force him to sell his shares, nor to buy theirs. In short, they were stuck with him, just as he was stuck with them—unless they all agreed to a resolution.
[47] Graham and Harroch attempted to persuade Marchand to sell his shares. On July 24, 2013, they offered to pay him $13,133.25 which they said represented the payment formula for a departing partner in the Partnership Agreement, payable over 5 years. On July 29, 2013 Graham and Harroch set a time limit for acceptance of August 2, 2013, failing which they would proceed with the dissolution of the company.
[48] While they had decided to dissolve the corporation if a satisfactory arrangement could not be made regarding Marchand’s ownership interest, as later developments disclosed, they did not intend to abandon the business conducted by the corporation.
[49] Graham contends that Marchand’s reasonable expectation was that they would work together for at least three years and the respondents were free to leave any time thereafter. This contention is irrelevant to a consideration of the applicable principles. It is unclear what Graham means when he says the respondents were free to leave. Certainly, they were not captives and they could withdraw from the corporation and its operations, however but they couldn’t do so in a manner that harmed the corporation by preferring their interests over the interests of the corporation. As it turned out, they didn’t want to leave the corporation’s business activities behind, they wanted to keep that. They just didn’t want the corporation to have the business, because they couldn’t get rid of Marchand.
[50] In depriving the corporation of the opportunity to carry on the existing business, Graham and Harroch breached the obligation of good faith they owed to the corporation. The only reason they dissolved the corporation was to rid themselves of Marchand. They ignored the fact that the corporation had rights as well as obligations, which they were duty-bound to protect. Instead, they put their personal interests ahead of the interests of the corporation. It was reasonable for Marchand to expect that Harroch and Graham would not breach their obligations to the corporation by dissolving it for an illegitimate purpose. I find that Marchand’s reasonable expectations were breached.
Graham and Harroch’s Actions Were Oppressive in Their Breach of Marchand’s Legitimate Expectations
[51] The next step in the analysis requires a consideration of whether the conduct complained of was “oppressive” in the context of the situation in which the parties found themselves. In my view, there is ample evidence to support the conclusion that it was. Marchand was effectively “shut out” of the business that the two other stakeholders decided to carry on. They made a point of attempting to keep their plan confidential from Marchand. It does not matter that Harroch did not have a position in the new corporation, and it is not necessary for Marchand to prove that Harroch profited. In my view, the remedy was engaged in relation to Harroch when he agreed with Graham to dissolve the corporation for the improper purpose of getting rid of Marchand, coupled with the evidence of his involvement in actively recruiting teams for the 2014 version of the event.
[52] Graham was more closely connected with the new corporate structure than Harroch, but it does not matter that Graham did not have a position in the new company. He was clearly not at arms length from the owner of the new corporation, and he was actively involved in the planning and execution of both the elimination of Marchand and the organizing of tournaments subsequent to 2013.
[53] Oppressive conduct is not limited to the theft of corporate secrets or proof of monetary gain. Its flexible nature was made clear by Laskin J. in Can. Aero v. O’Malley 1973 23 (SCC), [1974] S.C.R. 592 at pages 619 and 620:
It is a mistake, in my opinion, to seek to encase the principle stated and applied in Peso, by adoption from Regal (Hastings) Ltd. v. Gulliver, in the straight-jacket of special knowledge acquired while acting as directors or senior officers, let alone limiting it to benefits acquired by reason of and during the holding of those offices. As in other cases in this developing branch of the law, the particular facts may determine the shape of the principle of decision without setting fixed limits to it … In holding that on the facts found by the trial judge, there was a breach of fiduciary duty by O'Malley and Zarzycki which survived their resignations I am not to be taken as laying down any rule of liability to be read as if it were a statute. The general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.
[54] Graham’s focus on partnership law as governing the dealings between the parties is misplaced. This enterprise was not a partnership; it was organized as a corporation and this fact engages fundamentally different considerations than would be applicable to a partnership. For example, annual tax returns were filed in the name of the corporation whereas in a partnership, the partners account for their profit participation and “equity” via the mechanism known as capital accounts which are unique to partnerships. In addition, partners pay taxes on their share of partnership profits through their personal tax returns. Investors must live with the consequences of how they organize their business affairs.
Damages
[55] Having determined that Marchand has proven his entitlement to relief, I turn to the question of damages.
[56] Marchand does not seek an accounting and disgorgement of lost profit. Instead, his request focuses on proper compensation for his shares.
[57] The parties agree that the tournament was less profitable in 2013. At the hearing of the Application, counsel for Marchand suggested that the damages ought to reflect the profit from 2012 of $24,804 when 44 teams participated, proportionately reduced to account for the fact that in 2013 fewer teams participated. He says that $21,000 would be a fair amount using the same proportion of profit to the number of participating teams. He offered no evidence to support the assertion that there should be a straight-line relationship between profit and the number of participating teams.
[58] Marchand disagreed with the 2013 value of $14,333.01 declared at the July 5, 2013 meeting because he says it did not include the undeclared cash receipts that had been included in the annual valuation in previous years. However, in the absence of some corroborating evidence, I am not prepared to accept this bald assertion. Marchand’s compensation should not include an allowance for undeclared revenue that he hasn’t proven was included in previous years’ income calculation and that he can’t quantify.
[59] Marchand’s difficulty on the damages issue is that he is not prepared to accept the valuation declared at the July 5, 2013 meeting but he hasn’t proven that this figure is incorrect. It is notable that Graham and Harroch were prepared to sell their shares to Marchand for the same amount that they offered to buy his shares. It doesn’t matter that their offer to sell may have been a ploy that they didn’t think Marchand would accept. Whether it was a ploy or not, their offer to sell to Marchand provides circumstantial evidence of fair value.
[60] Nor do I accept that Marchand’s compensation should be based on an average of several years’ profit because this is different than what they parties had agreed to. Also, using this approach implies that the declared value for 2013 was incorrect, an assertion the Marchand has failed to prove.
[61] Finally, I question why Marchand thinks it is appropriate that his compensation should include an allowance for cash receipts that the shareholders saw fit to hide from the C.R.A.
[62] In case there is any doubt, the compensation for the liability owed to Marchand is due from Graham and Harroch. The oppressive conduct is clearly attributable to them. Also, holding Graham and Harroch liable is fit in all the circumstances. In Wilson v, Alharayeri, 2017 SCC 39 the Supreme Court of Canada enumerated four general principles to guide courts in fashioning a fit remedy. First, the oppression remedy must itself be a fair way of dealing with the situation. Here, Graham and Harroch breached personal duties owed to the corporation. Second, any order should go no further than is necessary to rectify the oppression. Third, any order may serve only to vindicate the reasonable expectations of a qualifying corporate stakeholder. Fourth, a court should consider the general corporate law context in exercising its remedial discretion. I have taken these factors into account in an effort to fashion a remedy that reflects the fairness principle that underlies the purpose and objectives of the legislation but to go no further.
Disposition
[63] I agree with Marchand that it was reasonable for him to expect that Graham and Harroch would act in the best interests of the corporation, that they would perform their duties in good faith and that they would not place their personal interests ahead of the corporation. I also agree that their actions were oppressive to the interests of Marchand as a minority shareholder.
[64] I also find that the best indicator of the proper valuation of his shares is the July 5, 2013 valuation. On the basis of this valuation, Marchand’s special damages are equal to one third of the declared valuation of $14,333.01 multiplied by three years which equals $14,333.01, less the dividend that was actually paid in 2013 which should operate as a credit against the amount due to Marchand.
[65] In addition to the forgoing amount, I award Marchand general damages of $5,000. The amount in the previous paragraph represents the value of the shares of a departing shareholder in accordance with their agreement but there was no valid reason for Marchand to be forced out of the corporation. In my view an award of general damages is a valid and necessary component of a remedy whose object is to obtain fair treatment for Marchand in the context of what transpired. The sum of $5,000 fairly reflects the part time nature of the enterprise and the relatively modest amounts in dispute.
[66] The liability of Graham and Harroch shall be on a joint and several basis.
[67] If the parties are unable to agree on costs, Marchand may deliver a brief costs outline and a draft bill of costs with 21 days and the Respondents shall have 21 days to respond. The costs submissions may be filed electronically to: SCJ.Assistants@ontario.ca
Mr. Justice Martin James
COURT FILE NO.: CV-15-63529 DATE: January 29, 2021
SUPERIOR COURT OF JUSTICE - ONTARIO
BETWEEN: Marchand v 7104383 Canada Inc. et al.
BEFORE: Honourable Mr Justice Martin James
REASONS FOR DECISION
James, J.
DATE: January 29, 2021