Hrvoic v. Hrvoic, 2021 ONSC 7537

COURT FILE NOS.: CV-19-630077 & 20-636758

DATE: 20211115

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

DAG HRVOIC

Applicant

– and –

MELISSA HRVOIC

Respondent

Gregory M. Sidlofsky and Robert Alfieri for the Applicant/Defendant

Daniel F. Chitiz and Alastair J. McNish, for the Respondent/Plaintiff

AND BETWEEN:

MELISSA HRVOIC

Plaintiff

• and –

DAG HRVOIC and 1427830 ONTARIO CORPORATION

Defendants

HEARD: April 22, 26-30, May 4, 17, June 10, 2021

AMENDED DECISION

J. STEELE J.

1Further to my judgment in Hrvoic v. Hrvoic, 2020 ONSC 8139, the trial proceeded before me on the issues of (1) the respective shareholdings of Doug Hrvoic (“Doug”) and Melissa Hrvoic (“Melissa”) in 1427830 Ontario (“Holdco”); and (2) the fair value price Doug will pay Melissa to buy her shares of Holdco.

2Holdco owns 100% of the shares of Marine Magnetics Inc. (“Marine Magnetics”).

Overview

3This trial involved the division of a business that was built together by two spouses. Doug and Melissa started the company together and worked many years together building a successful business, Marine Magnetics. When they separated and addressed some of their matrimonial issues in the family courts, the business was not divided. Both spouses were working in the business, being paid equal compensation and equal dividends from the company.

4When the relationship further deteriorated between the parties, and after the expiration of the limitation period for seeking an equalization of net family property, Doug terminated Melissa’s employment and has not since authorized further dividends from Holdco, despite there being ample retained earnings in the business.

5The trial was held to determine the percentage of Holdco held by each of Doug and Melissa and the value of Holdco so that Doug can buy Melissa out of the business.

6Through the course of these proceedings it became apparent that the parties are engaged in at least two other matters before the court: (1) proceedings related to Melissa’s termination from Holdco; and (ii) family law proceedings related to their children.

Background

7Doug and Melissa were spouses. They were married in 1992 and separated in or around September 2010.

8Marine Magnetics was founded by Doug, Melissa, and Mark Oliver in 1998. Among other things, Marine Magnetics makes specialized sensors, known as magnetometers, for marine use and gradiometer products. Doug described magnetometer sensors and their use at trial. These sensors precisely measure the earth’s magnetic field. They can be used for resource exploration, as they can determine the location of mineral concentrations. Magnetometer sensors can also be used to find manmade objects made of iron, for example, such as unexploded bombs or archaeological objects made of iron.

9Doug’s father, Ivan Hrvoic (“Ivan”), owns a separate company, GEM Systems Inc. (“GEM”) which, among other things, manufactures Overhauser magnetometer sensors that are used in Marine Magnetics’ products. Ivan is the founder and president of GEM.

10When Marine Magnetics was incorporated, 70 common shares were issued to Doug, 20 common shares were issued to Melissa and 10 were issued to Mark Oliver. Initially, all three were directors and officers of Marine Magnetics. The three of them worked in the business, in addition to another employee, Dexter Ragai.

11In 1999, Mark Oliver resigned as a director and officer of Marine Magnetics. His shares were transferred back to the company, then subsequently issued to Melissa. This increased Melissa’s shareholdings to 30 common shares of Marine Magnetics. Doug’s evidence was that this was done in part to foster Melissa’s interest in the business. Melissa and Doug were the only employees of the business for some time and diligently worked together to build the company.

12On or about June 29, 2000 a rollover under section 85 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) was completed. At that time Holdco was incorporated to hold the shares of Marine Magnetics. Following the rollover, Doug held 77 common shares in Holdco and Melissa held 33 common shares in Holdco.

13The constating documents of Holdco authorize other classes of special shares, including Class D Shares. However, the corporate records of Holdco do not show any share classes, other than the common shares, having been issued.

14Melissa and Doug are the sole directors and officers of Holdco. Doug is the president of Marine Magnetics and Melissa is the secretary. Doug is also the president of Holdco and Melissa is the secretary-treasurer.

15Holdco is the owner on title of the commercial property at which Marine Magnetics carries on business. GEM also carries business at the same location.

16On or about March 2, 2020 Doug terminated Melissa’s employment with Marine Magnetics without notice. There is a separate legal proceeding ongoing related to Melissa’s termination.

The Witnesses at Trial

17The court heard from Doug and Melissa. Both parties also tendered experts with regard to the valuation of Holdco. Paul Mandel from RSM Canada Consulting LP (“RSM”) was the valuation expert engaged by Doug. Chris Polson from PricewaterhouseCoopers LLP (“PwC”) was the valuation expert engaged by Melissa. Both Mr. Mandel and Mr. Polson were tendered as experts and accepted by the court.

18Doug called Ilya Inozemtsev as a witness. Mr. Inozemtsev is employed full-time at Marine Magnetics as a geophysicist and lead engineer. He has worked at Marine Magnetics for the past five years. Mr. Inozemtsev and Doug met at university during graduate school about seven years ago.

19Doug also called his father, Ivan Hrvoic, as a witness. Ivan has a Ph.D in applied physics, the focus of which was on overhauser magnetometers.

20Rajeev Jain was called by Doug as a witness. Mr. Jain is a chartered accountant with the firm Toby & Jain. He is Doug’s accountant and the accountant for Holdco and Marine Magnetics. He was previously Melissa’s accountant as well.

21Rebecca Rose was subpoenaed as a witness by Melissa. Ms. Rose is a friend of Rebecca’s and they talk regularly. Ms. Rose has been working at Marine Magnetics since approximately 2011 and reported directly to Melissa until Melissa was fired. Her current position is operations manager. She now reports to Doug.

22Michael Daffern was called as a witness by Doug. Mr. Daffern is a production manager at Marine Magnetics and has worked there since 2001. He reports to Doug. He testified that when Melissa worked at Marine Magnetics, he reported to her on some things as well and worked closely with her when they were at trade shows.

23Gina Lopez was called as a witness by Doug. Ms. Lopez is a sales manager at Marine Magnetics and has worked there for approximately 4 years. When Melissa worked at Marine Magnetics, Ms. Lopez reported to Melissa and worked very closely with her. She now reports to Doug.

Analysis

(1) What are the respective shareholdings of Doug and Melissa in Holdco?

24Doug and Melissa built the business together. They both worked hard and contributed to the success of the company. Doug is the president and the person with the technical expertise. He is an engineer and geophysicist by education and training. Melissa was the lead sales, marketing and client/business development person during her time at Marine Magnetics.

25Having regard to the books and records of Holdco, the share registry shows that Doug holds 70% of the common shares of Holdco and Melissa holds 30% of the common shares of Holdco. These are the only shares that have been issued. There is no evidence of the issuance of any other share classes, including Class D shares, in the company’s minute book.

26Doug’s position is that the common shareholdings, as reflected in the minute books of Holdco, are correct: he owns 70% and Melissa owns 30%. However, his position is that the dividends that were paid by Holdco to Doug and Melissa equally on a regular basis following their separation were paid on Class D shares, despite there being no record of the issuance of any such Class D shares.

27There is considerable confusion regarding the issue of share ownership in Holdco based on the evidence and certain correspondence. For example, there is mention of an agreement in principle of Doug holding 51% of the common shares of Holdco and Melissa holding 49% of the common shares of Holdco (see the email to Scotiabank from Mr. Jain referred to below). There is also a letter from Doug’s counsel in the family law proceedings, dated April 23, 2018, where he states that Melissa holds 49% of Marine Magnetics and Doug holds 51%. On December 31, 2019, Doug’s counsel in the family law proceedings sent a letter to his counsel in these proceedings indicating that this was a misstatement and was incorrect. There are other emails, for example pertaining to Melissa’s and Doug’s shareholder accounts, in which Doug states to Melissa that he is the majority shareholder. Melissa’s evidence when asked about these emails was consistent in that she was being treated equally from the company so she was unconcerned about these statements. This makes sense to me – there are ongoing family law proceedings and the parties are trying to continue to work together in the business, so why add fuel to the fire if financially everything is equal?

28Melissa’s position is that she agreed to stay in Toronto, thereby giving up a significant acting opportunity in Los Angeles, and devote her time to building the business with Doug. As a result, and based on her recount of events at the time, she was to have half the business. Her understanding was that Doug would take the necessary steps to reflect the shareholdings in Holdco as 50/50. There was no discussion as to how that was to occur.

29The evidence was that Melissa was offered a great part in a show in Los Angeles. There is some disagreement about when that occurred. Melissa said that it was in the fall of 2000 after the reorganization of Holdco. Melissa’s evidence was that this was an incredible opportunity for her and that she was very excited about it. However, her evidence was that Doug did not want her to go and wanted her to stay and continue to build the business with him. Doug’s evidence was that he told her to go and that it was a great opportunity for her. Given that Marine Magnetics was operating with only 3 people at the time and Doug and Melissa were on the ground working twelve hour days, I find it difficult to accept Doug’s evidence that he told Melissa to move to Los Angeles and pursue this acting opportunity. Marine Magnetics was and is extremely important to Doug and it belies logic that he would tell Melissa, who by his own account was working long hours side by side with him, to go to Los Angeles. Accordingly, I accept Melissa’s evidence in this regard.

30As set out in section 139(3) of the Ontario Business Corporations Act, R.S.O. 1990, c.B.16 (“OBCA”), the information contained in a company’s minute book is admissible in evidence as proof, in the absence of evidence to the contrary, of all facts stated therein. As pointed out by the court in Glass v. 618717 Ontario Inc., 2012 ONSC 535, at para. 112: “The OBCA recognizes that a minute book may not be accurate, for a variety of reasons, so the presumption that the information in a minute book is proof of the facts stated therein may be displaced by ‘evidence to the contrary’.” In discussing section 139(3) of the OBCA, the court, in Trezzi v. Trezzi, 2018 ONSC 5180, at para. 37, aff’d 2019 ONCA 978, 150 O.R.(3d) 663, noted that “[t]he weight to be attached to such evidence [to the contrary] is left to the trier of fact” (at para. 37).

31Doug submits that Trezzi is instructive, as the applicant in that case similarly sought a declaration that she was a 50% owner of the shares of a company. She claimed that there was an agreement to make her 50% shareholder and there were draft documents that had been prepared but were not executed. The court determined that the applicant in that case had not satisfied the onus and her application was denied. In my view, Trezzi is distinguishable from the instant case. In this case, Holdco’s minute books are clearly inaccurate. Both parties in the instant case assert that share ownership is different from what is reflected in the corporate records.

32As set out in my earlier judgment, this is not a straight-forward corporate matter. There is no question that the Holdco corporate records are deficient – either they fail to show the revised common shareholdings as being 50/50, or they fail to show the issuance of Class D shares in equal number to each of Doug and Melissa.

33The share registry of this privately held company has not been updated. Melissa’s evidence was that she understood that she held 50% of Holdco. Doug’s evidence was that Melissa only ever held 30% of the common shares of Holdco, but held 50% of the Class D shares, which is why dividends were paid 50/50 to Doug and Melissa.

34Mr. Jain’s evidence was that Schedule 50 to the corporate tax returns up to and including the taxation year ended August 31, 2015 showed the common shareholdings as 70% Doug and 30% Melissa, and no preferred shares. There were letters from Mr. Jain, dated February 27, 2014 (the “2014 Letters”), to Doug and Melissa in respect of the dividends paid in 2012 and 2011, which refer to the dividends as having been paid “to the holders of the common shares” and to Doug and Melissa in equal amounts. Mr. Jain’s evidence was that there were no dividends paid in 2013 or 2014. Further, although there was a dividend paid in respect of 2015, there was no letter from Mr. Jain similar to the 2014 Letters. Interestingly, for the taxation year ended August 31, 2016, and for the first time, preferred shares are also included on Schedule 50 (showing Doug and Melissa each holding 50/50 preferred shares). By the time this tax return was prepared, which Mr. Jain indicated would have been in 2017, the limitation period under the Family Law Act, R.S.O. 1990, c. F.3 would have expired.

35Mr. Jain’s evidence was that someone on his staff in 2017 recognized that there was an error in that the Holdco corporate tax returns prior to 2016 had not made reference to the Class D shares. I do not accept this evidence. The timing coinciding with the expiry of the Family Law Act limitation period seems fortuitous from Doug’s perspective. Further, there is nothing in the corporate records to show the issuance or even intent to issue these phantom Class D shares. Further, had they actually been issued, as discussed below, there still would have been a requirement for dividends on the common shares in priority to the Class D shares based on the share provisions.

36Under section 25(1) of the OBCA, the articles of incorporation of a company may authorize the issuance of any class of shares and determine the designation, rights, privileges, restrictions and conditions attaching to the shares of each series. The Articles of Incorporation for Holdco authorize 5 share classes: Common Shares, Class A special shares, Class B special shares, Class C special shares and Class D special shares. The relevant attributes of the special share classes are as follows:

a. Class A special shares: identical rights to common shareholders, except non-voting.

b. Class B special shares: holders “entitled to receive and the Corporation shall pay thereon as and when declared by the board of directors out of the monies of the Corporation, properly applicable to the payment of dividends, non-cumulative, preferential cash dividends at the rate of eight percent (8%) per annum on the redemption value as determined from time to time …”

c. Class C special shares: holders “entitled to receive and the Corporation shall pay thereon as and when declared by the board of directors out of the monies of the Corporation, properly applicable to the payment of dividends, fixed, cumulative, preferential cash dividends at the rate of twelve percent (12%) per annum on the subscription monies paid for such special shares …”

d. Class D special shares: “The holders of the Class “D” Special Shares shall in each fiscal year of the Corporation, in the discretion of the directors, be entitled out of any or all profits or surplus lawfully available for dividends remaining after payment of dividends on Common Shares, the Class “B” Special Shares and the Class “C” Special Shares of the Corporation, to non-cumulative dividends at a rate and in an amount to be determined by the directors.” [emphasis added]

37Melissa submits that the provisions in the articles of incorporation of Holdco preclude payment of dividends on the Class D shares ahead of dividend payments on the common shares. When the articles are read as a whole, it is clear that the Class B and Class C shares are entitled to preferential dividends. However, the dividends on the Class D shares are only to be paid out of any profits or surplus available for dividends remaining after payment of dividends on Common Shares (and Class B shares and Class C shares). I am persuaded that the only logical interpretation of the terms pertaining to the Class D shares is that dividends must first be paid on the Common Shares in the year before dividends can be paid on the Class D shares. Accordingly, I am the view that Doug’s assertion that the 50/50 dividends were paid on the Class D shares is incorrect. Not only have no such shares been issued, but dividends on these Class D shares (if any) would only be paid after payment of dividends on any common shares. This means that the 50/50 dividends could only have been for the common shares, as such payments must come first before any Class D share dividends.

38In addition, I am of the view that the behavior of the parties following the separation is very telling as to what the shareholdings were in this closely-held company. First, Melissa did not claim equalization of net family property for family law purposes. Second, Doug ensured that both he and Melissa were treated equally in terms of income and dividends from the company. I discuss each of these in turn below.

39Melissa did not claim equalization of net family property for family law purposes, as she understood that she held 50% of their most valuable asset, Holdco (and, as discussed below, she was being treated as an equal owner). Importantly, the equalization rights under the Family Law Act expired in September 2016. Doug points to the Form 13.1 financial statements used in their family law proceedings. He notes that his sworn Form 13.1 financial statement stated that he was a 70% shareholder of Holdco. However, Melissa’s Form 13.1 did not specify her percentage ownership in Holdco and stated that the value was “TBD” (to be determined). I find that Melissa’s behavior in not seeking an equalization payment in the family law proceedings supports her testimony at trial that she understood that she and Doug owned Holdco equally.

40Further Melissa was compensated equally and received dividends in equal amounts from Holdco following the parties’ separation until she was terminated. This supports her position and view that she held half the company. Prior to separation, the evidence was that the parties shared one bank account. The salaries and bonuses paid to Doug and Melissa prior to separation were also the same, other than when their salaries were adjusted for tax reasons to take advantage of certain Scientific Research and Experimental Development Tax Incentive Program credits (related to research and development).

41After separation, Doug’s evidence was that he decided to “unilaterally equalize our incomes from the company in the interest of making things simpler in terms of financial equalization”. Mr. Jain’s evidence was also that Doug directed that any salary and dividends from the companies had to be equal as between Doug and Melissa from 2011 forward. Doug caused Melissa to rely on this equal treatment and she did rely on it. It is not clear why Doug unilaterally made this decision in the face of obvious family acrimony unless (i) Melissa’s position that she understood she was a 50% owner of the company is correct, or (ii) Doug was aware of his family law obligations on the breakdown of the marriage and determined that the best route forward to avoid conflict was to ensure that Melissa was treated equally from Holdco.

42In summary, I accept Melissa’s evidence regarding the ownership of the Holdco shares for the following reasons:

a. Dividends were paid equally to the parties following separation and there were no Class D shares issued. Further the Class D share provisions require payment of dividends on the common shares before any dividends on Class D shares;

b. Melissa’s behaviour in not making an equalization claim in the family law proceedings; and

c. Doug’s behaviour in ensuring that Holdco and Marine Magnetics treated him and Melissa equally, following their separation.

43For the above reasons, I find that Melissa holds 50% of the shares of Holdco.

Good Conscience Constructive Trust

44Had I not determined that Melissa was a 50% owner of Holdco based on the evidence, I would have found that based on good conscience 20% of the common shares allocated to Doug in the Holdco corporate records are subject to a constructive trust in favour of Melissa.

45There is some disagreement in the case law as to whether a constructive trust may be imposed in situations other than wrongful act/gain and unjust enrichment. The case law is unclear as to whether these two situations exhaust the “broad umbrella of good conscience”. Accordingly, I set out why it is my view that “good conscience” should encompass more than these two limited situations in appropriate circumstances.

46The remedial constructive trust is a tool of equity. In Moore v. Sweet, 2018 SCC 52, [2018] 3 S.C.R. 303, the Court stated, at para. 32:

“A constructive trust is a vehicle of equity through which one person is required by operation of law – regardless of any intention – to hold certain property for the benefit of another (Waters’ Law of Trusts in Canada (4th ed. 2012), by D.W.M. Waters, M. R. Gillen and L.D. Smith, at p. 478). In Canada, it is understood primarily as a remedy, which may be imposed at a court’s discretion were good conscience so requires. …”

47Under Canadian common law, the constructive trust is available as a remedy in at least two situations: where there has been unjust enrichment, or where property has been obtained through a defendant’s wrongful act, such as fraud or breach of fiduciary duty: Soulos v Korkontzilas, 1997 CanLII 346 (SCC), [1997] 2 S.C.R. 217 at para. 39.

48In Pettkus v. Becker, 1980 CanLII 22 (SCC), [1980] 2 S.C.R. 834, the Supreme Court affirmed the availability of the remedial constructive trust in a situation of unjust enrichment. Dickson J., for the majority, indicated that the constructive trust is available as a remedy if there has been an enrichment, a corresponding deprivation, and absence of any juristic reason for the enrichment (p. 848). The plaintiff must also establish that a personal remedy would be inadequate and that their contribution founding the action “is linked or causally connected to the property over which a constructive trust is claimed” (Moore, at para. 91).

49In Soulos, at para. 43, the Court recognized the availability of the remedial constructive trust for a wrongful act or gain in the absence of an unjust enrichment and corresponding deprivation. McLachlin J., for the majority, at para. 45, identified four conditions that should generally be met:

(1) the defendant must have been under an “equitable obligation” related to the activities giving rise to the assets in their hands,

(2) the assets in the defendant’s hands must be shown to result from “deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff”,

(3) the plaintiff must have “a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others … remain faithful to their duties”, and

(4) there must be no countervailing factors that would make imposing the constructive trust “unjust in all the circumstances of the case”.

50In Soulos, at para. 43, McLachlin J. recast the justification for the remedial constructive trust as being that of “good conscience,” concluding that, “in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation”. She described “[g]ood conscience” as a “common concept unifying the various instances in which a constructive trust may be found” (para 35). Although she acknowledged that “good conscience” has “the disadvantage of being very general,” (para. 35) she also provided some guidance, at para. 34:

“The inquiry into good conscience is informed by the situations where constructive trusts have been recognized in the past. It is also informed by the dual reasons for which constructive trusts have traditionally been imposed: to do justice between the parties and to maintain the integrity of institutions dependent on trust-like relationships. Finally, it is informed by the absence of an indication that a constructive trust would have an unfair or unjust effect on the defendant or third parties, matters which equity has always taken into account. Equitable remedies are flexible; their award is based on what is just in all the circumstances of the case.” [Emphasis added]

51Where neither of the two recognized grounds has been established, it is less clear whether a constructive trust may be imposed. The Supreme Court has given conflicting signals on this issue. On the one hand, in Professional Institute of the Public Service of Canada v. Canada (Attorney General), 2012 SCC 71, [2012] 3 S.C.R. 660, Rothstein J., for the Court, at paras. 144-45, cited Soulos for the proposition that there are “two grounds on which a court can impose a constructive trust” and that “good conscience might require the imposition of such a trust in two situations” (emphasis added). On the other hand, the Supreme Court in Sweet refused to answer the “open question” of whether Soulos “should be interpreted as precluding the availability of a remedial constructive trust beyond cases involving unjust enrichment or wrongful acts like breach of fiduciary duty” (para 95, emphasis added).

52The remedial constructive trust is an equitable remedy. I see no reason why it should be confined to only unjust enrichment or wrongful acts like breach of fiduciary duty. There are certainly other cases where good conscience may require the imposition of a remedial constructive trust, and this case is one of them.

53In my view this is a case where it is appropriate, and “good conscience so requires”, to impose a constructive trust for the following reasons. First, there was no equalization payment made for family law purposes and the limitation period under the Family Law Act has expired. The shares of Holdco were the parties’ most valuable asset and there had been no division of this asset. Second, based on the arrangement put in place by Doug following the parties’ separation, Doug and Melissa were treated equally in every respect with regard to compensation from Marine Magnetics and dividends from Holdco. This is because, as Doug stated, he wanted to ensure financial equality with Melissa. Further, Doug has refused to authorize dividends from Holdco to be paid out for some time, resulting in considerable retained earnings in the business. If that money had been paid out as dividends, it would have been 50/50 as between Melissa and Doug, based on the arrangement Doug had put in place following the parties’ separation. Based on the evidence, there is currently approximately $2 million in cash in Marine Magnetics. Melissa had requested that a dividend be paid out to the shareholders in the amount of $1 million ($500,000 each) and Doug refused.

54Accordingly, had I not determined above that the shareholdings of Holdco are 50/50, I would have determined that good conscience requires that 20% of the common shares of Holdco held by Doug be impressed with a constructive trust in favour of Melissa.

Clean Hands

55Doug’s position is that Melissa comes to the court with unclean hands and is therefore not entitled to equitable relief.

56The clean hands doctrine dictates that a plaintiff cannot obtain equitable relief from the court if they come to court with “unclean hands”: Taylor v. Guindon, 2005 CanLII 25894 (Ont. S.C.). The court in Taylor dealt with a situation where the parties had been in a common law relationship and the plaintiff claimed an interest in the defendant’s companies and his home based on unjust enrichment. The court, at para. 48, described the doctrine as follows:

Her claim is based in the law of equity. One of the tenets of the law of equity is that “he who comes to equity must come with clean hands”. A plaintiff cannot seek equitable relief if the party has violated the principle of good faith. Such a party is described as having “unclean hands”. If a claimant does not have clean hands, the court can exercise its discretion to refuse to award an equitable remedy. The test for clean hands must be established on the particular facts of each case. Only conduct that is immediately and necessarily related to the claim in question will bar a claim in equity. If both parties have “unclean hands” the court should consider only those of the plaintiff and need not balance the misconduct of one against that of the other.

57The court in Taylor determined that the plaintiff had not come to court with clean hands, had engaged in improper actions that were immediately related to her claim (she had misappropriated funds from the company on the same day as her privileges were revoked), and concluded that she was estopped from advancing a claim for unjust enrichment. The court stated, at para. 55, that “[t]he law of equity should not intervene on behalf of individuals who have acted in bad faith”.

58Doug’s position is that because Melissa made certain withdrawals from the company through her shareholder’s account while she was employed at Marine Magnetics, and withdrew $600,000 from Doug’s personal line of credit following her termination of employment, she does not come to court with clean hands and should not be granted equitable relief.

59Based on the evidence at trial, I am satisfied that both Doug and Melissa had shareholder accounts in Marine Magnetics and both had access to the funds when needed. There was a reconciliation done at the end of each year.

60The $600,000 withdrawal from the line of credit is more complicated. When Doug terminated Melissa’s employment with Marine Magnetics without notice or pay in lieu of notice, Melissa went to the bank and withdrew $600,000 from Doug’s line of credit. Melissa has since paid back this money.

61In all the circumstances I would still exercise my discretion and award an equitable remedy. There are complex family dynamics at play here. In fact, the evidence was that there are still ongoing acrimonious family law proceedings related to the children. Doug led Melissa down the garden path regarding her continued equal treatment from the family business. Then, he suddenly pulled the rug out from under her. Melissa panicked. By firing her, Doug had cut off her only source of employment income. All of Melissa’s relevant work experience had been gained in a company whose president was now claiming that she was fired for cause. Doug also refused to authorize dividends from the company, without explanation, and Melissa had no other source of income. She made a rash, and I am sure regrettable, decision to withdraw monies from Doug’s line of credit, to which she had access. Melissa repaid the money.

(2) Limitations Issue

62Doug takes the position that Melissa’s claim is statute-barred. Melissa’s claim was issued on February 21, 2020.

63Section 4 of the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B provides that a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered. The Limitations Act defines a claim as “a claim to remedy an injury, loss or damage that occurred as a result of an act or omission”.

64Section 5(1) of the Limitations Act provides that a claim is discovered on the earlier of

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

65In Clarke v. Sun Life Assurance Company of Canada, 2020 ONCA 11, 149 O.R. (3d) 433, the Court of Appeal, considering the elements set out in section 5(1)(a) of the Limitations Act, stated, at para. 20:

Section 5(1)(a) identifies the four elements a court must examine cumulatively to determine when a claim was “discovered”. When considering the four s. 5(1)(a) elements, a court must make two findings of fact:

(i) The court must determine the “day on which the person with the claim first knew” all four of the elements. In making this first finding of fact, the court must have regard to the presumed date of knowledge established by s. 5(2): “A person with a claim shall be presumed to have known of the matters referred to in clause (1)(a) on the day the act or omission on which the claim is based took place, unless the contrary is proved”; and

(ii) The court must also determine “the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known” of the four elements identified in s. 5(1)(a).

Armed with those two findings of fact, s. 5(1) then requires the court to compare the two dates and states that a claim is discovered on the earlier of the two dates: see Nasr Hospitality Services Inc. v. Intact insurance, 2018 ONCA 725, 142 O.R. (3d) 561, at paras. 34-35.

66The two-year period does not start to run until the plaintiff is aware of all of the elements in paragraphs 5(1)(a)(i) to (iv) or until a reasonable person with the abilities and in the circumstances of the plaintiff first ought to have known of the elements.

67Doug submits that Melissa had knowledge in 2011 or August 2017 at the latest that she was only a 30% shareholder of Holdco and that the claim is therefore statute-barred. Doug informed Melissa in 2011 that she had only a 30% interest in Holdco. There was also evidence from Mr. Jain that he had discussions with Melissa in 2016 and 2017 about her being a 30% shareholder of Holdco.

68Melissa submits that it is arguable whether she has sustained any injury, loss or damages even as of today, given the lack of reliable corporate records. She submits that she has simply asked the court to make an order confirming her view that she is a 50% shareholder. She states that if there is an injury, loss or damage, she did not know that the “injury, loss or damages had occurred” until, August 2017 at the earliest, when she saw Mr. Jain’s email to Scotiabank, dated August 11, 2017. That email stated:

Based on information provided to us current ownership structure is as follows: Marine Magnetics Inc. is 100% owned by [Holdco]. [Holdco]: Doug Hrvoic holds 70% of common shares. Melissa Hrvoic holds 30% of common shares. Doug Hrvoic: holds 50% of Class D Special shares. Melissa Hrvoic: holds 50% of Class D Special shares. This is our understanding that both Melissa and Doug have agreed in principal to have the following new ownership structure, pursuant to the separation agreement: [Holdco]: Doug Hrvoic to hold 51% of common shares. Melissa Hrvoic to hold 49% of common shares. Doug Hrvoic: to hold 50% of Class D Special shares. Melissa Hrvoic: to hold 50% of Class D Special shares.

69Melissa’s evidence was that when she saw Mr. Jain’s email she called him to ask about it as it referred to her being a 30% shareholder of Holdco at that time, inconsistent with her understanding. Mr. Jain told her to speak with Doug. Instead, Melissa asked Doug to see the Holdco minute books to determine her share interest. Despite numerous requests, Doug did not provide the minute books to Melissa until it was done through counsel on or about June 19, 2019.

70Melissa further submits that a proceeding would not have been an appropriate means to seek to remedy any loss or damage until, at the earliest, the date that Doug served the notice of shareholders’ and directors’ meetings, dated July 4, 2019. The notice was of a meeting at which Doug was seeking to remove Melissa as an officer and director of Holdco and Marine Magnetics. At that time, Melissa had just been given access to Holdco’s minute books. Up until then, she continued to believe that she was a 50% shareholder of Holdco as she continued to receive dividends from Holdco on a 50% basis and equal compensation from Marine Magnetics. Her position was that it was reasonable for her to take a “wait and see” approach until the receipt of her next dividend.

71The fourth component of the test under the Limitations Act is that having regard to the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it. When an action is “appropriate” depends on the facts of each case: Brown v. Baum, 2016 ONCA 325, 397 D.L.R. (4th) 161. In commenting on this element of the test, the Court of Appeal in 407 ETR Concession Company Limited v. Day, 2016 ONCA 709, 133 O.R. (3d) 762, at para. 49, stated:

The overall purposes of limitation statutes are well-established and well-known: certainty, finality and the unfairness of subjecting defendants to the threat of a lawsuit beyond a reasonable period of time. But it seems to me one reason why the legislature added ‘appropriate means’ as an element of discoverability was to enable courts to function more efficiently by deterring needless litigation. As my colleague Juriansz J.A. noted in his dissenting reasons in Hare v. Hare (2006), 2006 CanLII 41650 (ONCA), 83 O.R. (3d) 766 (C.A.), at para. 87, courts take a dim view of unnecessary litigation.

72Following closing submissions, counsel brought to my attention Grant Thornton LLP v. New Brunswick, 2021 SCC 31, which interprets the New Brunswick Limitation of Actions Act, S.N.B. 2009, c. L-8.5. The Court in that case determined that the province’s claim against Grant Thornton LLP was statute-barred as the province had actual or constructive knowledge of the material facts when it received a draft report from another firm on February 4, 2011. The Court found, at para. 55, that the “Province’s knowledge about its potential claim crystallized at this point.” The language of Ontario’s Limitations Act differs from the Limitation of Actions Act in that the New Brunswick statute does not contain language comparable to paragraph 5(1)(a)(iv) of the Limitations Act. Accordingly, it is my view that this case is not of assistance.

73I am persuaded that having regard to the nature of the loss, a reasonable person would not have commenced a lawsuit while they were being treated as a 50% shareholder. Even if Doug said he owned 70% of the business or Mr. Jain indicated in writing that the ownership split was 51/49, Melissa had no reason to think that she would not continue to be treated as a 50% shareholder until Doug sought to call the shareholder and director meetings. So why would she think it appropriate to take up the court’s time and start a legal proceeding until that time?

(3) What is the fair market value of Holdco?

74In order for Doug to buy out Melissa’s shares of Holdco, the value of Holdco must be determined. At trial, both parties filed expert reports and the court heard evidence from the experts retained by each party. The value of Holdco estimated by the two experts differed.

75Both parties agree that in determining the fair value of shares, a court must determine the highest price obtainable that a hypothetical informed prudent buyer and seller would reach. The definition of fair market value in Mr. Polson’s report from the CBV Institute Practice Bulletin No. 2, International Glossary of Business Valuation Terms is:

“the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

76Doug’s expert, Paul Mandel of RSM, testified that the value of Holdco could be as high as $9,590,000. Melissa’s expert, Chris Polson of PwC, testified that the value of Holdco could be as low as $12,800,000. Essentially the valuators were just a little more than $3 million apart in their valuations. This is remarkable given that they received different data from their clients upon which to base their valuations and used different assumptions. It is therefore incumbent on me to make a critical assessment on the validity of the data used and the methodology used by each expert to determine the value of Holdco.

77The valuations of Holdco were done as at December 31, 2020.

78The value of Holdco is comprised of 2 assets: (1) the 100% interest in Marine Magnetics; and (2) the commercial real estate located at 135 Spy Court, Markham, Ontario where Marine Magnetics and GEM are headquartered (the “Real Property”). The value of Holdco was determined as the sum of the underlying assets using an asset-based approach.

The Real Property

79The Real Property was appraised by Lebow, Hicks Appraisal Inc. as at December 31, 2020 as having a current market value of $5,440,000. Both valuators accepted the FMV of the Real Property determined by Lebow and took into account the Book value of the Real Property ($2,276,010) and contingent disposition costs ($201,462 per PwC; $323,000 per RSM).

80The discrepancy in the valuations related primarily to the valuators’ evidence regarding Holdco’s other asset, Marine Magnetics.

Marine Magnetics

81Doug argues that Mr. Polson’s evidence and underlying assumptions were extraordinarily partisan and unreasonable. His position is that Mr. Polson crossed the line as an expert and became an advocate. Similarly, Melissa submits that Mr. Mandel was too influenced by Doug’s own thinking to arrive at an objective conclusion. It is trite that experts are not to act as an advocate for the party that retains them and are required to be independent.

82On the whole, I found both experts to be professional, knowledgeable and helpful to the court. I also found helpful Mr. Mandel’s observation that valuation determination involves art, science and professional judgment. Doug would have the court accept that the value of Marine Magnetics is limited to its liquidation value, whereas Melissa would have the court accept that the value of Marine Magnetics is based on the most optimistic scenario and outcome.

83The difference between the two valuations, notwithstanding the “art”, “science” or “professional judgment” used by each valuator, is probably a function of the assumptions used by each, in turn influenced by the data provided to them by their clients. This is not to say that either of the valuators were intentionally biased. In fact, I find that each of them did their best to assist the court with their professional judgment as to value based on the methodology used and the data points provided to them by their clients.

84For example, it is clear that Mr. Polson relied on certain information from Melissa that was not confirmed or corroborated. Mr. Mandel had access to Doug and others at the company. Mr. Polson did not have the same access. For this reason, I have determined that Mr. Mandel’s report is entitled to somewhat greater weight.

85Both experts were experienced valuators. However, Mr. Mandel has been previously qualified as an expert in business valuations several times. On the other hand, Mr. Polson had only been qualified as such “once or twice” previously.

86It is clear to me that valuation of a company involves many assumptions that are not prescribed. In fact, on many occasions in his evidence Mr. Mandel made statements such as “there’s a bit of art in this science”, “there’s a little bit of art that goes into it”, “it’s a bit of a professional judgment”, “a lot of professional judgment”, and “again, this is art versus science”. (I was impressed with the extent to which Mr. Mandel’s approach reflects the principles set out in Glass, to which I will refer later.)

87As mentioned above, the valuations differed most dramatically in the value attributed to Marine Magnetics. Both valuators selected the Income Approach, and the Capitalized Cash Flow (“CCF”) method, in particular, as the primary approach to value Marine Magnetics. Under the CCF method, the maintainable cash flow is multiplied by a multiple (or capitalization factor) to arrive at the going-concern value of the operations. Accordingly, the valuators determine what the free cash flow of the business is and multiply that by the capitalization multiple.

88The capitalization multiple used by Mr. Mandel is 4.9 or 5.2. The capitalization multiple used by Mr. Polson is 12.9 or 12.5. The larger the capitalization multiple, the greater the value of Marine Magnetics, as the maintainable cash flow number is multiplied by the capitalization multiple.

89The key differences between the valuators in their assessment of Marine Magnetics are:

a. The impact of COVID-19 on the business;

b. The impact of key suppliers and key person risk;

c. The estimated future growth of the business; and

d. The estimated cost of equity for Marine Magnetics.

90The “art” side of the valuation of Marine Magnetics is illustrated in the following examples:

• The cost of equity: The cost of equity is used in the determination of the capitalization rate, which is used to determine the capitalization multiple (one divided by the capitalization rate is the multiple, which Mr. Mandel then further discounted for COVID-19).

o Mr. Mandel explained to the court that when a business is valued the valuator looks at cash flows that are debt-free and determines what multiple a notional purchaser would put on cash flows that are debt-free. He indicated that his determination for the cost of equity was 23%-26% but indicated that it could be between 20% and 30%. He stated that “whether you go with 20, whether you go with 30 on a business like this is your professional judgment”.

o Mr. Polson determined that the cost of equity was 16% to 17%. Mr. Polson explained that cost of equity is a well-understood and well referenced benchmark across finance as a measure of how risky an enterprise is. As the cost of equity number increases, the more unpredictable or risky is the business. He indicated that at the upper end you see cost of equity numbers in the range of 30-35% for businesses that are not much better than a good concept. He indicated that venture capital-type investments generally would fall in the 25% range. He stated that Marine Magnetics is a business with a good track record, producing cash flows back to the shareholders, and he would expect that the cost of equity would be in the range of 15-20%.

• Long-term growth rate: Another input in the determination of the capitalization rate is the long-term growth rate.

o In determining the capitalization rate, Mr. Mandel adopted an estimated long-term growth rate of 3.4% for Marine Magnetics, which implies inflationary growth of 2%, plus 1.4% of company-specific growth. Mr. Mandel’s evidence was that he selected the growth rate of 3.4%, which is equal to that of the Navigational Instrument Manufacturing in Canada for 2020-2025 as reported by IBISWorld. He indicated that many valuators would say 2% as it is difficult to beat inflation in perpetuity. By using the IBIS world data number, Mr. Mandel’s evidence was that he probably overstated the growth rate.

o Mr. Polson pointed out that the timeframe that RSM used includes the year 2020, which is the year that was most dramatically impacted by COVID-19, with a -10% industry growth in that year. His view was that Mr. Mandel was, in effect, taking COVID-19 into account in more than one place in his valuation, as it was taken into account by Mr. Mandel in the discount on the multiple (discussed below). Mr. Polson’s opinion was that the growth rate should be 4% to 5%, which he views as a conservative estimate. Marine Magnetics had steady historical growth between 2016 and 2019 with sales in 2016 of $3,093,382, in 2017 of $3,754,688, in 2018 of $4,074,167 and in 2019 of $4,449,386. His view was that it was reasonable to look at Marine Magnetics’ own growth in determining the long-term growth rate. There was a fall in sales in 2020 to $3,054,652. Mr. Polson’s opinion is that his assumed growth rate, 4% to 5%, is a conservative estimate. In arriving at this assumed growth rate, Mr. Polson indicated that PwC took into account historical growth rates, external industry research, ongoing investments in the competitive capabilities of the company and certain identified growth opportunities.

• Impact of COVID-19: Another difference between the reports is how they deal with the potential impact of COVID-19 on the business, which is a real unknown. There was a significant drop in revenues of Marine Magnetics in 2020, however there was evidence of recovery and new products on the horizon:

o Mr. Mandel considered COVID-19 as a significant factor. Mr. Mandel’s evidence was that he determined what the multiple should be for Marine Magnetics, but then discounted that for COVID-19 based on the assumption that there would be no cash flows for 1.5 to 2 years. This is an assumption Mr. Mandel made regarding the impact of COVID-19 on the business.

o Mr. Polson’s view was that Mr. Mandel’s assumption regarding the impact of COVID-19 did not appear reasonable. He would not acknowledge that COVID-19 was the cause of the drop in revenues and indicated that he was not provided with enough information to determine the cause of the loss. Mr. Polson’s report does not factor in COVID-19 as having an impact.

91As I indicated earlier, Glass jurisprudentially reflects Mr. Mandel’s discussion of “art”, “science” and “professional judgment” required in assessing valuation evidence. As set out in Glass, at para. 245, quoting Lambert J.A. in Cyprus Anvil Mining Corp. v. Dickson (1986), 1986 CanLII 811 (BC CA), 8 B.C.L.R. (2d) 145 (B.C.C.A.), the “one true rule” guiding the judicial valuation exercise is to consider all of the evidence that might be helpful, consider the particular factors in the particular case, and exercise the best judgment that can be brought to bear on all of the evidence and all of the factors. In Glass, the court, at para. 246, set out certain principles governing judicial valuations:

a. Valuation is a fact-based assessment that requires an important element of judgment by the court;

b. In exercising its judgment, the court must be prudent, not optimistic;

c. Neither party bears the burden of providing the fair value of shares;

d. Judges should exercise caution in attempting to mix and match portions from competing experts’ reports;

e. Market value “is the highest price expressed in money obtainable in an open and unrestricted market between knowledgeable, prudent, and willing parties dealing at arm’s length, who are fully informed and under no compulsion to transact”;

f. Fair value is a value that is just and equitable. It is one which provides “adequate compensation (indemnity), consistent with the requirements of justice and equity”; and,

g. While hindsight evidence is generally excluded, there are some limited but potentially significant exceptions.

92Applying the judicial principles for valuations as set out in Glass to the facts I have found on the conflicting evidence, I am satisfied that while Mr. Mandel’s valuation may be entitled to more weight, Mr. Polson’s opinion, equally unbiased, is entitled to sufficient weight to persuade me that the most accurate valuation is in the range of $10,800,000.00. Accordingly, I find that a reasonable and appropriate valuation of Holdco is $10,800,000.00.

Disposition and Costs

93Melissa is entitled to 50% of the value of Holdco.

94The value of Holdco is $10,800,000.00 and, accordingly, Doug will pay Melissa $5,400,000.00 for her shares of Holdco.

95I would encourage the parties to agree on costs. If the parties are unable to agree on costs by December 17, 2021 they shall notify my judicial assistant, and they may deliver written submissions on costs by delivery to my judicial assistant and by uploading to Caselines, according to the following schedule: (i) Melissa, shall, on or by January 7, 2022, serve and file her Bill of Costs, together with any supporting material and her written submissions of no more than four pages with authorities hyperlinked; and (ii) Doug shall, on or by January 21, 2022, serve and file his Bill of Costs, together with any supporting material and his written submissions of no more than four pages with authorities hyperlinked.

J. Steele J.