COURT FILE NO.: CV-21-00662130-00CL
DATE: 20220425
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
Court file no.: CV-21-00662130-00CL
DEVAD SEFEROVIC (also known as ALEX SEFEROVIC), REZA ABEDI and RODOLPHE NAJM
Applicants
– and –
285 SPADINA SPV INC., RONALD HITTI (also known as RONY HITTI) and RAJA FARAH
Respondents
John P. Ormston, for the Applicants email: jormston@olflaw.com
Julian Binavince, for 285 Spadina SPV Inc. and Raja Farah Email: jbinavince@levyzavet.com
Ronald Hitti – Self-represented Email: Rony@boagroup.ca
HEARD: February 17 and 18, 2022
Kimmel J. REASONS FOR DECISION
Table of Contents
THE APPLICATIONS. 1
THE OPPRESSION REMEDY APPLICATION.. 1
Factual Background. 1
The contributions of the parties. 2
The understandings of the parties regarding their investments. 3
The falling out between the applicants and Rony. 4
Further accounting issues. 6
Key Documents and Chronology. 7
Additional Factual Considerations. 8
Summary of Outcome. 9
The Issues Raised by the Oppression Remedy Application. 10
Discussion and Analysis – Oppression Remedy Application. 11
The statutory framework and leading authorities. 11
Are the applicants proper complaints under the oppression remedy?. 13
(i) Are the applicants direct or beneficial shareholders of 285 Spadina?. 13
(ii) If the applicants are shareholders of 285 Spadina, what are their respective shareholdings? 14
(iii) If the applicants are not shareholders, are they otherwise proper complainants?. 14
What were the applicants’ reasonable expectations and have they been met?. 15
What are the immediate consequences of the failure to meet the applicants’ reasonable expectations? 17
Other matters that may require a trial of issues. 18
Relief Sought and Orders Granted. 19
Costs. 21
REASONS FOR DECISION
THE APPLICATIONS
[1] Three applications were heard together. This is the third, “oppression remedy” application.
[2] The two “lease applications” (Court file no. CV-21-00667377-00CL and Court file no. CV-21-00674331-00CL) involve the interpretation of the lease of a heritage building (the “Building”) located at the intersection of Dundas and Spadina Streets in Toronto (the “SPV Premises”) dated August 26, 2020 (the “SPV Lease”). My decision in those two lease applications is being released contemporaneously with this decision: see 2356802 Ontario Corp. v. 285 Spadina SPV Inc., 2022 ONSC 2427.
[3] The issues in the lease applications were largely connected to work on the roof of the SPV Premises undertaken after the decision of Perell J. in 285 Spadina SPV Inc. v. 2356802 Ontario Corp., 2020 ONSC 1645, in which a prior application by the Landlord (2356802 Ontario Corp.) to evict the Tenant (285 Spadina SPV Inc., “285 Spadina”) was dismissed and certain declaratory relief sought by the Tenant was granted in part (the “Perell Decision”).
[4] The within “oppression remedy” application (CV-21-00662130-00CL) was commenced by three individual investors (Devad Seferovic, aka. Alex Seferovic — “Alex”; Reza Abedi — “Reza”; and Rodolphe Najm — “Rudy”) against the Tenant and the principal of the Tenant, Ronald (or “Rony”) Hitti and his mother, Raja Farah (“Farah”). Farah is the sole shareholder and director of the Tenant. She is named as a respondent but was not involved in any of the day-to-day operations of the Tenant and was not involved in any dealings among the parties to this application.
[5] To preview briefly the outcome of this oppression remedy application, the applicants are entitled to a remedy but not, at this time, the full remedy that they have requested. First, they are to be provided with certain requested corporate and financial information to enable a proper accounting and reconciliation of net funds invested by the applicants and by Rony (or his mother), so that future determinations can be made of their proportionate shares of the business enterprise, how those shares are to be held, and what their respective roles and responsibilities were and are.
THE OPPRESSION REMEDY APPLICATION
Factual Background
[6] The only valuable asset of the Tenant is its leasehold interest in the SPV Premises. The Tenant intends to convert the SPV Premises into an entertainment complex described by Rony as “the Victory Burlesque Social Campus” (the “Entertainment Complex”). That is where the parties to this oppression remedy application fit in. They were supposed to be part of a joint venture or business enterprise that will eventually sub-lease the SPV Premises and operate and manage the Entertainment Complex once the SPV Premises have been renovated (the “business enterprise”). The vision for the business enterprise was tied to the historic Building situated on the SPV Premises.
[7] This business enterprise was to be built around the SPV Lease of the SPV Premises. The parties contemplated an investment structure in which the Tenant would sublease the SPV Premises to an operating entity (or entities) in which the three applicants and Rony would be direct or indirect shareholders. The structure was discussed and legal documentation was prepared, but it was never finalized.
[8] The background and dealings between the parties to this oppression remedy application is chronological and documented, for the most part. However, the primary points of factual contention are not well documented. They relate to the timing, amounts, and proper characterization of various advances made by two of the applicants, Alex and Reza. There is also a dispute and lack of documentation about the amount and proper characterization of monies Alex was paid. Not surprisingly, the other significant factual dispute is about what the parties understood or expected that they would receive in return for their respective investments.
The contributions of the parties
[9] None of the parties expected the renovations to the SPV Premises to take as long as they have. Much of the delay has been due to disputes that the Tenant has been involved in with the Landlord about the roof of the SPV Premises, which are the subject of the Perell Decision and my contemporaneous decision in the “lease applications.”
[10] In the meantime, while the Tenant was embroiled in disputes with the Landlord, some of the Tenant’s Work under the SPV Lease was undertaken and, after the rent-free periods expired, the Tenant was required to begin to pay rent, in addition to incurring some other operating costs. The Tenant had operating cash flow needs that were financed, in part, by advances from the applicants that were made directly to the Tenant in the absence of any formal structure having been put in place for the intended business enterprise. The amounts of each of their advances are not fully admitted by the respondents, but it is admitted that:
a. Rudy advanced $25,000;
b. Alex advanced $300,000 [Alex asserts that he actually advanced approximately $600,000 between November 2018 and September 2020]; and
c. Reza advanced $113,000 [Reza asserts that he actually advanced $360,000 in 2018 and 2019].
[11] The initial advances by each of the applicants were made to the Tenant in approximately the same timeframe during the spring or summer of 2018, when the Tenant entered into the original offers to lease for the SPV Premises (later replaced by the SPV Lease after the Perell Decision). There were some advances made jointly by Alex and Reza and it is not entirely clear how those have been allocated as between them. They do not have good records of their advances, some of which were made in cash. The respondents have refused to produce any corporate financial and accounting records, pending the court’s determination in this oppression remedy application of whether they are required to do so.
[12] This leaves the court unable to determine at this time exactly how much each of Reza and Alex advanced. The amount and timing of Rudy’s investment is not in dispute. For purposes of this decision it is sufficient that the respondents acknowledge that each of the three applicants advanced funds in or around the spring or summer of 2018 to the Tenant in at least the admitted amounts indicated above.
[13] There is a further complication regarding advances made by Alex because it is acknowledged that he received payments from the Tenant of approximately $365,000 in the aggregate between 2019 and March 2021, which he says was to compensate him for construction management work done at the SPV Premises. The respondents say this amount was to repay Alex’s investment (although the amount allegedly repaid exceeds what the respondents say Alex invested).
[14] Rony’s contribution to the business enterprise (for himself and presumably on behalf of his mother Farah) included his vision and the work and financial and other investments made to secure and maintain the SPV Lease. According to an unsigned agreement drafted in or about April 2020, Rony claims to have invested $500,000 in the entertainment enterprise, but the applicants have not seen any banking records or other independent verification of same.
The understandings of the parties regarding their investments
[15] Rudy invested in the entertainment enterprise at about the same time as Reza, but they were not made aware of each other’s investments at the time. Rudy thought he was investing in a business with Rony, who was a childhood friend.
[16] Reza says that he invested in June of 2018 on the understanding that he and Rony were 50/50 joint venture partners in the business enterprise. He expected to be in charge of the day-to-day operations. Rony and Reza agree that Reza was also going to be responsible for trying to raise funds from outside investors. There is no evidence in the record to suggest that any other investors have contributed any equity to the business enterprise. One of Rony’s complaints is that Reza did not bring any other investors to the table.
[17] Reza suggested that Alex be brought in to assist with “project management” because the Building was in need of much renovation work and Alex had experience as a contractor on other projects that they had worked on together in the hospitality industry. Alex understood that he would invest and be responsible for overseeing the construction work and would also be retained to do some of the construction work.
[18] Once it became known that there were three investors in addition to Rony, the applicants’ eventual understanding was that Reza and Alex would have a combined 50% interest and Rony would have the other 50% interest, part of which he would allocate to Rudy on account of Rudy’s investment.
[19] The applicants’ understanding regarding the structure for their investments was memorialized in a letter of intent signed in July of 2018 (the “LOI”). Alex and Reza would invest through their holding companies that were to be the shareholders of a company they incorporated, 2503248 Ontario Limited (“250 Limited”). Rudy would hold his interest through his shareholdings in a company called Beryte Inc. (“Beryte”) in which Rony’s mother Farah was to be the other shareholder (Rony’s mother representing Rony’s interests).
[20] The LOI contemplated that the holding companies (250 Limited and Beryte), would in turn, invest in joint venture vehicles that would operate the entertainment enterprise. The holding companies were to be the shareholders of R Square Management Inc. (“R Square”), which in turn would be the shareholder of Victory Burlesque Holding Corp. (“VBHC”). VBHC would own the shares of both the sub-tenant, Victory Burlesque Limited (“VBL”) and the operating company, Victory Burlesque Operations Inc. (“VBO”). 250 Limited, R Square and VBL were all incorporated in or about July 2018, but no joint venture agreements were ever finalized or signed, and the companies were never formally organized or capitalized.
[21] Rudy signed and delivered to Rony a trust agreement dated July 13, 2018 when he contributed his $25,000 investment (the “Trust Agreement”). The respondents acknowledge this Trust Agreement, even though Farah never signed it. It elaborated upon the structure through which Rudy was to hold his interest in the intended entertainment venue to be operated out of the SPV Premises (one and the same as the business enterprise described herein), as well as act as trustee for Farah’s interest, through their respective shareholdings in Beryte.
The falling out between the applicants and Rony
[22] For a period of time after the applicants advanced their funds, and when he chose to do so, Rony provided informal spreadsheets to the applicants that contained some general information about the ongoing expenses being incurred by the business enterprise (primarily in connection with the SPV Lease and SPV Premises). Given the early stages and the fact that the Tenant was embroiled in a dispute with the Landlord (which was not determined until the July 2020 Perell Decision), very little else was happening. During this time, the Tenant attempted to fulfil its covenants under the SPV Lease and resisted the Landlord’s efforts to terminate the SPV Lease.
[23] Over the course of the following year, various steps were taken by the applicants to finalize the definitive documents contemplated by the LOI with the assistance of legal counsel working with Reza and Alex. The documents drafted were never finalized. Requests by Reza for access to the corporate books and records, financial records, and accounting documents (the “requested corporate records and financial information”), were resisted by Rony. The respondents have refused to provide any of the requested corporate records and financial information to the applicants to date. They argue that the applicants are not entitled to receive them since they are not shareholders of the Tenant company and none of the other companies have been organized or capitalized.
[24] Rony was displeased by Reza’s requests for corporate records and financial information. Rudy also had a falling out on a personal level with Rony in 2019. In or about June and July of 2019, Rony locked Reza and Rudy out of the SPV Premises and has refused to provide them with any more information about the expenses or progress of the business enterprise.
[25] Rudy’s corporate email address was also shut down. Despite this, Rony told Rudy that he would give him his money back, in exchange for a mutual release, and repeated that he had made that promise in various text messages throughout 2020 (after getting the Perell Decision). Rudy never received a draft release nor any funds from Rony or any of the other respondents.
[26] Alex stayed on and continued to work on the SPV Premises for a period of time after Reza and Rudy were locked out.
[27] The biggest construction issue for the SPV Premises was the roof. The responsibility for the roof repair/replacement was the subject of the prior litigation that involved the interpretation of the original offers to lease between the Landlord and the Tenant that resulted in the Perell Decision. They then entered into the SPV Lease, which was not signed until August of 2020. The SPV Lease reflected the outcome of the Perell decision that the Landlord was responsible to pay for the roof repair/replacement as part of the “Landlord’s Work”, but it also reflected the agreement between the Landlord and the Tenant that the Tenant would carry out this work on the Landlord’s behalf.
[28] Although not involved in or knowledgeable about the litigation between Landlord and Tenant, Alex was aware that there were delays in the work being done on the roof that were impacting his ability to obtain permits for much of the internal construction work that he was to oversee. Despite this, Alex maintains that he undertook some work at the SPV Premises for the Tenant, for which he claims he was paid $365,000 in management and construction fees between 2019 and March 2021.
[29] Issues came to a head between Alex and Rony in January 2021, when Rony suggested to Alex that he had taken his investment out of the business enterprise instead of leaving it in and becoming a 50/50 partner with Rony after Rony “booted Reza out.”
[30] The respondents assert that these monies were paid to Alex to reimburse his advances to the Tenant. They argue that it is not plausible that the Tenant would pay Alex over $300,000 in management fees for renovation work during a period in which he himself says work permits were not available because of the ongoing roof replacement. They further challenge Alex’s assertion that he was paid for work done on behalf of the Tenant when no invoices were issued, no HST was charged or remitted, and no income was declared for tax purposes for any work he claims to have done in respect of the SPV Premises.
[31] The respondents have not provided any corporate records or financial information that might assist in determining the timing and precise amounts of the payments made by the Tenant to Alex, which in turn might assist in determining what they were for (whether it be for project management and construction work as Alex says or a return of Alex’s investment as Rony says).
[32] There are documents dated in April 2020 that indicate that Alex subscribed for shares in the Tenant, with a corresponding director’s resolution approving the issuance of shares to him, and an acknowledgement and agreement detailing the intended transactions at that time. The subscription agreement refers to advances of $500,000 having been made to the corporation prior to that date. According to Alex, these were signed in April 2020, but he only retained a photograph of the signature page, the originals of which were retained (and have, according to the applicants, been withheld) by Rony.
[33] The respondents deny that these April 2020 transactions were ever implemented and deny that the documents were signed. According to the respondents, funding was requested from Alex in April 2020 as a stop gap measure because Rony had COVID-19 and needed an immediate cash infusion of $150,000, which Alex agreed to provide. Rony maintains that these funds were not ever advanced by Alex and that he obtained outside financing instead and Alex was repaid all that he had advanced.
[34] The respondents maintain that these April 2020 documents are not reflective of some broader arrangement or agreement regarding intended shareholdings for the investors in 285 Spadina.
Further accounting issues
[35] None of the applicants were aware of the litigation between the Tenant and the Landlord when it was initiated. Reza was only told about the litigation with the Landlord when Rony was looking for further funding in August of 2019. Reza and Alex say that, when they found out about the litigation, they agreed to advance further funds to help finance it because they were concerned that what they had already invested was at risk of being lost if the SPV Lease was terminated. From and after this time, they understood that some of their advances were being used to fund the Tenant’s litigation with the Landlord.
[36] None of the parties have been able to produce documentary evidence to support or trace the amounts of money that they claim to have invested in the entertainment enterprise. Additionally, the Tenant has not produced its records to show where the funds allegedly expended came from, nor has it fully accounted for how the funds were spent.
[37] The Tenant claims to have incurred expenses (as of the date of answering its undertakings and not including legal fees) of $3,398,600 in respect of the entertainment enterprise. These expenses are summarized on a chart without corresponding supporting documentation or records. Spreadsheets prepared by Rony and shared with the applicants on an ad hoc basis indicate that 285 Spadina was using funds to pay for the Tenant’s Work under the SPV Lease (leasehold improvements) and various operating costs of the Tenant. However, the respondents have not produced detailed spreadsheets of expenses covering the entire relevant period, nor have they produced the requested corporate records and financial information or any supporting documents that could prove the actual amounts spent to date.
[38] The applicants acknowledge that it would have been preferable for them to have kept better records of their investments and to have properly documented the legal arrangements between the parties. However, they did not do so. They have come to court because they have now hit a wall with the Tenant and Rony, who refuse to acknowledge their investments and will not produce documents that might assist in determining the amounts invested and what they were used for. No party is suggesting that the funds advanced by the applicants were intended to be loans to the Tenant.
Key Documents and Chronology
[39] Many of the facts and documents have already been detailed in the background section (above). The following is a recap of the chronology of key documents:
a. The Trust Agreement dated as of July 13, 2018 between Farah and Rudy provides that Rudy’s $25,000 investment represents a 3% beneficial interest in Beryte.
b. Intended joint venture vehicles were incorporated by Reza on July 16, 2018 (VBL and R Square). These companies were never formally organized or capitalized and never opened bank accounts.
c. A non-binding LOI between Beryte (owned by Rudy and Rony, through his mother Farah) and 250 Limited (owned by Reza and Alex) was signed dated July 19, 2018 setting out a proposed investment structure for the business enterprise. Alex and Reza agreed to make an initial capital investment of $250,000 in the entertainment enterprise through 250 Limited. Beryte represented that it has already made an equivalent capital contribution that had been paid as sublease deposits for the SPV Premises.
d. A receipt and acknowledgement dated July 19, 2018 from 285 Spadina, signed by Rony, confirmed receipt of a total of $125,000 from Alex and Reza, which was paid pursuant to the LOI. This aligns with the first installment of the initial capital contribution that 250 Limited was to make, payable to SPV Inc. (285 Spadina) upon the execution of the LOI.
e. An LOI amending agreement dated as of November 14, 2018 provided for the delivery of additional payments (of up to $600,000) to Beryte by 250 Limited between November 14, 2018 and January 20, 2019.
f. Lawyers were preparing draft joint venture documents into December 2018:
i. A 2018 draft Shareholders Agreement for R Square. This refers to 250 Limited and Beryte being shareholders of R Square, and it refers to R Square being in the business of developing, managing, and operating a restaurant and entertainment venue located at the SPV Premises as the sub-tenant.
ii. A draft sub-lease agreement between 285 Spadina and VBL effective as of July 13, 2018.
g. [Disputed] documents dated in April of 2020, including:
i. A resolution of the sole director (Farah) of 285 Spadina dated April 20, 2020 approving the issuance of 100 shares in 285 Spadina to Alex.
ii. A subscription agreement from Alex dated April 20, 2020 for 100 shares in 285 Spadina for $5,000.
iii. An Acknowledgment and Agreement that deals with the issuance of shares in 285 Spadina.
Additional Factual Considerations
[40] The parties make various assertions against each other, each side alleging bad faith and ulterior motives behind the conduct of the opposing party. They claim breaches of duty and damages. These allegations cannot be resolved on a written record, nor do they need to be for me to decide the immediate issues on this oppression application.
[41] There are unquestionably a number of disputed facts. The determination of this oppression remedy application, or at least this stage of it, does not depend on these facts being resolved and findings being made. Some are not necessary for the determination of the issues on this oppression application at all, and others may require a trial of issues at some future time. These include the following:
a. How much has each of the applicants and Rony invested in the entertainment enterprise?
b. How much money was paid to Alex after his initial investment and why did he receive those funds?
c. Why were the LOI joint venture documents never signed?
d. What were Alex’s and Reza’s obligations in respect of the entertainment enterprise, and have they fulfilled those obligations? If not, why not and what are the implications?
e. Do the applicants owe money to the Tenant or Rony?
f. Have the applicants suffered damages as a result of the conduct of the Tenant and/or Rony?
g. Has Rony misappropriated funds from the entertainment enterprise for his own benefit?
h. Were any documents signed in April 2020?
i. Was Alex required to advance an additional $150,000 in conjunction with the April 2020 documents? Did he advance this money?
Summary of Outcome
[42] The Tenant remains today the only operating company in the business enterprise.
[43] Through the broad relief that is available under the oppression remedy, the applicants (1) ask the court to declare them to be shareholders of the Tenant, 285 Spadina; (2) they seek an accounting of all receipts and disbursements of funds by that company; and (3) they seek to be given day-to -day operational control of the company, replacing Rony in that role.
[44] The oppression remedy application is against the Tenant company, 285 Spadina, and Rony for his actions undertaken on behalf of that company. The issue in this case is whether the applicants are proper complainants against the Tenant company (285 Spadina) in which they were never issued any shares and in which the original LOI did not contemplate that they would be direct or indirect shareholders.[^1]
[45] The applicants seek a declaration that they are shareholders of that company. If they are shareholders, then they would be proper complainants. But even if they are not, they are investors in an intended business enterprise that was to be comprised of a group of companies with indirect holdings and ultimately an interest in the SPV Lease, the prize (and currently only) asset of the business enterprise.
[46] The corporate structure was never finalized but funds were advanced by the applicants that were not intended as loans. They were advanced directly to 285 Spadina (in the case of Alex and Reza) and to Beryte (in the case of Rudy), all for the common purpose and objective of providing much needed cash flow and funding for 285 Spadina to maintain the SPV Lease, including to pay the rent and to carry out the Tenant’s obligations thereunder, as well as its other operating costs. The equitable oppression remedy takes into account the business relationship between the parties, not just their current legal relationship, especially in a case such as this where the legal relationship is ill-defined.
[47] The applicants are proper complainants and are beneficial owners of the business enterprise. While the intention was for that enterprise to be comprised of more than just the Tenant company, that is currently the only operating company, and it is the company that has received the benefit of all of the applicants’ investments. As such, the applicants had a right to the requested corporate information and financial records and they should not have been shut out of the Building, shut out of all decision-making, and shut out of all day-to-day operations. That conduct (by Rony on behalf of the 285 Spadina) has defeated their reasonable expectations as investors in the business enterprise and has unfairly prejudiced or disregarded their interests.
[48] The applicants are entitled to a remedy under s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”), but not precisely the remedy that they seek. The remedy fashioned by the court is detailed at the end of this decision.
The Issues Raised by the Oppression Remedy Application
[49] The following issues are raised for the court’s determination in this oppression remedy application:
a. Are the applicants proper complainants under s. 248 of the OBCA (as shareholders or otherwise)?
i. Are the applicants direct or beneficial shareholders of 285 Spadina?
ii. If the applicants are shareholders of 285 Spadina, what are their respective shareholdings?
iii. If the applicants are not shareholders of 285 Spadina, are they otherwise proper complainants with respect to the conduct of the business and affairs of 285 Spadina?
b. If the applicants are proper complainants under s. 248 of the OBCA, were their reasonable expectations defeated?
i. Were the actions of Rony, on behalf of 285 Spadina, oppressive, unfairly prejudicial to, or unfairly disregard the applicants’ interests?
c. What is the appropriate relief to grant to the applicants under s. 248(3) of the OBCA?
d. Are there any aspects of the relief sought that require a trial of an issue or can all aspects of this application be dealt with now?
Discussion and Analysis – Oppression Remedy Application
The statutory framework and leading authorities
[50] Section 245 of the OBCA defines a "complainant" to include:
a. a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or of any of its affiliates,
b. a director or an officer or a former director or officer of a corporation or of any of its affiliates,
c. any other person who, in the discretion of the court, is a proper person to make an application under this Part [Part XVII of the OBCA].
[51] Only a complainant may apply for an order under s. 248 of the OBCA. Section 248(2) of the OBCA provides the statutory framework for an oppression remedy application to be made to rectify the matters complained of where the court is satisfied in respect of a corporation or any of its affiliates,
(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;
(b) the business of affairs the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or
(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditors, director or officer of the corporation.
[52] Conduct will be found to be in breach of s. 248 if:
a. That conduct breached the reasonable expectations of the applicant; and
b. The breach amounts to oppression, unfair prejudice, or an unfair disregard of a relevant interest.
See: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, at paras. 56 and 68.
[53] There is a spectrum of what type of conduct constitutes oppression. The burden of proof for establishing unfair prejudice or disregard of interests (which are more focused on the result of the conduct on the complainant) is less rigorous than the burden to establish oppression (which is more focused on the state of mind of the “oppressor” and/or the character of the conduct itself, which often arises from an abuse of corporate power). But even oppression, while described as “burdensome, harsh and wrongful,” does not require proof of bad faith: see Waxman v. Waxman, 2002 CanLII 49644 (Ont. S.C,), at paras. 1508 and 1521 – 1522, aff’d 2004 CanLII 39040 (Ont. C.A.); C.I. Covington Fund Inc. v. White, 2000 CanLII 22676 (Ont. S.C.), at para. 21.
[54] The oppression remedy protects reasonable expectations and interests, rather than legal rights, particularly in a closely held corporation: see BCE, at paras. 61 – 64.
[55] What constitutes reasonable expectations for purposes of the oppression remedy was extensively canvassed by the Supreme Court of Canada in BCE (at paras. 59, 61 – 78).
a. Fundamentally, a stakeholder has a reasonable expectation of fair treatment.
b. Reasonable expectations may not be solely found in written agreements between the parties.
c. A protected expectation must be one that could be said to have been part of the “compact” of the shareholders. This may be determined with regard to general commercial practice, the nature of the corporation, the relationship between the parties, past practice, steps the claimant could have taken to protect itself, representations and agreements.
d. The reasonableness of any particular expectation asserted must be considered and evaluated objectively, with regard to the "facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations."
e. Reasonable expectations are not static and may evolve over time.
[56] In order to make a successful oppression claim, a complainant must:
a. identify the expectation(s), that he or she claims have been violated by the conduct at issue;
b. establish that the expectations were reasonably held; and
c. demonstrate that the defendants' failure to meet this expectation:
i. caused detrimental consequences; and
ii. that it amounted to "oppression," "unfair prejudice," or "unfair disregard" of a relevant interest.
See BCE at paras. 70 and 95.
Are the applicants proper complaints under the oppression remedy?
[57] The applicants are not registered holders of any shares of 285 Spadina, nor have they been appointed as officers or directors of that company. Rudy’s status (as acknowledged under the signed Trust Agreement) as a beneficial shareholder of Beryte, an affiliate of 285 Spadina, does not impact this analysis because no remedy is sought by him in that capacity. His claims, like the other applicants, are as beneficial shareholders of 285 Spadina, or as proper persons whose interests and reasonable expectations vis-à-vis that company should be protected under s. 248 of the OBCA.
(i) Are the applicants direct or beneficial shareholders of 285 Spadina?
[58] The applicants do not directly hold any shares of 285 Spadina.
[59] The applicants invested in a business enterprise that is comprised of an Entertainment Complex to be situated in the Building at the SPV Premises. The intended corporate structures did not materialize. In furtherance of the business enterprise, the applicants nonetheless advanced funds to 285 Spadina, the Tenant of the SPV Premises, with the expectation that there would eventually be a corporate structure put in place in which they would indirectly hold shares in the intended sub-tenant of the SPV Premises.
[60] The respondents contend that even the structure that the applicants proposed under the LOI (which was never implemented) did not contemplate that the applicants would ever be shareholders of the Tenant. They say that the applicants’ position now that they are shareholders of the company, and the applicants’ request for the court to declare them to be such, is inconsistent (or not in harmony) with the probabilities of the case as a whole when all of the historic documents and dealings between the parties are considered. They say that this cannot be found by the court to be a “reasonable” expectation for the applicants to have held: see Faryna v. Chorny (1951), 1951 CanLII 252 (BC CA), [1952] 2 D.L.R. 354 (B.C.C.A.), at p. 357.
[61] The applicants were never intended to be direct or beneficial shareholders of 285 Spadina under any of the corporate structures that were contemplated. At the time they made their investments, they did not have an expectation that they would be issued shares in that company. Even putting aside the respondents’ challenges to the authenticity of the April 2020 documents that appear to have contemplated a share subscription by Alex in 285 Spadina in exchange for a further infusion of funds (that the respondents say was not advanced), the mere existence of those documents is not enough to overcome the clear and direct evidence that the applicants did not have an expectation of being issued shares in 285 Spadina at the time of any of their acknowledged advances of funds to that corporation.
[62] The record does not support a legal or equitable claim for the applicants to be issued (or assigned) shares in 285 Spadina at this time. Therefore, there is no foundation for a finding at this time that they are direct or beneficial shareholders of that company for purposes of establishing their standing as complainants. However, this is not dispositive of the remaining issues to be decided.
(ii) If the applicants are shareholders of 285 Spadina, what are their respective shareholdings?
[63] It is not possible on the record before the court to determine what the applicants’ respective shareholdings in the business enterprise would be (whether it ultimately be represented by shares in the Tenant or any other company). The accounting and reconciliation of their respective investments and receipts from the business enterprise needs to be undertaken first (discussed below).
(iii) If the applicants are not shareholders, are they otherwise proper complainants?
[64] Even though the record before the court does not support a finding at this time that the applicants are direct or beneficial shareholders of 285 Spadina, it does support a finding that they are beneficial owners of the business enterprise, of which 285 Spadina is an integral part.
[65] The applicants qualify as “person[s] who, in the discretion of the court, [are] proper person[s] to make an [oppression remedy] application”: OBCA, s. 245. The companies in which the applicants expected to have shares, which in turn were expected to own and control a company that was to hold a sublease of the SPV Premises, have not been organized, capitalized and/or are not operational. Until the sublease (or some alternative) is put in place, none of these other entities within the business enterprise would have had any corporate purpose or function. Additionally, for a period of time, the entire SPV Lease was in jeopardy as a result of ongoing litigation with the Landlord.
[66] The applicants were supposed to invest in other companies that held an interest in the SPV Lease, but because the corporate structure has not been formalized, they advanced funds directly to the Tenant, which is the only company currently holding an interest in the SPV Lease. In other words, the funds that would have capitalized these other companies and eventually flowed through to the Tenant and/or sub-tenant and other operating entities instead have all been paid directly to 285 Spadina for the benefit of the Tenant. It would be unfair for the stalled implementation of the originally intended (or any other) corporate structure in furtherance of the business enterprise (that the respondents are equally if not more to blame for) to entirely deprive the applicants of any claim.[^2]
[67] I do not accept the respondents’ argument that only 250 Limited (and Beryte) could be proper complainants (since they were eventually intended to own shares in the joint venture entities that would operate the Entertainment Complex and hold the sub-lease). The applicants were the intended shareholders of those holding companies. The respondents’ argument that the complainants in this oppression remedy application should have been the holding companies (which are not applicants and in respect of which leave has not been sought to bring a derivative action) is based on a corporate technicality that should not deprive the applicants of their oppression remedy claims which are equitable in nature.
[68] The applicants were investors in the business enterprise and as such they had reasonable expectations in relation to their investments which have, to date, been directed to and benefited only 285 Spadina. Their investments and expectations (detailed below) are deserving of the court’s protection. The applicants are proper complainants with respect to the conduct of Rony and 285 Spadina under s. 245(c) of the OBCA.
What were the applicants’ reasonable expectations and have they been met?
[69] The applicants assert, and have established, that they held the following reasonable expectations in connection with their investment in the business enterprise:
a. That they would be issued shares evidencing their investments;
b. That the respondents (and their companies) would include the applicants and not shut them out of the business enterprise that they invested in; and
c. That all information pertaining to the business enterprise would be shared amongst all investors.
[70] The respondents’ position that these are not reasonable expectations for the applicants to have held is primarily tied to their contention that the applicants are not, and were not intended to be, shareholders of the Tenant. It has been determined in an earlier section of this decision that the applicants are not entitled to a declaration at this time that they are shareholders of the Tenant. Nor does the current record support a finding that they held a reasonable expectation that they would be issued or assigned shares in 285 Spadina.
[71] The respondents insist that the applicants were only intended to be shareholders of other companies (not 285 Spadina), which were to form part of the business enterprise and that the applicants are as much (or more) to blame as the respondents for the failure to organize those companies and implement that structure. Thus, it is suggested that if their expectations were defeated, they too are to blame.
[72] The question of blame with respect to the failed organization of the business enterprise is not determinative in this case. Regardless of who is to blame for the failed corporate structure, the applicants were intended to be indirect shareholders of companies that would have an interest in the SPV Lease. I further agree with the applicants that it is nonsensical to suggest that they would “gift” significant capital for the benefit of Rony and his mother (who is the sole registered shareholder of 285 Spadina).
[73] The Tenant wishes to keep itself isolated from all of the other intended direct and indirect investors by encircling itself in the silo of the sub-landlord in the business enterprise. The Tenant wants to say that it is isolated from the applicants by virtue of an intended corporate enterprise that would have seen funds flowing to, and shares issued in, other entities within the enterprise. At the same time, the Tenant wants to take the funds directly when those corporate structures were not implemented and try to hide behind them. The Tenant cannot do both.
[74] I find that the applicants had a reasonable expectation that their investments would be recognized and respected and that they would receive value for them, either through the intended or some other corporate structure.
[75] The exact nature and extent of their equity and in which entity it will be held cannot be decided on the record before the court at this time as it requires a further accounting and reconciliation of advances and receipts by all of the participants (the applicants and Rony (and/or his mother Farah) and further consideration of the corporate structure, which will in part depend on whether the SPV Lease can and will be assigned (or the SPV Premises sub-let) to another entity within the business enterprise now that the lease applications have been decided and it has been determined that the SPV Lease has not been terminated.
[76] The respondents insist that the only reasonable expectation that a shareholder or other person with an interest in 285 Spadina could have held in relation to that company since 2018 was for the Tenant to protect the SPV Lease vis-à-vis the Landlord (who has twice attempted, and failed, to have that lease declared invalid). The Tenant insists that it has protected those interests and thus its conduct cannot be faulted. That is a very myopic view of the responsibility of a corporation to its direct or indirect investors.
[77] The respondents acknowledge that a shareholder in a private corporation (they use the example of Beryte, but the same would apply to 285 Spadina), can reasonably expect to receive a copy of the corporation's financial statements upon request and to receive their proportionate share of any dividends paid by the corporation: see e.g., Wilfred v. Dare, 2017 ONSC 1633, at para. 67, citing Senyi Estate v. Conakry Holdings Ltd., 2007 CanLII 20102 (Ont. S.C.).
[78] As investors in the private entertainment enterprise that has yet to be properly constituted, I find that the applicants had a reasonable expectation of receiving the requested corporate and financial disclosure from the Tenant, as it is the only entity currently operating within the structure and the entity that is managing the asset that the entire entertainment enterprise is to be structured around.
[79] In the absence of an existing corporate structure that reflects that formal relationship, and having advanced funds directly to the Tenant rather than through a corporate structure, the applicants held a reasonable expectation that they would receive the requested corporate and financial information (and information about the Tenant and about the Tenant’s Work and its fulfillment of its obligations under the SPV Lease).
[80] I further find that it was reasonable for the applicants to expect to have the opportunity to maximize their investments in the business enterprise and to participate in its operations, as had been contemplated. They were not intended to be entirely passive investors. This entitles them not only to information but also physical access to the SPV Premises and the site of the intended Entertainment Complex.
[81] The respondents’ conduct, in locking the applicants out of the SPV Premises and refusing to share information, including the requested corporate records and financial information, with them about the business of the Tenant (the only operating entity within the business enterprise), and refusing to recognize that they were equity holders with attendant rights, has defeated the reasonable expectations of the applicants and has unfairly prejudiced or disregarded their interests in connection with their investments in the business enterprise.
What are the immediate consequences of the failure to meet the applicants’ reasonable expectations?
[82] The relief sought by the applicants is argued to be necessary to give effect to their reasonable expectations, having regard to the conduct of Rony to date. In particular, they consider it necessary to have their equity investments recognized, and for them to be given day-to-day control over the business and operations of the Tenant, replacing Rony in that role. Between the three of them, they were to hold more than 50% of the shares in the operating company, and thus they contend that they should have control of the day-to-day management of the business and operations of the Tenant, which is the only operating company within the entertainment enterprise.
[83] The applicants seek an accounting and tracing of funds and an order for the return of any funds improperly diverted by Rony to uses outside of the entertainment enterprise. They further request an order allowing them to buy Rony and his mother Farah out of the business enterprise.
[84] The applicants’ reasonable expectations, as found by this court, and the corresponding relief must be logically connected. I consider the above requested relief to be premature at this stage, beyond the recognition that they are equity investors in the business enterprise which entitles them to certain information and accounting. If it turns out that there has been mismanagement of funds or misappropriation of funds by any of the respondents, something that the applicants allege but will require an accounting and tracing to determine, then some or all of the aspects of this relief may need to be revisited.
[85] As a starting point, the applicants’ rights as intended indirect shareholders in an operating company (VBO) and in the company (VBL) that was to be the sub-tenant under the SPV Lease through which funds were supposed to flow to the Tenant (but instead they were paid directly to the Tenant) affords them a reasonable expectation, and entitlement to, disclosure of the requested corporate records and financial information and an entitlement to the records to enable a proper accounting to be undertaken to reconcile all of the advances and receipts of the parties (the applicants and Rony and his mother Farah) to and from 285 Spadina, and an accounting of its expenses and use of funds.
[86] Much of the requested disclosure would have been available through the applicants’ indirect shareholdings in the sub-tenant. Their combined indirect holdings were to comprise more than 50% of the shares in ultimate “parent” company, R Square. In any event, the requested disclosure of corporate records and financial information about the Tenant is appropriate given how the situation has evolved, and it is ordered.
[87] This will provide a foundation for an accounting and tracing of funds, which the applicants are also entitled to. If the parties are unable to reach agreement for the joint retainer of an accounting professional to undertake this exercise, they may seek further directions from the court for one to be appointed, at their shared expense, 50% by the applicants and 50% by the respondents. They should share the cost given that the need for this is due to the lack of disclose by the respondents and lack of record keeping by the applicants.
Other matters that may require a trial of issues
[88] The first step is for disclosure to be made. After that, and once there are documents that will enable the parties (or the court if need be) to determine how much Alex and Reza advanced (and what, if any of that was repaid to Alex), the next step will be to determine how the SPV Lease will be held and how the applicants will hold the direct or indirect shares in that entity. If it turns out that the SPV Lease is going to continue to be held in 285 Spadina, and that there will never be a corporate structure that will make the applicants indirect shareholders of the sub-tenant, then they might be entitled to an order that they be granted shares in that company. However, more information and disclosure is required before such a remedy should be considered by the court. This is an example of something that may require a trial of an issue.
[89] It is premature to make that ruling now, and in any event, it cannot be made until the applicants’ respective investments have been determined so that the shares (or units) in whatever corporate vehicles are determined will operate the business enterprise can be properly allocated. These further determinations about the nature and extent of the equity to be held by the applicants and the respondents in the companies that will be part of the business enterprise may require a trial of issue(s). Many of the disputed factual points outlined earlier in these reasons will fall to be determined in the context of this trial of issues.
[90] The respondents also argue that if the transactions contemplated by the LOI are implemented then Reza is in breach of his obligations to find outside financing. They claim to have suffered damages as a result. They effectively seek to set that off against any investment credited to Reza for funds advanced. No authority was presented for setting off an ex post facto damages claim against an initial equity investment. If that is even possible, it would have to be addressed in the trial of issues to determine the nature and extent of the parties’ equity, but it is more likely a claim that would have to be tried entirely separately. Not only because of the foundational difficulty in the set-off, but also because the trial of issues regarding the equity holdings may not lead to the implementation of the LOI.
[91] The aspects of the relief sought that have been indicated below to be premature are adjourned to a trial of issues. The trial will take place after the respondents have made the disclosure ordered, the accounting and tracing has been undertaken, and it has been determined whether the SPV Lease is going to be assigned (or sub-let) to another entity.
Relief Sought and Orders Granted
[92] The court’s rulings with respect to the relief sought be the applicants is as follows (the ruling is indicated at the end of the recitation of each instance of relief sought):
a. An order declaring that the powers of the respondents have been exercised in a manner that is oppressive, unfairly prejudicial to, or unfairly disregards the interests of the applicants — granted.
b. An order compensating the applicants for any damages suffered by them due to the oppressive and unfair manner in which the respondents have exercised their powers, whether the damages are or have been caused directly or indirectly by the respondents — premature and cannot be determined at this time, as it will require a trial of an issue after disclosure has been made and the accounting and tracing has been undertaken.
c. An interim, interlocutory, and permanent order — premature not granted:
i. removing the respondent, Rony, as officer and director of the respondent company 285 Spadina;
ii. preventing Rony from exercising any authority or control over 285 Spadina with respect to its day-to-day operations;
iii. preventing Rony from dissipating any funds from 285 Spadina;
iv. appointing the applicants, Alex and Reza, as directors of 285 Spadina;
v. appointing Alex and Reza as the president and vice-president of 285 Spadina, respectively;
vi. granting Alex and Reza full authority over all of 285 Spadina's bank accounts, corporate books, and records;
vii. requiring 285 Spadina to update its shareholder registry to reflect Alex and Reza's collective 50% ownership in 285 Spadina;
viii. requiring 285 Spadina to update its shareholder registry to reflect the applicant, Rudy’s 3% ownership in 285 Spadina; and,
ix. authorizing Alex and Reza to take over the day-to-day operations of 285 Spadina.
d. An order for an accounting and tracing of all funds invested into 285 Spadina by Rony, Alex, Reza, and Rudy — granted, to be undertaken by a jointly, or alternatively court, appointed accounting expert at the shared cost of the applicants and respondents (50/50).
e. An order for the repayment for all funds that have been improperly taken by Rony — premature to consider, pending accounting and tracing.
f. An order that Alex, Reza, and Rudy purchase Rony's 47% shareholding in 285 Spadina at fair market value in a process to be determined — premature to consider, pending disclosure and the accounting and tracing.
g. Pre-judgment and post-judgment interest pursuant to the Courts of Justice Act, R.S.O. 1990, c. C.43 — not applicable as no amounts of money are being awarded at this time.
[93] The respondents request that this application be dismissed. In oral argument, the respondents indicated that the corporate and investment structure contemplated by the LOI was not implemented, so anything done in furtherance of it should be unwound, and any monies not yet returned should be returned to the applicants. This was not the subject of a counter-application or separate request for relief. But even if it had been, the court is not prepared to grant that relief.
[94] There was an intended investment, and it should be recognized. The clock is not going to simply be turned back. The Tenant has had the benefit of the invested funds for almost four years and is now finally in a position to move forward with the intended business enterprise (the SPV Lease having now been upheld in the second round of the Tenant’s dispute with the Landlord). The parties will need to figure out a way to work together or a buyout will need to be structured. Ideally, that will be done through a negotiated business transaction with the benefit of the directions now provided by the within decision.
[95] To the extent that further directions are required to implement the orders sought and granted in this oppression remedy application, the parties may request a case conference before me through the commercial list scheduling office. To the extent that a trial of issues is required after the orders and declarations herein have been implemented, and/or the prerequisite(s) to any relief that was deferred (as opposed to denied) have been satisfied such that it is thought to be appropriate for the request for such relief to be renewed, a case conference may be requested to be scheduled before me. No further relief may be pursued in connection with the matters raised by or in the context of this oppression remedy application without leave of the court.
Costs
[96] Each of the applicants and respondents seek substantial indemnity costs against each other. They reached an agreement that the winner would pay the loser costs of this application fixed in the amount of $45,000, with the court to determine who was the overall winner on this application.
[97] The applicants have achieved substantial success on this application. While not all of the relief the applicants sought was awarded at this time, part of the reason some of the relief was determined to be premature is due to the lack of disclosure on the part of the respondents, which has now been ordered, along with an accounting and tracing. Further, the respondents resisted this application largely on the basis that the applicants were not proper complainants, and they lost on that threshold argument.
[98] The respondents, Rony and 285 Spadina, are ordered to pay the applicants forthwith their costs of the application to date fixed in the amount of $45,000.
Kimmel J.
Released: April 25, 2022
COURT FILE NO.: CV-21-00662130-00CL
DATE: 20220425
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Court file no.: CV-21-00662130-00CL
DEVAD SEFEROVIC (also known as ALEX SEFEROVIC), REZA ABEDI and RODOLPHE NAJM
Applicants
– and –
285 SPADINA SPV INC., RONALD HITTI (also known as RONY HITTI) and RAJA FARAH
Respondents
REASONS FOR DECISION
Kimmel J.
Released: April 25, 2022
[^1]: It is acknowledged by the respondents that Rudy is a beneficial shareholder of Beryte, an affiliate of the Tenant, and that he would technically have standing to bring an oppression remedy application in that capacity. However, his complaints in this application are not made by him in that capacity.
[^2]: No cases were cited by the applicants regarding the “any other interested person” clause of the oppression remedy under s. 245 (1) (c) of the OBCA. It was argued from first principles. Although not cited, the arguments made in this case are analogous to those raised in the case of Ninth Square Capital Corp. v. Boyes, 2021 ONSC 3878 that explores, albeit on a pleadings motion, the application of the “any other interested person” proviso to displace what would otherwise have been a technical argument about intended vs. actual shareholdings being raised in an attempt to deprive intended shareholders of standing to make an oppression remedy claim. In this case, the “any other interested person” clause is being used to displace what is otherwise a technical argument about intended but failed corporate structures being raised in an attempt to deprive investors of standing to make an oppression claim against the corporation that received the benefit of their investment in the absence of the implementation of an intended corporate structure.