Court File and Parties

Court File No.: CV-21-00669918CL and CV-21-00672488CL Date: 2022-01-14 Superior Court of Justice – Ontario Commercial List

Re: MacBryce Holdings Inc., Allison Elizabeth Bryce and Donna Belinda Bryce, Applicants And: The Magnes Partnership, AS Holdings Inc., Richard J. Farnworth, Roberta Tasson and Susan Lynn Hammond, Respondents

And Between: The Magnes Partnership, AS Holdings Inc., Richard J. Farnworth, Roberta Tasson and Susan Lynn Hammond And: MacBryce Holdings Inc., Allison Elizabeth Bryce and Donna Belinda Bryce.

Before: C. Gilmore, J.

Counsel: Sean Laubman and Philip Underwood, Counsel for the Magnes Partnership, AS Holdings Inc., Richard J. Farnworth, Roberta Tasson and Susan Lynn Hammond. Ranjan K. Agarwal and Jason Berall, Counsel for the MacBryce Holdings Inc., Allison Elizabeth Bryce and Donna Belinda Bryce.

Heard: January 7, 2022

Endorsement

Introduction

[1] This proceeding involves the interpretation and application of the Magnes Shareholders Agreement (“the MSA”) governing the Magnes Group Inc.

[2] Two Applications were argued in this matter: (i) an Application for Directions and the appointment of Mr. John Rockx (“Mr. Rockx”) as arbitrator by The Magnes Partnership, AS Holdings Inc., Richard J. Farnworth, Roberta Tasson and Susan Lynn Hammond (“the Purchasers”); and (ii) an Application by MacBryce Holdings Inc., Allison Elizabeth Bryce and Donna Belinda Bryce (“the Sellers”) for the appointment of Mr. Chris Polson (“Mr. Polson”) as the arbitrator under the MSA.

[3] The Purchasers seek direction from the Court as to the proper application of the terms of the MSA so that an efficient process can be facilitated for the valuation of the shares. They also seek confirmation that April 30, 2021 is the relevant valuation date for the shares under the MSA. The Sellers’ position is that the arbitrator can determine the valuation date for the shares and that they are entitled to a full and fair hearing under the Arbitration Act, 1991, S.O. 1991, c. 17 (“the Act”), not the informal, truncated version proposed by the Purchasers.

Background

[4] MacBryce Holdings Inc. is owned by Jeffrey Bryce. Allison, Belinda and Jeffrey Bryce each own shares equivalent to a 10.1% ownership interest in the Magnes Group Inc.(“Magnes”), an independent Canadian insurance brokerage. The Purchasers are also shareholders of Magnes. The Magnes Partnership is the majority shareholder of Magnes.

[5] On April 21, 2021, Magnes terminated the Bryces’ employment. The termination triggered the provisions of the MSA which entitled the Purchasers to purchase the Bryces’ shares.

[6] The parties do not agree on the fair market value (“the FMV”) of the Sellers’ shares. As such, the FMV to be determined through arbitration. The MSA also provides that if the parties cannot agree on an arbitrator, they may apply to this Court for the appointment of an arbitrator. The MSA stipulates that the arbitrator must be a partner at a major national Canadian firm of Chartered Accountants. There is no dispute that both Mr. Polson and Mr. Rockx are partners in major Canadian Chartered Accountants’ firms.

[7] The Sellers seek to appoint Mr. Polson, a partner at PriceWaterhouseCoopers (“PWC”), as the arbitrator. Mr. Polson has extensive experience in business valuations and providing expert business valuations for court and arbitration proceedings. The Purchasers seek to appoint Mr. Rockx, a partner at KPMG, as the arbitrator. He also has extensive experience in business valuations.

The Magnes Shareholders Agreement

[8] The parties entered into the MSA on October 16, 2015. The relevant provisions of Section 15.2 of the MSA are set out below:

15.2 ESTIMATE OF FAIR MARKET VALUE

(a) Valuator's Report. If at any time a Shareholder's Shares are to be transferred at Fair Market Value in accordance with the terms of this Agreement, the Company shall instruct the Valuator to prepare and deliver to the Company, within 30 days after the date of its receipt of those instructions, a valuation report.

(c) Dispute regarding Fair Market Value. If the selling Shareholder and the purchasing party do not both agree in writing to the Valuator's determination of the Fair Market Value, they shall negotiate expeditiously and in good faith during that 10 day period to arrive at a mutually agreeable Fair Market Value. If they reach an agreement as between them, then that amount agreed upon will be the final Fair Market Value of the Shares for purposes of determining the price per Share in respect of the sale transaction to which it relates.

(d) Appointment of Second Valuator. If they are unable to agree as to the Fair Market Value of the Shares within that 10 day period, a second Valuator as agreed to by the Shareholders shall be retained to determine the price per Share who will make a final determination of the Fair Market Value of the Shares for purposes of determining the price per Share in respect of the sale transaction to which it relates. If the parties cannot agree to a second Valuator, then a disputing party will have five days from the end of the 10-day period within which to give Notice of dispute to the other parties and the provisions of section 15(g) will apply.

(e) Dispute Notice. If either party disagrees with the Fair Market Value set forth in the second valuation report and fail to reach agreement as provided hereunder, a disputing party will have five days from the end of the 10 day period referred to in section 15.2(e) within which to give a Notice of dispute to the other parties.

(g) Effect of Dispute Notice. If either party receives a Notice of dispute from the other party within the prescribed time, the purchase price of the Shares will be determined as follows:

(i) They shall elect to use either one arbitrator to make a determination of the Fair Market Value of the Shares. The arbitrator shall be a partner (current or former) from any major national Canadian firm of Chartered Accountants appointed with the agreement of both parties (failing agreement in connection with which arbitrator will be appointed on application to a Judge of the Ontario Court (General Division))

(ii) The arbitrator will review all material documentation including the first and, if applicable, the second valuation reports when making his/her determination of the Fair Market Value of the Shares. The Fair Market Value arrived at by the arbitrator will constitute the purchase price, which will be final and binding upon the parties.

(iii) The Fair Market Value arrived at by the arbitrator will constitute the purchase price, which will be final and binding upon the parties.

(h) Payment of costs. The Company shall pay all the Valuator's costs and expenses incurred in connection with the preparation of the first valuation report. The selling Shareholder and the purchasing party shall share equally in the second Valuator's costs and expenses incurred in connection with the preparation of the second valuator's report and in the cost of the arbitration.

(i) Valuators are not arbitrators. The Valuator(s) who is acting in determining the Fair Market Value of the Shares will be considered to be acting as an expert, not an arbitrator within the meaning of the Arbitration Act, 1991 (Ontario).

[9] On May 25, 2021, the Purchasers delivered to the Sellers a Notice of Exercise of a Purchase Option under s.15 of the MSA. That section required the determination of the FMV of the Sellers’ shares.

[10] FMV is defined at section 1.1(z) of the MSA as:

[T]he price per Share, determined by a Valuator as of the relevant valuation date, that would be received upon a sale of all of the issued and outstanding Shares in a single transaction determined in an open and unrestricted market between prudent parties, acting at arm's length and under no compulsion to act, and having reasonable knowledge of all relevant facts concerning the Company. The Valuator will determine the Fair Market Value of the Shares on a going concern basis (except to the extent that market, financial, economic, business or other conditions dictate different criteria in the reasonable judgment of the Valuator), without any discount for minority interests or any premium for control.

[11] The MSA required that on the occurrence of a Triggering Event (here, the termination of the Bryces’ employment), Magnes was to retain a valuator and instruct them to deliver a valuation report to the company. “Valuator” is defined in the MSA as “an independent qualified business valuator who is at arm’s length from the parties, and who is experienced and qualified in insurance brokerage valuations.”

[12] On July 9, 2021, a copy of a valuation report prepared by Eric Walker was delivered to the Sellers offering to buy their shares for $18,760,305.85. The report valued the shares as of April 30, 2021.

[13] The Sellers did not agree to this price. As a result, the MSA required the parties to negotiate and failing any agreement, a second valuator was to be retained to determine the FMV of the shares. If the parties could not agree on a second valuator, the MSA provides for a party to give a Notice of Dispute to the other parties.

[14] The parties agreed to extend the various time limits under the MSA but ultimately on July 23, 2021, the Purchasers proposed Mr. Rockx as the second valuator. The Sellers did not agree to Mr. Rockx for various reasons including a perceived conflict of interest.

[15] On July 30, 2021, the Purchasers delivered the Notice of Dispute to the Sellers under s.15.2(d) of the MSA asking that the FMV be set at the amount in Mr. Walker’s report. The Sellers have made no formal response to the Notice of Dispute.

[16] On August 4, 2021 the Purchasers proposed appointing Mr. Rockx as the arbitrator. On August 18, 2021, the Sellers proposed appointing Mr. Polson as the arbitrator. Neither party is agreeable to the other party’s proposal with respect to the appointment of an arbitrator. Given the disagreement, the Sellers commenced an application to appoint Mr. Polson as arbitrator in October 2021. In November 2021, the Purchasers cross-applied to appoint Mr. Rockx and for certain declarations and directions from this Court including a request that the Court determine the valuation date.

The Positions of the Parties

The Sellers

[17] The Sellers submit that the “directions” sought by the Purchasers are a thinly veiled attempt to substantially change the MSA and deprive the Sellers of their right to present their views on FMV. The draft Order included in the Sellers’ factum effectively adds new relief by requesting a declaration that the arbitration is not an arbitration within the meaning of the Act.

[18] The Purchasers seek appointment of an arbitrator under the MSA who is merely an appraiser, thus depriving the Sellers of their right to present documentation to support their position on the FMV of the shares and their procedural rights under the Act.

[19] The Sellers submit that the MSA is clear that the arbitrator appointed under the MSA to determine FMV is an arbitrator within the meaning of the Act which includes all of the procedural rights afforded to the Sellers.

[20] The Sellers further submit that up until recently, the Purchasers conducted themselves and their litigation such that they sought appointment of an arbitrator under the Act. The Sellers gave various examples of this previous conduct including the request in the Purchasers’ own application for appointment of an arbitrator under s.10 of the Act and the fact that their Notice of Dispute is styled as a pleading and a notice demanding arbitration under the Act. Paragraph 11 of the Notice of Dispute specifically refers to the Notice as triggering a dispute resolution process requiring arbitration.

[21] It was only on November 1, 2021 that for the first time the Purchasers referred to the arbitrator under section 15.2 (g) as an “appraiser”. There is no reference in the MSA to an “appraiser.”

[22] The Sellers are concerned that by reducing the role of the arbitrator to that of an appraiser, they will be unable to either present their case or respond to the Purchasers’ case. The Purchasers are attempting to limit the evidence on which the Purchasers can rely to support their position on FMV. Nothing in the MSA limits the Sellers’ procedural rights or the evidence they can submit to the arbitrator.

[23] The Sellers rely on s.15(i) which specifically differentiates between the role of the valuator and the arbitrator. The MSA does not stipulate that the arbitrator is to be a valuator. Rather, the arbitrator appointed under s.15.2(g) is “considered to be acting” as an arbitrator pursuant to the meaning of the Act. Further, parties cannot contract out of s.19 of the Act which provides each party’s procedural fairness rights during an arbitration.

[24] Section 15.2(g)(ii) of the MSA provides that the arbitrator will “review all material documentation including the first and, if applicable, the second valuation reports.” Nothing in that language restricts the parties’ right to make submissions or tender valuations to the arbitrator. The relief sought by the Purchasers attempts to deviate from that language and restrict the Sellers’ right to provide all relevant documents and evidence to the arbitrator. The plain meaning of section 15.2(g) is that the parties intended for the process to determine FMV to be different from the first and second valuators.

[25] There is nothing in the Act that requires that the arbitrator have legal training. An arbitrator may be chosen because of his/her particular expertise. In any event, an arbitration need not follow the same procedures as a court hearing. Further, s.20 of the Act limits the manner in which the Court can intervene in matters governed by the Act with certain exceptions including the prevention of unequal or unfair treatment of parties to arbitration agreements. The Sellers urge the Court to take a pragmatic approach which includes intervening in matters governed by the Act only when there are practical reasons for doing so. In this case, the procedure to be followed at the arbitration should be determined by the arbitrator and not the Court.

[26] The Sellers submit that this Court should not rule on the valuation date. There is insufficient evidence for the Court to do so. Further, the Sellers submit that the valuation date is an important issue which should be placed before the arbitrator with proper evidence. There is no reason for the Court to intervene at this stage and restrict the material placed before the arbitrator or make declarations about the valuation date.

[27] The Purchasers seek a preliminary ruling from this Court on the valuation date because of concern that a current valuation may result in a higher share sale price. Under the competence-competence principle, a dispute related to the valuation date falls within the jurisdiction of the arbitrator.

[28] The Purchasers seek to appoint Mr. Chris Polson as the arbitrator in this matter. Mr. Polson is a partner at PWC and has an MBA from Queens University. He has been a licensed Chartered Business Valuator since 2005 and has several other related designations including CFA, CMA and CPA. His PWC profile describes him as a valuation and damages expert focusing on litigation relating to shareholder disputes, breach of contract, tax and contested M&A and restructuring matters. He has experience as a valuator in courts, mediations, arbitrations and across several industries including insurance, investment brokerage, pharmaceuticals, oil and gas and others. Mr. Polson has been appointed as an arbitrator to determine the FMV of shares in several disputes involving partners and shareholders.

[29] Mr. Polson’s experience includes arbitrating a dispute similar to this case. In that case, Mr. Polson was required to review share valuations from both sides and gave a written opinion as to which valuation he preferred. The opinion was binding on the parties and was the amount the parties used for the transaction. Mr. Polson is independent and has had no prior dealings with any party in this matter.

[30] The Sellers dispute the appointment of Mr. John Rockx as arbitrator. While he meets the precondition in the MSA of being a partner in a major national Canadian firm of Chartered Accountants, his profile does not indicate that he has ever acted as an arbitrator. He has acted as an expert witness and as a valuator in the context of an arbitration.

[31] Mr. Rockx is not independent of the parties. In 2015, Magnes and its shareholders underwent a restructuring. KPMG was retained by some of the shareholders to provide advice on that transaction. Even if this association does not rise to the level of a direct conflict of interest, there is no reason to take the risk of appointing Mr. Rockx when there are many other experienced accounting professionals available, such as Mr. Polson.

[32] It is important that the arbitrator in this matter have both expertise and be independent from the parties. Mr. Polson fulfills those requirements. Further, Mr. Polson has experience both as an arbitrator and in the insurance brokerage industry. By contrast, Mr. Rockx’s CV discloses that he has provided a business valuation in only one contested insurance brokerage matter.

The Purchasers

[33] The Purchasers submit that the MSA makes it clear that the process contemplated therein is intended to be expedited and streamlined. That process does not include a formal hearing or reasons for decision. Rather, the arbitrator is to apply their professional expertise based on a review of certain documentation and come to their own conclusion as to FMV.

[34] The arbitrator’s jurisdiction is limited by the MSA to determining FMV and not to any contractual interpretation or legal findings.

[35] The relief sought by the Sellers is contrary to the intention of the MSA as they have sought to convert the streamlined process intended by the MSA into a formal arbitration. This is not the intention set out in s.15.2(g) of the MSA.

[36] The actions of the Sellers have created confusion and frustration for the Purchasers. For example, the Sellers did not agree to Mr. Walker’s conclusion on FMV but did not provide their own alternative figure. The Sellers do not agree that April 30, 2021 is the valuation date but have provided no alternative date of their own.

[37] The Sellers refuse to agree to the appointment of Mr. Rockx as a valuator despite his qualifications as a Chartered Business Valuator and a Chartered Professional Accountant with decades of experience in business valuation. Mr. Rockx has direct and related experience in that he has been retained to determine the FMV of shares of an independent insurance brokerage for the purpose of assessing shareholder entitlement.

[38] As to any alleged conflict on the part of Mr. Rockx, the restructuring for which KPMG was engaged by Magnes in 2015 was done out of KPMG’s Vancouver office. Mr. Rockx had no involvement in the transaction which was undertaken by a different group of professionals in another office.

[39] The Purchasers accept that Mr. Polson meets the requirements under the MSA but point out that there is no evidence that Mr. Polson has any experience in insurance brokerage valuations.

Analysis and Ruling

Issue 1: What is the Proper Process under the MSA?

[40] The first issue to be decided in this case is whether the process contemplated by the MSA is the “streamlined” process suggested by the Purchasers or the formal evidentiary hearing suggested by the Sellers.

[41] A close review of s.15.2(g) is necessary to determine the parties’ intentions under the MSA. This section states:

(i) They shall elect to use either one arbitrator to make a determination of the Fair Market Value of the Shares. The arbitrator shall be a partner (current or former) from any major national Canadian firm of Chartered Accountants appointed with the agreement of both parties (failing agreement in connection with which arbitrator will be appointed on application to a Judge of the Ontario Court (General Division))

(ii) The arbitrator will review all material documentation including the first and, if applicable, the second valuation reports when making his/her determination of the Fair Market Value of the Shares. The Fair Market Value arrived at by the arbitrator will constitute the purchase price, which will be final and binding upon the parties.

[42] It is clear that the parties intended that an arbitrator be appointed to determine the FMV of the shares. Further, the MSA makes it clear in s.15.2(i) that an arbitrator is not a valuator. The roles are differentiated and defined. This bifurcation of the process is confirmed in s.15.2(h) in which the parties agree to share the cost of the second valuation and the arbitration.

[43] The Purchasers agree that until recently they conducted the litigation as if an arbitration would be undertaken. Their real question relates to the exact function of the arbitrator in this case given that the arbitrator must determine FMV of the shares. Is the arbitrator to simply review a valuation from each side and give reasons as to which is preferred, or is a formal process to be undertaken as suggested by the Sellers? I accept that clarity is required on this issue which the Court will provide.

[44] I do not agree with the Purchasers’ interpretation of the MSA with respect to the process to be used by the arbitrator or that the matter is not an arbitration under the Act. I find that the parties intended an arbitration, following the valuations, which invokes the requirements and protections of the Act and specifically those processes under s. 19 of the Act. Section 3 of the Act is clear that no party can contract out of s. 19. This is to ensure procedural fairness for both sides.

[45] In Sport Maska Inc. v. Zittrer, 1988 CanLII 68 (SCC), [1988] 1 S.C.R. 564, the Supreme Court of Canada dealt with whether an agreement between parties was an agreement to arbitrate or simply an agreement to obtain a professional opinion from a third party. In that case, the Court found that arbitration was not intended because there was no “dispute” between the parties. Clearly, there is a well-defined dispute in this case and a requirement to serve a “Notice of Dispute.”

[46] In Maska, the Court mentioned, at p.603, the importance of identifying “the precise function the parties intended to entrust to this third party.”

[47] Turning to the MSA, it is clear that its terms require that the arbitrator will review all material documentation including the first, and if applicable, the second valuation reports. The Purchasers view this as restricting any further formal process such as submissions or the tendering of additional evidence. I do not agree. The parties intended an arbitration process. The appointed arbitrator will review all material documentation as presented by the parties. I do not interpret this provision as restrictive in any way.

[48] If the process continues to be disputed by the Purchasers, the competence-competence principle would allow the arbitrator to determine the parameters of the documents and evidence required to determine FMV based on submissions from the parties. In Ontario Medical Assn. v. Willis Canada Inc., 2013 ONCA 745, 118 O.R. (3d) 241, at para. 22, the Court described the competence-competence principle as one in which any challenge to the arbitrator’s jurisdiction must first be resolved by the arbitrator.

[49] The differentiation between arbitrator and valuator in the MSA must be respected. The word “valuator” is not used in s.15.2, which is the arbitration section of the MSA. The word “arbitrator” is used throughout that section and the parties must be taken to mean the language they chose. Why use the words “arbitrator” and “valuator” in separate contexts in the MSA if the intention of the parties was simply to have a valuator decide which report he or she preferred?

Issue 2 – Who Should Determine the Valuation Date?

[50] The Purchasers submit that this Court should rule on the valuation date issue. In Maurice v. Alles et al., 2013 ONSC 6046, [2013] O.J. No. 4568, the Respondent sought the appointment of an arbitrator to deal with the FMV of shares which the Respondent sought to sell under a Unanimous Shareholders Agreement (the “USA”). The USA provided that if the FMV of the shares was in dispute, an independent business valuator would determine the FMV of the shares as of the last day of the month preceding the month in which the triggering event occurred. If there was a dispute relating to the implementation of any provision of the agreement, it was to be resolved by arbitration. PWC was appointed to value the shares. The Respondent disputed the valuation date and brought claims for oppression and breach of contract. He sought to have the issues arbitrated or dealt with by the Court.

[51] The Court identified that dispute was one which would trigger an arbitration under the agreement but for the fact that the dispute involved a person who was not a party to the USA. The Court ordered that the oppression and breach of contract claims be dealt with by the Court before a valuator was appointed. The valuator would deal with the valuation date issue: see Maurice, at paras. 36-38.

[52] Section 6 of the Act restricts the Court’s intervention in matters governed by the Act except in the following circumstances:

1. To assist the conducting of arbitrations.
2. To ensure that arbitrations are conducted in accordance with arbitration agreements.
3. To prevent unequal or unfair treatment of parties to arbitration agreements.
4. To enforce awards.

[53] I see no reason for the Court to intervene in this matter to attempt to fix a valuation date for two reasons. First, the record before the Court is incomplete on that issue. Indeed, the only evidence is that of the Purchasers. Second, this is a question which can reasonably be answered by a qualified arbitrator with a complete record, including expert evidence, before him or her as part of the arbitration process.

What is the Solution to the Problem?

[54] Section 6 of the Act permits courts to intervene to assist in the conducting of arbitrations. As I have already found that the parties’ intent was to conduct an arbitration, the arbitration must be undertaken with a complete record.

[55] Given the disagreements between the parties, it would be logical for each party to have the benefit of a valuation done as of the valuation date as determined by the arbitrator. A form of pre-hearing can be conducted by the arbitrator to hear evidence on this issue and determine the valuation date and each party will then be in a position to submit their expert report on FMV based on that date. It is hoped that once this is done the parties would be in a position to enter into further negotiations before incurring the expense of a full arbitration on FMV.

[56] Given my finding that this is not merely a valuation hearing but an arbitration pursuant to the Act, the parties must appoint a third-party arbitrator who meets the criteria in the MSA but is not Mr. Polson or Mr. Rockx. Mr. Polson and Mr. Rockx may provide their valuation reports after the valuation date is fixed if the parties choose to retain them as their respective valuation expert.

[57] If the parties cannot agree on an arbitrator, I can be spoken to as set out below.

Orders

[58] Given all of the above, I make the following Orders.

a. The parties will enter into an arbitration to determine the FMV of the Sellers’ shares as per the MSA. The arbitration will be conducted pursuant to the Act.

b. Any dispute as to the arbitrator’s jurisdiction or the process to be used during the arbitration will be adjudicated by the arbitrator in accordance with the competence-competence principle.

c. A third-party arbitrator who meets the requirements under the MSA is to be chosen by the parties. The arbitrator will not be Mr. Polson or Mr. Rockx. If the parties cannot agree on an arbitrator within 10 days of the release of this decision, I will conduct a one-hour Case Conference to determine a process for doing so, or if there is still disagreement, I will randomly select the arbitrator based on the parties’ fully qualified candidates.

d. The arbitrator, once chosen, will conduct a pre-arbitration hearing to determine the valuation date of the shares.

e. Once the valuation date has been determined by the arbitrator, the parties shall retain experts of their choice within 30 days to prepare an FMV of the shares as of the valuation date. After the experts’ reports have been exchanged, the parties shall negotiate for a period of 10 days in the hope that a resolution can be reached without the necessity of a full arbitration hearing.

f. If no resolution of FMV is reached after the 10-day negotiation period, the parties shall attend for arbitration based on a process and schedule as determined by the arbitrator.

Costs

[59] The parties have agreed that there would be no costs payable in relation to the Application to appoint an arbitrator and $10,000 in costs payable in relation to the Application for Directions. Given that my directions were different from those sought by either counsel, there shall be no costs payable.

C. Gilmore, J.

Date: January 14, 2022