COURT FILE NO.: CV-20-651951
DATE: 20220802
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Shiu Yiu Kong
Applicant
– and –
Raymond Au, 1802606 Ontario Inc. and Taknology (Canada) Inc.
Respondents
Wong. O., for the Applicant
Lim, N., for the Respondents
HEARD: November 30, 2021
REASONS FOR JUDGMENT
Sugunasiri, J.:
[1] Kong and Au have been business partners since the mid-eighties. They and two other partners who are no longer in the business, incorporated Taknology (Canada) Inc. in 1992 as a printer business. Takno’s warehouse, showroom and office is at 50 East Pearce Street in Richmond Hill. The partners involved in Takno at the time incorporated a company to own 50 East Pearce Street. Ultimately the Defendant 1802606 Ontario Inc. came to own the property through an amalgamation. Au ran the day-to-day operation of the business. Kong was a passive but equal shareholder and director until he transferred 10% of his holdings in Takno and 180 to Au in 2009. At that point, Au became the majority shareholder with a 55% interest in Takno. Kong signed documents when required and received periodic payments and dividends.
[2] In 2017 the Kong alleges that Au wanted to buy his interest in Takno for approximately $400,000. Kong felt the price to be low in comparison to the amount their former business partner received for his one-third interest in 2007. In 2019 Kong received some financial statements for Takno and 180 and an appraisal of 50 East Pearce Street. This caused him to refer the information to his long-time accountant who analysed the reports and raised some concerns. Kong was provided with the financial statements from 2009 to 2019 and his accountant identified issues in 180’s statement with rental income reconciliations, inconsistent bank charges, a CIBC mortgage, fluctuations in property tax and losses experience by 180 since 2011. The accountant also identified issues with Takno’s financial statements relating to the payment o professional fees, a big swing in gross margin, unexplained losses between 2001 and 2015, unreasonable amounts payable, and fluctuating shareholder loans. Overall Kong’s accountant commented on the fact the financial statements were not signed and lacked explanation or background information.
[3] In the summer of 2020 Au provided Kong with many corporate documents both made available to Kong for inspection and sent to counsel. As Kong’s accountant began to review the documents, Kong discovered the intricacies of the corporate restructuring that lead to a buyout of the third partner’s interest and the creation of 180; the absence of a recording for a loan given by Kong to Takno and repaid to him with interest; the change in Kong’s payor from Takno to 180 with a reduction in the size of the payments; the fact that Au received director’s fees, a car allowance and salary from Takno and 180; and that Au wife Doris was receiving employment income and a car allowance as a means of income splitting. Kong’s sudden interest in the operations of the companies has triggered a wholesale challenge to Au’s overall management of the defendant companies.
[4] Kong wishes to sell his interest in defendant companies to Au for fair market value. Au and Kong disagree about that value. Kong also wants to sell 180’s property which Kong does not want to do. Kong applies to the court to resolve the “stalemate” by applying the oppression remedy provisions in Ontario and Canada’s business corporation acts to address rectify Au’s alleged injustices. Kong’s proposed solution is for the court to:
a. Regulate 180’s and Takno’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;
b. Direct Au to purchase Kong’s shares in 180 at fair market value or direct 180 to sell its property at a price to be determined by the Court;
c. Direct Au to purchase Kong’s shares in Takno at fair market value;
d. Require 180 and Takno to provide financial statements pursuant to section 155 of the Canada Business Corporations Act and section 154 of the Ontario Business Corporations Act; and
e. Direct investigations into 180 and Takno pursuant to Part XIX of the CBCA and Part XIII of the OBCA.
[5] I dismiss the application. The oppression remedy is not the appropriate vehicle to resolve Kong’s dispute with Au. I explain below.
Law and Analysis:
[6] The parties agree that section 241 of the CBCA and section 248 of the OBCA grants the court the ability to make an interim or final order to rectify corporate or director conduct that is oppressive, unfairly prejudicial, or unfairly disregards the interests of any security holder. They also agree that in applying those sections, the court must first consider whether the complainant’s expectations are reasonable and second whether a breach of those expectations is oppressive, unfairly prejudicial or unfairly disregards the complainant’s interests (BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at para. 56). In determining whether to grant this equitable relief, the court looks at business realities and not just narrow legalities (BCE supra at para. 90). The onus is on Kong to identify, through evidence, the expectations he claims were violated by the conduct in question (Cosentino v. Alilovic, 2020 ONSC 1050 at para. 64).
Kong has not established his expectations with supporting evidence
[7] Kong attests that he relied on Au since the inception of the partnership to conduct all aspects of the business operation and in doing so, to treat him fairly as a shareholder. He states at paragraph 83 of his factum that he also expected from Au comprehensible financial statements, information pertaining to benefits and “perks” for Au, and especially his non-working spouse, information on the use of funds from bank loans and facilities, major leasing arrangement pertaining to the Property, and essential financial records including banking and mortgage statements. Paragraph 83 is not supported by the evidence and indeed there is no reference to supporting evidence for that statement in the factum. Kong was not interested in any financial records or explanations until he attempted to sell his interest in the companies and obtained financial documents related to the valuation of his shares. Throughout the history of the partnership, Kong attests that he did not look at financial documents that Au sent to him, nor paid any attention to the company’s dealings. Au informed him of the business operations from time to time that Kong repeatedly attests he did not question or review information that was given to him. For example, at paragraph 106 of Kong’s affidavit, he attests that “I had received financial statements for the two corporations from Au, which I would simply file away without really reviewing them.” The evidentiary record does not support Kong’s bald statement in his factum that he expected to see records and be provided the information noted above. This alone defeats his application.
Kong has not demonstrated oppressive or prejudicial conduct warranting the court’s intervention
[8] Even if I am incorrect in concluding that Kong’s evidence falls short of establishing the expectations he claims have been violated, I am not satisfied that Kong has proved oppressive, prejudicial conduct, or conduct that does not take his interests in mind that warrants court intervention under the oppression remedy provisions of either Act. Kong enumerates his complaints at paragraph 85 of his factum:
a. Au has failed to provide comprehensible financial statements to Kong;
b. Kong has not been informed of the various benefits and “perks”, not only received by Au, but also his spouse, or of any income splitting arrangement between Au and his spouse;
c. Au has not kept Kong informed on decisions involving the utilization of any facilities or loans from the banks of the corporations, and the application of new bank loans or facilities;
d. Au has not kept Kong informed of any leasing arrangement of the Property, including but not limited to the determination of rent payable from time to time, and the execution of any lease; and
e. Au has failed to provide financial records, including bank statements and mortgage statements.
Kong chose to be left out of the decision-making
[9] As noted in BCE, whether Au or the corporations’ actions are “oppressive” must be judged in the context of the business realities between the parties. Kong was a director, was paid director fees, but was never active in the business apart from signing documents where necessary. In this context, it is not reasonable to complain that he was left out of the decision making. This was the case for 30 years without complaint notwithstanding Kong’s right, as a shareholder, and director to review the books and records of the corporations and the financial statements that were sent to him. There is no evidence that Kong had any expectation to be kept informed of any of the decisions relating to the corporation. In fact, he benefited from Au’s active operation of the companies for 30 years.
[10] These complaints are not reasonable in the circumstances of this case and Au has not acted oppressively or prejudicially in that regard. This case is not akin to Wright v. Donald S. Montgomery Holdings Ltd. where the court found that the failure to consult with minority shareholders among other conduct amounting to oppression had to be assessed in the context of more specific allegations that are dissimilar to the specific allegations in this case. In other words, it was insufficient for a complainant to trigger the protection of the oppression remedy by simply stating that he or she was not consulted before taking actions ((1998), 38 B.C.L. (2d) 266 at paras. 24-26).
[11] This case is much more akin to Mennillo v. Intromodal Inc., 2016 SCC 51 which involved a two-person company in which dealings between the parties were informal. Of note is Justice Cromwell’s comment that what triggers the oppression remedy is conduct that frustrates reasonable expectations. In this case, as in Mennillo, Kong was treated exactly as he wanted to be with respect to decision-making; he did not want to be involved. No reasonable expectations have been frustrated with respect to decision-making about the Defendant corporations’ operations and finances.
[12] Notwithstanding Kong’s admitted disinterest in the operation of the corporations, I accept Au’s evidence that after the third partner left in 2008, Au and Kong met annually to informally discuss corporate matters including director fees, the year-end financial statements and the corporations’ general economic situation. Despite Kong’s evidence to the contrary, I accept Au’s evidence that among these discussions was the income splitting done between Au and his wife, Doris, and which lead to total incomes ranging from approximately $97,000 to $130,000. Au’s and Doris’ income is provided for in T4s and the Defendant corporations’ financial documents available for Kong’s review. Further, Au retained Compensation Governance Partners in mid-June of 2021 to analyse Au’s income in comparison to the industry standard to address Kong’s concerns. Au has gone to great lengths to answer Kong’s late breaking questions about the operations of the Defendant Corporations. I accept his affidavit and do not find that it was shaken on cross-examination. In any event as framed, Kong’s application complains of his expectation to be kept informed and Au’s alleged failure to do so.
Au has made the books and records available to Kong
[13] Au has not responded oppressively or prejudicially to Kong’s current or past requests for financial documents. Kong himself states in his affidavit that Au has provided a large volume of documents in response to his request both before and after commencing this application. I further accept Au’s evidence that he has made all books and records available for inspection at Takno’s office. The fact that counsel has indicated that the Defendants are unwilling to make copies does not rise to the level of oppression. Au conveyed his willingness to arrange for a safe environment for Kong and his auditors to review all records as many times as necessary. Kong has conceded that Au provided his counsel with many of the documents requested and instructed the controller of the company, Thomas, to prepare all documents Kong requested for an inspection scheduled on July 27, 2020. Kong also has always had authority to instruct Thomas to provide him with any financial documents or question Thomas on any aspect of them.
[14] Kong further complains at paragraph 86 of his factum that the following conduct demonstrates Au’s total disregard of Kong’s rights and interest:
a. Taking out new loans or facilities from CIBC even in the midst of the legal proceedings herein;
b. Using corporate funds to pay for his own legal costs in the legal proceedings herein; and
c. Au dealt with Kong in an extremely high-handed manner in relation to Au’s attempt to buy out Kong’s interest in the corporation
[15] I disagree. Au has not taken out new loans during the legal proceedings, there is nothing oppressive about the corporations paying for his legal fees to defend this action, and Au has not acted high-handedly in negotiating his potential purchase of Au’s shares. In any event the purchase price has nothing to do with Au’s administration of the corporations’ business as a director and majority shareholder. The true dispute between the parties is the price of Kong’s shares that can easily be resolved by obtaining an independent valuator agreed upon by both parties. Kong’s complaints do not trigger the oppression remedy.
Corporate loans are not new
[16] As part of the Defendants disclosure to Kong as requested, Au provided Kong with two CIBC loan contracts. Au has explained in his affidavit, and I accept, that there are two CIBC loans registered against 180’s property. The first mortgage for $1.4million was entered into when the partners first purchased the property. The second mortgage was given in 2008 when the third partner’s interest was purchased. Au further attests that CIBC renews these two mortgages annually and provides a new loan contract each year with updated charges and interest amounts. Au has provided Kong with the latest contract which caused Kong to believe that Au had obtained new CIBC loans during this litigation. Kong complaints with respect to documents does not trigger the protection of the oppression remedy provisions.
Corporate Defendants are paying legal fees which Au will reimburse his share of
[17] Au has admitted that the companies are currently paying counsel to defend this litigation. Au has indicated however that he will repay the corporations his one-third share after the litigation has come to an end. Kong has not shown why this conduct is oppressive or unfairly prejudices him.
The oppression remedy is not the vehicle to compel Au to pay what Kong believes is fair market value for his shares
[18] It is clear from the record that the crux of the dispute is the valuation of Kong’s shares. Kong uses the oppression remedy to compel Au to purchase his shares at fair market value. There is no dispute as to whether Kong’s share should be purchased at fair market value – their difference lies in what that value is. Kong complains that Au is applying a different formula than was applied to their third partner, Mr. Tung, when Khan and Au bought his shares in 2007. Tung’s payout calculated by a chartered professional accountant was $1,212, 328 with his one-third interest in calculated at $700,000. Au has offered Kong $408,697 for his half interest. Au has attested that this is calculated the same way as Tung’s calculation was made.
[19] I see no oppressive conduct on the part of the Defendant Corporations or Au as Director, to trigger the oppression remedy or the court’s intervention. The mere fact that Kong does not like Au’s buyout figure or his method of calculation does not warrant the court’s intervention. Au is not obliged to buy Kong’s shares at the price Kong sets. Au is not obliged to buy out Kong at all. Au has no direct obligation to Kong. His obligation is to the Defendant corporations. Kong could seek share redemption which he should expect fair treatment. However, Kong has not proposed to have the Corporate Defendants redeem shares which process is subject to the shareholder agreement signed by Au and Kong and to provisions of both Acts. Instead Kong seeks to use the oppression remedy to force Au to buy his shares at an amount set by Kong. Kong does not provide any authority or this use of the oppression remedy. Even if he did, Kong has not satisfied me that Au has frustrated a reasonable expectation through his conduct.
Criticism of books and records is a sideshow
[20] With respect to the state of the Corporate Defendants’ books and records, Kong has not made out the applicability of the oppression remedy. He has not set out his expectations as required, but even if one assumes that Kong can expect that the Corporate Defendants and Au have clear books and records, I am persuaded that they are sufficient for the purposes of an oppression remedy analysis. Mr. Regan has responded to Accountant Ng’s critiques and the deficiencies in the books and records are explained or can be readily corrected. For example, the fact that the financial statements were not signed can be fixed. The Defendant Corporations have had an independent CPA completing their financial statements since their inception. The standards applied to closely-held corporations such as the Defendant Corporations are not as stringent as for publicly-traded companies. Further, it remains that Kong is a director of both corporations and has the same access and ability to direct the accountants as Au does.
[21] To the extent that a dispute remains as to the value of Kong’s shares, the parties should simply select an independent accountant to value them and agree to be bound by the valuation. The parties should take a similar approach to the sale of the Property. It is not oppressive for Au to disagree with Kong that the Property should be sold or at what value. Kong’s expectation should be that nothing is done relating to the Defendant Corporations and corporate matters that is oppressive to him as a minority shareholder. On the record before me, merely disagreeing as to the necessity of a sale and the value of the property does not trigger the oppression remedy.
Costs:
[22] Both parties have provided me with their Bills of Costs and costs outlines. Au made two offers with respect to the buyout of Kong’s shares. As I make no finding on what that figure should be, the offers have little impact on my costs determination. Unfortunately both sides have spent an inordinate amount of money responding to what I regard as an improper oppression remedy application. Au seeks substantial indemnity costs for having to respond to Kong’s premature application to the court and improper use of the oppression remedy. I agree. Kong’s approach has caused Au to incur costs unnecessarily. Kong shall pay the Defendants their all -inclusive substantial indemnity costs of $111,510.89 payable within 60 days of today’s date.
Disposition:
[23] I dismiss the application with substantial indemnity costs in favour of the Defendants in the amount of $111,510.89.
“Original signed”
August 2, 2022 Justice P.T. Sugunasiri
COURT FILE NO.: CV-20-651951
DATE: 20220802
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Shiu You Kong
Applicant
– and –
Raymond Au, 1802606 Ontario Inc. and Taknology (Canada) Inc.
Respondents
REASONS FOR JUDGMENT
P.T. Sugunasiri J.
Released: August 2, 2022