COURT FILE NO.: CV-20-00654829-0000
DATE: 20220812
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
JING WANG
Applicant
– and –
ZIMENG YE, THOUSAND SUNNY CORPORATION, 2519604 ONTARIO INC. and TPS ONE INC.
Respondents
William Murray, for the Applicant
Marcos Cervantes and Daniel Ebady, for the Respondents
HEARD: January 13-14, 2022
reasons for judgment
VERMETTE J.
[1] The Applicant applies for remedies under the oppression provisions of the Business Corporations Act, R.S.O. 1990, c. B.16 (“Act”). She alleges that the Respondent Zimeng Ye (“Respondent”) is operating the business and affairs of the respondent corporations (“Corporations”) in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of each of the Corporations and the Applicant.
[2] For the reasons set out below, I order that the issues raised on this Application proceed to trial.
I. FACTUAL BACKGROUND
A. The parties
[3] The Applicant immigrated to Canada from China in 2013. The Respondent immigrated to Canada from China in 2012. They first met when they attended ESL (English as a second language) classes in British Columbia in 2005.
[4] The Corporations each operate a CoCo Fresh Tea & Juice (“CFTJ”) bubble tea store in the Greater Toronto Area.
B. Introduction to CFTJ and Franchise Agreement
[5] In 2012, the Respondent went to a CFTJ store in China. She was impressed by the quality of the bubble tea that she had there. On November 20, 2013, she sent an e-mail to the franchisor for CFTJ, a corporation located in Taiwan, with respect to potentially acquiring rights to open a CFTJ store in Toronto. She received the following response on the same day:
Greetings from CoCo, the world’s biggest tea chain store! Thank you for calling us. My name is Ivy and I will be very happy to assist you.
For you [sic] information, we do Regional Joint Venture Partnership with oversea partners, not single store franchise. We are very excited to discuss the potential of building a business with you in Ontario, Canada. To start, I strongly advise you and your team members to fill our application form online. During the process, you’ll be able to see the apply [sic] methods and procedures for our joint venture program. It is essential for us to read your application in order to understand you and deliver the service that meets your needs.
Thank you again for choosing CoCo. I will give you a call one [sic] I have reviewed your application. Should you have any question or concern in regards to our partnership, please feel free to contact me. We hope to hear from you soon.
[6] The e-mail also provided the links to CFTJ’s website and online application.
[7] On November 22, 2013, the Respondent sent an e-mail to CFTJ indicating that she would try to complete the online application form on that day, but that it might take a few more days for her team member to fill in the form. The team member in question was Lin Ji, a friend of the Respondent. The Respondent and Lin Ji met at work and the Respondent invited her to start up a CFTJ business with her.
[8] On November 27, 2013, the Respondent sent the following e-mail to CFTJ:
My partner Lin Ji (Elain) told me that she already submitted her application form online last Friday.
There may [sic] something that I and her are not on the same page, however we can discuss about that later.
If our application works for you or you have any questions or concern, Please [sic] feel free to let me know.
Thank you for your help.
[9] There is no evidence that the Applicant filed a separate application, like the Respondent and Lin Ji.
[10] The Respondent and Lin Ji participated in a conference call with a CFTJ representative on January 28, 2014. They were requested to prepare a proposal.
[11] On February 24, 2014, the Respondent and Lin Ji sent an e-mail to the CFTJ representative to ask about CFTJ’s expectations regarding the budget section of the proposal. They sent the following follow-up e-mail on March 2, 2014:
On Monday, February 24, I sent you an email regarding various budgeting issues. However I have yet to receive a reply from you. I just wanted to confirm that you have actually received the email. And also I apologize for the tardiness on our end. With Chinese New Year, and some business trips, we had a busy February at work. So I just wanted to apologize for the lack of communication during that period of time.
Elain and I would also wish to assure you that we are very serious about this potential venture with CoCo Fresh Tea & Juice. We have been in Toronto for a long time, and we are frequent bubble tea drinkers ourselves, so we have extensive knowledge on what consumers are looking for, as well as the necessary networks to promote our business. The locations we have chosen (included in our business proposal) have been carefully evaluated, and we feel will provide us and yourself with a great opportunity to grow our business. Collaborating with CoCo Fresh Tea & Juice have [sic] been our dream for a long time, so I assure you, we will do whatever it takes to make this venture a success.
So again, we apologize for the tardiness on our end. If you haven’t received that email, I have attached it to this email. So if you could take a look at it, that would be much appreciated. Our proposal is almost ready to be submitted, just some minor issues regarding budgeting we were hoping to clear up with you.
We look forward to hearing back from you.
[12] It appears that the Respondent first invited the Applicant to invest in a CFTJ store at around the time that the proposal to CFTJ was being prepared. The Applicant’s evidence with respect to the timing of her discussion with the Respondent regarding opening a CFTJ store is very general. She states that in 2014, the Respondent asked her to start a CFTJ bubble tea store in Toronto.
[13] The Respondent’s evidence is that she and Lin Ji believed that building a team would make their business plan stronger and would lend the project more credibility. The Respondent and Lin Ji believed that: (a) the Applicant and another person, Yan Chen, might be interested in investing in the first CFTJ store and work with the Respondent and Lin Ji; and (b) adding the Applicant and Yan Chen to the team would buttress the team’s experience in the operational aspects of running a food establishment because they both had some experience working in restaurants.
[14] Eventually, a business plan/proposal was submitted to CFTJ in a PowerPoint format. The cover page indicated that it was from Lin Ji, the Respondent and the Applicant. The slide entitled “Team Members” read as follows:
Members[’] Name and Role in the team
• Mina Wang [the Applicant] (Age: 29) – Store Operation – Full time (35% share)
• Chloe Ye [the Respondent] (Age: 26) – Accounting and Performance Management – Full time (40% share)
• Elain Ji [Lin Ji] (Age: 27) – Public Relations, Marketing – Part time (25% share)
[15] In mid-April 2014, the Respondent and Lin Ji were advised by CFTJ that they had passed the initial screening. They were invited to Taiwan for a final interview. Lin Ji decided not to go. The Respondent went to Taiwan with her husband, Qinsi Liu.
[16] The Respondent did a presentation to CFTJ on May 19, 2014. On May 21, 2014, she received the following e-mail from CFTJ:
Thank you for visiting our office with Ray. It was a pleasure to meet you and speak with you in person. After careful consideration, we would like to offer you 100K for the franchise fee of 3 stores plus monthly royalty fee of 6%. You may see more details in the table below. Kindly let me know if everything is okay so we may start the contract and training preparation.
We would like to advise you to sign with CoCo as an individual rather than a company to avoid preparation time and complication. If you would like to work with us as an individual, please email me a copy of your passport.
Thank you again for choosing and considering us. We are excited to work with you in Toronto. Please share your decision with us as soon as possible so we may start preparing the contract and your training.
[17] The Respondent forwarded this e-mail to the Applicant on the same day, i.e. on May 21, 2014.
[18] CFTJ subsequently sent to the Respondent a copy of its template franchise agreement. The Respondent’s evidence is that she also forwarded the e-mail attaching the draft franchise agreement to the Applicant.
[19] The Respondent signed the franchise agreement on June 5, 2014 and it became effective on June 19, 2014. The franchise agreement is between CoCo Fresh Tea & Juice USA, LLC as the franchisor, and the Respondent as the franchisee (“Franchise Agreement”). The Franchise Agreement is 33 pages long and has two signature lines for the franchisee: one “if a business entity” and one “if an individual”. The Respondent signed on the signature line under “if an individual”.
[20] The first section of the Franchise Agreement is entitled “Recitations” and contains the following paragraphs, among others:
D. Franchisor is in the business of granting qualified individuals and entities multi-unit franchise for the right to independently own and operate CoCo Locations utilizing the Proprietary Marks and CoCo System at the locations that Franchisor approves in writing.
F. Franchisee desires to acquire three-unit non-exclusive franchise for the right to operate CoCo Locations from Approved Locations, and has submitted an application to obtain such three-unit franchises from Franchisor.
G. Franchisor is willing to grant Franchisee the right to operate three particular type [sic] of CoCo Locations based on Franchisor’s material reliance on the representations contained in the franchise application, and subject to the terms and conditions set forth in this Agreement.
[21] The Franchise Agreement has a five-year term and provides that the franchisee may submit a request to renew the agreement for one additional, consecutive term of five years, subject to certain conditions. It outlines the obligations of the franchisee such as the submission of sales reports and the payment of a number of fees, including royalties equal to 6% of the gross sales generated by all the franchised business. The Franchise Agreement also states that the franchisee must locate and secure three locations in the Greater Toronto Area within two years. The locations have to be approved by the franchisor.
[22] Until the commencement of this proceeding, the Applicant never requested a copy of the Franchise Agreement from the Respondent.
C. First CFTJ store – Thousand Sunny Corporation
[23] The respondent Thousand Sunny Corporation (“Thousand Sunny”) was incorporated on June 4, 2014, while the Respondent was still in Taiwan/China and before the Franchise Agreement was signed. Searches for locations for the first CFTJ store had begun through a real estate agent and the agent suggested that it would be more convenient to have a corporation to make any offer to lease.
[24] At the time of incorporation, the Applicant and the Respondent were the directors of Thousand Sunny. The shareholders were the following:
a. Respondent – 425 shares (42.5%)
b. Applicant – 325 shares (32.5%)
c. Lin Ji – 150 shares (15%)
d. Yan Chen – 100 shares (10%)
[25] In June 2014, the Respondent and the Applicant traveled to Taiwan to take a training course offered by CFTJ to enable them to operate a CFTJ store. Lin Ji was not able to go.
[26] In August 2014, the shareholders of Thousand Sunny entered into a unanimous shareholder agreement. The unanimous shareholder agreement contains restrictions with respect to the transfer of shares. No share transfers are permitted without the consent of the board of directors or a written instrument containing the unanimous agreement of the shareholders. Further, the sale of shares to a third party is conditional upon the third-party purchaser first entering into an agreement with the shareholders remaining after such sale, in which the third-party purchaser agrees to assume and be bound by all the obligations of the unanimous shareholder agreement. The unanimous shareholder agreement also contains detailed provisions regarding a right of first refusal.
[27] Thousand Sunny started operating the parties’ first CFTJ store on December 19, 2014. The Applicant was in the last stage of her pregnancy at the time and had stopped working on or about December 12, 2014, before the opening of the store. The Applicant had a baby at the end of 2014, but, sadly, her baby died on December 29, 2014, three days after birth. The Applicant began working at the Thousand Sunny store on a full-time basis on February 1, 2015.
D. Second CFTJ store – Blooming Light Incorporated
[28] Blooming Light Incorporated (“Blooming Light”) was incorporated on August 4, 2015. Its first directors were the Respondent and Lin Ji. It was incorporated in anticipation of opening a second CFTJ store. The Applicant and Yan Chen were invited to participate in the ownership of Blooming Light, but they declined the invitation. In addition to the Respondent and Lin Ji, a third person invested in Blooming Light, Haiming Huang.
E. Third CFTJ store – 2519604 Ontario Inc.
[29] In May 2016, the decision was made to open another CFTJ store. The respondent 2519604 Ontario Inc. (“251”) was incorporated for that purpose on May 20, 2016. The Applicant, the Respondent and Lin Ji were the directors of 251. The shareholders were the following:
a. Respondent – 375 shares (37.5%)
b. Applicant – 325 shares (32.5%)
c. Lin Ji – 250 shares (25%)
d. Yan Chen – 50 shares (5%)
[30] In June 2016, the shareholders of 251 entered into a unanimous shareholder agreement that was substantially the same as the unanimous shareholder agreement they entered into with respect to Thousand Sunny.
F. Sale of Yan Chen’s shares in Thousand Sunny and 251
[31] In March 2017, Yan Chen sold her shares in Thousand Sunny and 251 to the other shareholders, based on their proportionate shareholdings. With respect to Thousand Sunny, she transferred 47 shares to the Respondent, 36 shares to the Applicant and 17 shares to Lin Ji. With respect to 251, she transferred 20 shares to the Respondent, 17 shares to the Applicant and 13 shares to Lin Ji. The new shareholding was as follows:
| Shareholder | Thousand Sunny | 251 |
|---|---|---|
| Respondent | 472 | 395 |
| Applicant | 361 | 342 |
| Lin Ji | 167 | 263 |
G. Fourth CFTJ Store – TPS One Inc.
[32] In September 2017, the Respondent and the Applicant decided to open a third CFTJ store together (which was the Respondent’s fourth store). The respondent TPS One Inc. (“TPS”) was incorporated for this purpose on September 27, 2017. The Applicant and the Respondent were the directors of TPS. The Respondent held 55% of the shares and the Applicant held 45% of the shares.
H. The parties’ roles in the Corporations
[33] The nature and extent of the work done by the Applicant both before and after the opening of the various stores is generally in dispute.
[34] The Respondent managed the finances of each of the Corporations. The Applicant had online access to view the bank accounts of each of the Corporations, and she received certain financial documents from the Respondent on some occasions. From June 2014 until October 2018, the Respondent paid out a portion of the Corporation’s revenues each month as wages. No dividends were declared. According to the Respondent, no profits were generated from Thousand Sunny (i.e. the first store) during the first two years of existence.
[35] Based on the evidence before me, it is unclear what the arrangements were between the Respondent, the Corporations and the franchisor with respect to the performance of the Respondent’s rights and obligations under the Franchise Agreement. For instance, the Respondent had the obligation to pay royalty fees and the right to use CFTJ’s proprietary marks under the Franchise Agreement, but the Corporations are the entities that paid the fees and used the marks.
I. The Applicant’s and Lin Ji’s offers to sell their shares
[36] The relationship between the Applicant and the Respondent started to deteriorate at some point in 2018, approximately three and a half years after they opened their first CFTJ store (i.e. Thousand Sunny) and before the opening of their third store (i.e. TPS).
[37] The Respondent was in China for part of August and September 2018. During that time, the Applicant was solely responsible for the day-to-day operation and direction of all three Corporations. The Respondent continued to deal with the financial affairs of the Corporations from China. While the Respondent was still in China, the Applicant advised her that she wished to sell her shares in the Corporations.
[38] The Applicant herself left for China a couple of days before the Respondent returned to Canada from her trip. The Applicant came back to Canada in late September. The TPS store opened while the Applicant was in China.
[39] On October 1, 2018, the Applicant made a verbal offer to sell her shares to the Respondent. The Respondent declined to purchase the Applicant’s shares as she was of the view that the Applicant’s offer was overpriced.
[40] After her return to Canada in late September 2018, the Applicant did not work again at any of the stores, except for a week or two in October 2018.
[41] On October 10, 2018, Lin Ji made an offer to sell her shares in Thousand Sunny and 251 to both the Applicant and the Respondent, in accordance with the unanimous shareholder agreements for these two Corporations. Lin Ji’s offer was for a total price of $579,000.
[42] On October 17, 2018, the Applicant made an offer to sell her shares in Thousand Sunny and 251 to both the Applicant and Lin Ji, in accordance with the unanimous shareholder agreements for these two Corporations. The sale price set out in the offers, which was lower than the price asked in the Applicant’s prior verbal offer, was $580,000 for the Applicant’s shares in Thousand Sunny and $406,000 for the Applicant’s shares in 251. The Applicant also made an offer to the Respondent to sell her shares in TPS for $450,000.
[43] The Applicant’s offers were not accepted. However, the Respondent accepted Lin Ji’s offer and purchased Lin Ji’s shares in both Thousand Sunny and 251. After the purchase, the Respondent owned 639 shares in Thousand Sunny, while the Applicant owned 361 shares, and the Respondent owned 658 shares in 251 while the Applicant owned 342.
[44] Beginning in October 2018, the Applicant asked the Respondent to provide her with financial documentation for each of the Corporations. Some documents were provided to her by e-mail on October 4, 2018. The Respondent eventually told the Applicant to request the documentation from the Corporations’ accountant. When the Applicant did so in January 2019, however, the accountant told the Applicant that she needed to receive the Respondent’s authorization before providing documentation, and the Respondent failed to provide such authorization, despite the fact that the Applicant requested her to do so.
J. The Applicant’s departure for China and payment of wages/dividends
[45] At the end of November 2018, the Applicant decided to visit her parents in China for an extended stay. At the time of the hearing, the Applicant was still in China and had only returned to Canada for a brief stay in December 2018 and two brief stays in 2019. According to the Applicant’s evidence, she has not yet returned to Canada because of concerns related to the COVID-19 pandemic. She had a baby in China in the first half of 2021. The Applicant maintains that it has always been her intention to return to Canada. She declares her income in Canada and pays Canadian income taxes. In 2019, she became a Canadian citizen. She was required to renounce her Chinese citizenship as a result.
[46] At the beginning of 2019, Thousand Sunny and 251 paid wages to the Applicant, even though she was not working in the stores. The Applicant received $28,880 from Thousand Sunny and $5,130 from 251. In March 2019, the Applicant asked the Respondent to begin paying dividends instead of salaries. Thousand Sunny subsequently paid the Applicant $178,695.00 in dividends in 2019, and 251 paid her $55,746.00 in dividends. The Applicant did not receive anything from TPS, either wages or dividends.
[47] The Respondent’s evidence with respect to the payment of dividends is that some time after the distributions were made to the Applicant, she found out that the retained earnings of the Corporations were not sufficient to allow her to pay herself a proportionate amount of dividends. Consequently, she signed a dividend waiver and paid herself management fees in lieu of dividends.
[48] In March 2020, the Respondent sent the following e-mail to the Applicant:
According to the financial situation of Thousand Sunny Corp., 2519604 Ontario Inc. and TPS One Inc., starting from year 2020, your monthly payment will be paid as management fee in the future. I will let you know the amount before 15th of each month. Please provide me your invoice with HST number. Once I receive your invoice, I will issue the cheque for you to pick up at […].
Your T5 and T4 of Thousand Sunny Corp. and 2519604 Ontario Inc. are kindly attached with this email.
All the payments you received or will receive from Thousand Sunny Corp., 2519604 Ontario Inc and TPS One Inc are all in the fact of t [sic] you declare that you are the resident of Canada. If your residency status changed or will change, please inform me in advance.
The amount of your payment of 2519604 Ontario for Feb 2020-$3420
The amount of your payment of Thousand Sunny Corp. for Feb 2020-$9025
[49] In her response to this e-mail, the Applicant stated that she had consulted with her accountant and that she did not agree to be paid a management fee.
[50] In a further e-mail, the Respondent asked the Applicant to confirm her Canadian residency status for income tax purposes, and her Canadian residency status within the meaning of the Immigration Act, 1976 [sic]. The Respondent set out facts that, according to her, cast doubt on the Applicant’s Canadian residency status.
[51] The Applicant responded that she was a resident of Canada and stated that she was not obligated to answer the Respondent’s “speculative questions” regarding her residency.
[52] The Respondent sent the following e-mail in response:
Nothing speculative. I have no interest in your personal life. I am simply fullfiling [sic] my obligation as a director of the companies to ensure these companies are fully compliant with section 212 of the Income Tax Act when it comes to making any payments to non-resident of Canada when in doubt.
I hereby restate that due to various reasons, it is decided not to declare any further dividends to the shareholders for all the companies, as such, there will be no further dividends paid to any shareholder since beginning of the year of 2020. In terms of management fees, this can be paid only on the grounds to remunerate the time and efforts a director has put in to manage the operations of these companies.
I do not believe you had spent any effort and time in managing the operations of these companies since the beginning of 2019, as such, paying you management fees would have no grounds.
Regardless, I have clearly stated my request previously as below just in case if it is further decided to make any payment to you should the current circumstances change:
Proof of your residensy [sic] of Canada for income tax purposes, please note merely filing income tax returns in Canada do [sic] not constitute an automatic confirmation of proof of your residency. I request you provide a certificate of residency issued by Canada Revenue Agency. AND,
Proof of your Canadian citizenship as well as the fact that you are ordinarily living in Canada.
Without further ado, I would like to obtain the above before any payment of any nature can be made to you, further request of this matter will be simply ignored. Keep in mind that I am also the majority and controlling shareholder of all the companies you have interest in, if you have further disagreements on this matter, I would suggest to summon all the shareholders to have a special shareholder meeting to resolve this by voting.
[53] The Applicant advised the Respondent that she would provide her with documents confirming her residency status. She also stated the following:
Meanwhile, shareholders are paid through monthly dividend, now you want to cancel this and change to pay as management fees[.]
As you said, pay as a management fee is not something I qualify for, we have to abide by the law. Therefore I suggest we take turns to manage the company and storefronts, so we can qualify; and you will also have more time to spend with your family. Do you agree? You are the one who makes the decision, so I’m all ears.
K. March 30, 2020 shareholders’ meetings
[54] The parties exchanged further correspondence on the issues of residency status, the documentation that was required to establish it, and payments from the Corporations. No agreement was reached and, ultimately, shareholders’ meetings were held on March 30, 2020 over a WeChat group chat. Both the Respondent and the Applicant were present at the meetings, as well as others invited by the Respondent. For all three Corporations, the main item on the agenda was the election of directors. The directors who were elected for Thousand Sunny and TPS were the Respondent and her husband, Qinsi Liu. The directors who were elected for 251 were the Respondent, Qinsi Liu and Ruibin Zhang. The Applicant voted against all the motions to elect these directors, but since she is a minority shareholder in all the Corporations, the resolutions passed.
L. Financial information received by the Applicant and payments made by the Corporations
[55] In April 2020, the Applicant no longer had online access to the bank accounts of 251 and TPS. However, she still had access to the bank account of Thousand Sunny.
[56] In May 2020, the Applicant received copies of the balance sheets and profit and loss statements for each of the Corporations for the period January 2019 to December 2019. The profit and loss statement for Thousand Sunny shows that Thousand Sunny paid consultation fees in the amount of $362,705.00 in 2019. The profit and loss statement for 251 shows that $117,124.00 were paid in consultation fees by 251 in 2019.
[57] After receiving the unaudited financial statements for the three Corporations, the Applicant reviewed some of the online banking information for Thousand Sunny. She found out that in 2020, the Respondent had been issuing cheques to herself and her husband for wages. She also found out that the Respondent had issued cheques from Thousand Sunny to a company called Four-Leaf Clover Consulting Inc. (“Clover”) ($21,662.10 in April 2020 and $42,244.60 in August 2020). The Respondent and her husband are 50-50 owners, as well as directors and officers of Clover. Moreover, the Applicant noticed a number of transfers of large amounts of money to unknown payees.
[58] In 2020, Thousand Sunny paid the Applicant $7,220.00 in dividends, and 251 paid her $2,736.00 in dividends. TPS did not pay anything to the Applicant. The Applicant did not receive any other dividends from any of the Corporations in 2020, and she did not receive wages either. From August 8, 2019 to May 31, 2020, the Respondent issued a series of seven cheques to the Applicant from TPS to repay the Applicant’s shareholder’s loan to TPS.
[59] The Applicant has not received any payment from the Corporations since early 2020.
[60] The Respondent has never received dividends from any of the Corporations.
[61] This Application was commenced on December 18, 2020. The Applicant’s first request for audited financial statements was made in the course of this proceeding.
M. Other CFTJ stores opened by the Respondent
[62] In 2019, at CFTJ’s request and in light of the upcoming expiry of the Franchise Agreement, the Respondent signed a new franchise agreement, this time through a company, in order to open additional CFTJ stores.
[63] In January 2020, the Applicant found out that the Respondent had begun to operate another CFTJ store in Scarborough. The Respondent is the only shareholder of the corporation that operates this store.
[64] At some point in March 2021, the Applicant learned that the Respondent had opened a sixth CFTJ store in Aurora, Ontario.
II. POSITIONS OF THE PARTIES
A. Position of the Applicant
[65] The Applicant submits that, based upon (i) an agreement with the Respondent prior to the setting up of Thousand Sunny and (ii) the conduct of a director in the performance of their duties, she had the following reasonable expectations:
a. that Thousand Sunny or the shareholders of Thousand Sunny owned the Franchise Agreement;
b. that the Applicant and the Respondent would participate equally in the operation and management of Thousand Sunny, 251 and TPS;
c. that as a director of the Corporations and, in particular, Thousand Sunny, the Respondent would not undertake business opportunities that could be undertaken by the Corporations without the express approval of the shareholders of the Corporations;
d. that the Respondent would provide full transparency of all financial information about the Corporations;
e. that the Respondent would pay out profits of the Corporations in a manner that is equitable to all shareholders; and
f. that the Respondent would not make unreasonable and unidentifiable payments to herself or related persons or entities.
[66] The Applicant argues that the Respondent conducted herself in a manner that was oppressive, unfairly prejudicial to or unfairly disregarded her reasonable expectations. She relies on the following, among other things:
a. The Respondent asserted that the Franchise Agreement belonged to her, thereby affecting the Applicant’s interest in the Corporations.
b. In 2019 and 2020, the Respondent paid dividends to the Applicant without declaring dividends, while paying herself management fees instead.
c. In March 2020, on the pretext that the Applicant was not a resident in Canada, the Respondent unilaterally refused to make any payments to the Applicant while she continued to pay herself management fees.
d. On March 30, 2020, the Respondent removed the Applicant as a director of all three Corporations, thereby excluding her from management of the Corporations.
e. After removing the Applicant as director, the Respondent paid herself and her husband wages from the Corporations, as well as substantial management fees to her own company. In addition, there have been significant transfers to unknown entities.
f. The Respondent has denied the Applicant access to financial information about the Corporations.
g. No audited financial statements have been prepared for the Corporations.
h. The Respondent opened other CFTJ stores without the Applicant’s knowledge or consent, thereby appropriating a business opportunity available to Thousand Sunny, 251 or TPS.
[67] According to the Applicant, the appropriate remedy is for the court to order: (a) an investigation into the affairs of the Corporations to “clean up the accounting”; (b) a valuation of the shares of the Corporations after the investigation at the expense of each Corporation or the Respondent; and (c) that either each Corporation or the Respondent purchase the Applicant’s shares at fair market value, without a minority discount.
[68] The Applicant also states that, from a procedural standpoint, the Respondent has prevented her from fully investigating the facts in this case. She points out that the Respondent did not provide answers to undertakings until the day after the Applicant’s Factum was delivered, thereby preventing her from recalling the Respondent to answer questions arising out of the answers to undertakings, unless the Application was adjourned.
B. Position of the Respondent
[69] The Respondent’s position is that she has not breached section 248 of the Act and, therefore, the Applicant is not entitled to any relief under this section. She argues that the Applicant’s evidence as a whole contains numerous inaccuracies and countless contradictions, and that most of her allegations are bald and should not be a basis for the court to make findings of facts. According to the Respondent, the evidence arising from the affidavit evidence and exhibits, the cross-examinations and answers to undertakings all corroborates the Respondent’s timeline and overall version of events.
[70] The Respondent states the following in response to the Applicant’s position in respect of her reasonable expectations:
a. The evidence does not support that the Applicant was a party to the Franchise Agreement. Since the Applicant has no rights under the Franchise Agreement, she cannot have any reasonable expectations about how the Franchise Agreement ought to be used. The Respondent points out that, in the past, she opened new CFTJ stores without having to seek the approval of the Applicant. According to her, this suggests that there was a common understanding that the Applicant had no rights or obligations under the Franchise Agreement.
b. The Applicant failed to participate equally in the operation and management of the Corporations. The Applicant cannot have a reasonable expectation that she was to participate equally in the operation and management of the Corporations when she abandons the business and fails to perform the very reasonable expectations that she now asserts.
c. The Respondent complied with the law with respect to financial disclosure. The Respondent argues that the evidence does not support the Applicant’s allegations that the Respondent was not transparent in respect of financial information about the Corporations and that the Respondent denied the Applicant access to such information.
d. The Respondent complied with the law in directing distributions out of the Corporations and the management fees were bona fide transactions. The Respondent points out that she and her husband are performing management functions and that the Applicant has not led any evidence to suggest that the fees were excessive, higher than the industry norm or not bona fide.
[71] The Respondent submits that her opening up more stores did not take any business opportunity from the Corporations or the Applicant because they did not have de jure and independent rights under the Franchise Agreement to be able to use it to their benefit. She further submits that she could not have usurped a business opportunity that the Applicant or the Corporations had no de jure right to pursue.
[72] The Respondent argues that her exercise of discretion and decision-making fall within the ambit of normative decision-making with a view of the best interests of the Corporations and, as a result, are protected by the business judgment rule. Among other things, she states that she had an obligation to do her due diligence regarding the Applicant’s residency status in order to protect the Corporations against liability.
[73] The Respondent further argues that the removal of a director does not in and of itself constitute oppression. She states that the Applicant did not have a right to remain as a director and that if she had remained as a director, there would have been strife and disagreement, which was not in the best interest of the Corporations.
[74] In the alternative, given the significant conflicts in the evidence, the Respondent submits that there should be a trial of the following issues: (a) whether the Applicant is a party to the Franchise Agreement; (c) whether the Applicant’s reasonable expectations were breached; and (c) whether the business judgment rule protects the Respondent’s decisions that the Applicant alleges breached her reasonable expectations and amounted to oppression. The Respondent further submits that these issues cannot be fairly and justly resolved by way of an Application and that no findings of facts should be made based on the record before the court. The Respondent states that justice requires discovery of the evidence and trial of the issues or, at the minimum, a summary trial given the plethora of contradictory evidence given by the Applicant and, in some instances, the lack of evidence. According to the Respondent, there is significant evidence that was not covered in this Application and expert witnesses are required on the issues of financial, tax and accounting liability.
[75] In a Supplementary Factum, the Respondent argues that the court has the authority under section 207 of the Act to order a sale without a finding of oppression. She further argues that it is unnecessary for the court to perform an oppression analysis when it can simply order a sale without oppression. She submits that this Application and the Applicant abandoning the Corporations have made the working relationship between the parties untenable and impossible to salvage. She notes that the Applicant’s principal objective is to force the Respondent to purchase her shares in the Corporations. Accordingly, the Respondent seeks an order that the Applicant sell her shares in the Corporations to the Corporations, at an agreed-upon price, with a minority discount and without taking into account the Applicant’s allegation that she is an “owner” of the Franchise Agreement. According to the Respondent, where there is no oppression like in this case, this militates in favour of a valuation based on pure market value, with a minority discount. If the parties cannot reach an agreement on price, the Respondent states that they can return to court for a trial on the issue of the fair market value of the Applicant’s shares.
[76] At the hearing, the Applicant advised that she does not agree with the Respondent’s suggestion in her Supplementary Factum because it applies a minority discount and does not recognize the Applicant’s alleged interest in the Franchise Agreement. According to the Applicant, no one will be interested in purchasing her shares if the Corporations or their shareholders do not have any control over the Franchise Agreement. The Applicant is of the view that the Respondent’s suggestion defeats her expectations and would have the effect of lowering the price of her shares.
III. DISCUSSION
A. Preliminary evidentiary issue
[77] There was a preliminary issue raised at the hearing regarding two affidavits filed by the Respondent after the cross-examinations were conducted. The first one is an affidavit of the Respondent attaching documents that were presented to the Applicant during her cross-examination. Counsel for the Respondent was content to have the exhibits attached to this affidavit considered as exhibits to the transcript of the cross-examination, with the narrative portion of the affidavit not being considered by the court. I proceeded on that basis.
[78] The second affidavit relates to procedural steps and communications between counsel before the hearing of the Application and does not contain any evidence on substantive matters. The Applicant’s counsel did not take any position with respect to this affidavit. I find it unnecessary to make a ruling with respect to this affidavit as I did not rely on it.
B. Oppression remedy
[79] Section 248 of the Act gives the court broad powers to remedy oppressive conduct in respect of a corporation. Subsection 248(2) states as follows:
Where, upon application under subsection (1), the court is satisfied that 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 or affairs of 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, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.
[80] Oppression is an equitable remedy. It seeks to ensure fairness and what is just and equitable. It gives a court broad, equitable jurisdiction to enforce not only what is legal but what is fair. Therefore, courts considering claims for oppression should look at business realities, not merely narrow legalities. Given that oppression is fact-specific, conduct that may be oppressive in one situation may not be in another. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. See BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at paras. 58-59.
[81] In assessing a claim of oppression, a court must answer two questions: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest? See BCE at paras. 68, 95.
[82] With respect to the first question, the claimant must identify the expectations that they claim have been violated by the conduct at issue and establish that the expectations were reasonably held. Factors that are useful in determining whether a reasonable expectation exists include: 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; and the fair resolution of conflicting interests between corporate stakeholders. See BCE at paras. 70, 72.
[83] The business judgment rule is relevant when assessing whether the directors of the corporation have achieved a fair resolution of conflicting interests between corporate stakeholders that is in accordance with their duty to act in the best interests of the corporation. Under this rule, deference should be accorded to business decisions of directors taken in good faith and in the performance of their functions, so long as they lie within a range of reasonable alternatives. See BCE at paras. 40, 81-84, 87, 99.
[84] To complete a claim for oppression, the claimant must show that the failure to meet their reasonable expectation involved unfair conduct and prejudicial consequences within section 248 of the Act. Not every failure to meet a reasonable expectation will give rise to the equitable considerations that ground actions for oppression. The court must be satisfied that the conduct falls within the concepts of “oppression”, “unfair prejudice” or “unfair disregard” of the claimant’s interest, within the meaning of section 248 of the Act. See BCE at para. 89.
[85] In BCE, the Supreme Court of Canada stated the following with respect to these three concepts (at paras. 91-94):
[91] The concepts of oppression, unfair prejudice and unfairly disregarding relevant interests are adjectival. They indicate the type of wrong or conduct that the oppression remedy of s. 241 of the CBCA [Canadian Business Corporations Act, R.S.C. 1985, c. C-44] is aimed at. However, they do not represent watertight compartments, and often overlap and intermingle.
[92] The original wrong recognized in the cases was described simply as oppression, and was generally associated with conduct that has variously been described as “burdensome, harsh and wrongful”, “a visible departure from standards of fair dealing”, and an “abuse of power” going to the probity of how the corporation’s affairs are being conducted: see Koehnen, at p. 81. It is this wrong that gave the remedy its name, which now is generally used to cover all s. 241 claims. However, the term also operates to connote a particular type of injury within the modern rubric of oppression generally — a wrong of the most serious sort.
[93] The CBCA has added “unfair prejudice” and “unfair disregard” of interests to the original common law concept, making it clear that wrongs falling short of the harsh and abusive conduct connoted by “oppression” may fall within s. 241. “Unfair prejudice” is generally seen as involving conduct less offensive than “oppression”. Examples include squeezing out a minority shareholder, failing to disclose related party transactions, changing corporate structure to drastically alter debt ratios, adopting a “poison pill” to prevent a takeover bid, paying dividends without a formal declaration, preferring some shareholders with management fees and paying directors’ fees higher than the industry norm: see Koehnen, at pp. 82-83.
[94] “Unfair disregard” is viewed as the least serious of the three injuries, or wrongs, mentioned in s. 241. Examples include favouring a director by failing to properly prosecute claims, improperly reducing a shareholder’s dividend, or failing to deliver property belonging to the claimant: see Koehnen, at pp. 83-84.
[86] In this case, the Applicant has alleged, among other things, the failure to disclose related party transactions (e.g. payments to Clover), the payment of dividends without a formal declaration, the decision to stop paying dividends to the Applicant, and the preferring of a shareholder with management fees higher than the industry norm.
C. Trial of an issue
[87] As stated above, the Respondent’s alternative position is that this Application should not be determined on the record currently before the court and a trial of certain issues should be ordered.
[88] Under Rule 38.10 of the Rules of Civil Procedure, a judge may, on the hearing of an application, order that any issue proceed to trial and give such directions as are just. Subsection 248(3)(n) of the Act also provides that the court can make an order requiring the trial of any issue in connection with an oppression application brought under section 248.
[89] The following factors are relevant to the determination of whether an application should proceed as an action: (1) whether there are material facts in dispute; (2) the presence of complex issues requiring expert evidence and/or a weighing of the evidence; (3) whether there is a need for the exchange of pleadings and for discoveries; and (4) the importance and impact of the application and of the relief sought. See Collins v. Canada (Attorney General) (2005), 76 O.R. (3d) 228, 2005 CanLII 19819 at para. 5 (S.C.J.) and Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company, 2021 ONCA 159 at para. 48.
[90] Applying these criteria to this case, there are numerous material facts in dispute between the parties regarding the Applicant’s reasonable expectations and whether such reasonable expectations were violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest.
[91] Expert evidence is required. The Applicant has raised a reasonable concern regarding the quantum of wages/consultation fees/management fees paid to the Respondent and related parties (including her husband and Clover) since the Applicant is no longer active in the Corporations. Based on the current record, I cannot determine the reasonableness or unreasonableness of these amounts, whether they are higher than the industry norm, and whether they lie within a range of reasonable alternatives for the purpose of the business judgment rule.
[92] Similarly, with respect to the Applicant’s residency status, I cannot determine the reasonableness or unreasonableness of the parties’ positions based on the current record, nor whether the actions and decisions of the Respondent lie within a range of reasonable alternatives for the purpose of the business judgment rule. The hearsay evidence of the Corporations’ accountant contained in the Respondent’s affidavit on this point is both insufficient and inadmissible under rule 39.01(5) of the Rules of Civil Procedure. Expert evidence may be required on this issue.
[93] This case also requires the weighing of evidence. The Applicant’s evidence, including the evidence she gave on cross-examination, raises significant credibility issues with respect to certain points. The evidence of the Respondent also raises some credibility issues regarding a number of her positions and her alleged lack of knowledge/understanding of certain matters.
[94] In addition, this case would greatly benefit from further documentary and oral discovery. The parties were rushed, documentation was provided late in the proceeding and the parties did not have time to seek relief with respect to refusals or to conduct further examinations based on the answers to undertakings. The late production or total lack of production of documents on certain issues made it impossible for the parties to deal properly with certain issues, including, for instance, the issue of the reasonableness of the management fees.
[95] Further, the transcripts of the cross-examinations of the parties are of limited assistance because an inordinate amount of time was spent on what appears to be tangential issues and a significant portion of the transcripts are exchanges between counsel. While both sides can be criticized on this issue, I consider the number of interventions by counsel for the Applicant to be excessive.
[96] Efforts could also be made to obtain evidence from individuals who are more knowledgeable or have direct knowledge about certain matters, including the Corporations’ accountant and representatives of the franchisor.
[97] Finally, the relief sought could have a significant impact, economic and otherwise, for both sides.
[98] In light of the above, I am not confident that I can make the necessary findings of fact required in order to fairly resolve the dispute on the basis of the record filed and the evidence relied upon by the parties: see Hazelton Homes Corporation v. Katebian, 2019 ONSC 4015 at para. 13 and Jansari v. Jansari, 2020 ONSC 2473 at para. 39. I am of the view that it would be inappropriate to simply dismiss the Application on the basis that the Applicant has failed to meet her burden of proof because the Applicant has raised legitimate concerns with respect to certain aspects of the conduct of the Respondent and the Corporations, but production issues and other issues have interfered with the investigation of these concerns. Thus, I conclude that the issues raised on this Application cannot be resolved fairly without a trial, and that they should proceed to trial. Counsel should contact my assistant to schedule a case conference with me after they have had the opportunity to discuss a detailed trial plan/schedule.
[99] While it may have been possible to determine some discrete issues based on the record before me, I decline to do so. In my view, the issues raised on this Application are factually related, and making findings with respect to certain issues and not others would raise some of the risks that have been identified in relation to motions for partial summary judgment (see, e.g., Service Mold + Aerospace Inc. v. Khalaf, 2019 ONCA 369 at paras. 14, 18), including the risk of duplicative or inconsistent findings which is increased in this case by the fact that the record before me is not as expansive as the record will be at trial.
[100] I also decline to grant the relief sought by the Respondent in her Supplementary Factum i.e. to order a sale without a finding of oppression. The specific relief sought by the Respondent is an order that the Applicant sell her shares in the Corporations to the Corporations, at an agreed-upon price, with a minority discount and without taking into account the Applicant’s allegation that she is an “owner” of the Franchise Agreement.
[101] There are many issues with the specific relief sought by the Respondent, including the following:
a. The Respondent has not brought an application and the Applicant opposes the relief sought. Further, the Respondent took this position and served her Supplementary Factum only shortly before the hearing of the Application.
b. The relief sought by the Respondent would require a finding on the issue of whether the Applicant or the Corporations have an interest in the Franchise Agreement. As stated above, it is my view that it is not appropriate to make findings of fact on the record before me.
c. The issue of whether there has been oppression is relevant to the issue of whether a minority discount should be applied to the value of the shares: see Locke v. UWE Quast, 2021 ONSC 3988 at paras. 47-50. While the Respondent argues that a finding of oppression is not necessary to order the sale of the Applicant’s shares, she also argues that there should be no minority discount because there has been no oppression, which is inconsistent with her position that a finding of oppression is unnecessary.
d. Pursuant to subsection 248(6) of the Act, I cannot make an order that the Corporations purchase the Applicant’s shares under subsection 248(3)(f) of the Act if there are reasonable grounds for believing that: (a) the Corporations are or, after the payment, would be unable to pay their liabilities as they become due; or (b) the realizable value of the Corporations’ assets would thereby be less than the aggregate of their liabilities. This issue was not addressed before me.
e. Given that the parties have been unable to agree on a price so far, it is my view that it would not be productive to order the Applicant to sell her shares “at an agreed-upon price”. Without further production/information from the Respondent, it is unclear why the parties would now be able to agree on a price. Further, if the parties are able to agree on price, they do not need an order of the court to do so. Of course, I strongly encourage the parties to try to resolve this matter without further court intervention.
f. The Respondent submits that if the parties cannot reach an agreement on price, they can return to court for a trial on the issue of the value of the Applicant’s shares. As stated above, given the inability of the parties to agree so far, asking them to come back to court later if they cannot agree is postponing the unavoidable and creating additional delay. Further, a trial of an issue may not be necessary to value the Applicant’s shares as various orders and mechanisms are available to the court with respect to valuation of shares.
[102] Thus, it is not appropriate to make the order requested by the Respondent at this time.
IV. CONCLUSION
[103] I order that the issues raised on this Application proceed to trial. As stated above, counsel should contact my assistant to schedule a case conference with me after they have had the opportunity to discuss a detailed trial plan/schedule so that appropriate directions can be given as to the next steps.
[104] With respect to costs, given that the issues remain to be determined and that the work done on the Application will undoubtedly be used for the purpose of the trial, I am of the view that the most appropriate order as to costs is that they be payable in the cause, as determined by the trial judge.
Vermette J.
Released: August 12, 2022
COURT FILE NO.: CV-20-00654829-0000
DATE: 20220812
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
JING WANG
Applicant
– and –
ZIMENG YE, THOUSAND SUNNY CORPORATION, 2519604 ONTARIO INC. and TPS ONE INC.
Respondents
REASONS FOR JUDGMENT
VERMETTE J.
Released: August 12, 2022