SUPERIOR COURT OF JUSTICE - ONTARIO

RE: LEEDER AUTOMOTIVE INC. and 2786818 ONTARIO INC. Applicants

AND: WARWICK, DOUGLAS Respondent

BEFORE: VELLA J.

COUNSEL: James Smith, for the Applicants Hilary Book and Samantha Del Frate, for the Respondent

HEARD by VIDEOCONFERENCE: February 23, 2022 and supplementary submissions (in writing) May 5, 2022

REASONS FOR JUDGMENT

[1] Leeder Automotive Inc. and 2786818 Ontario Inc. (collectively, “Leeder”) have brought an application under r. 14.05(3)(d), (f), (g) and (h) for a declaration and mandatory order requiring Mr. Warwick to complete a share purchase transaction made pursuant to a Shareholders’ Agreement dated September 19, 2003.

[2] Mr. Warwick resists the application on the basis that Leeder repudiated the offer and acceptance to buy his shares by failing to comply with all of the contractual requirements of the governing provisions of the Shareholders’ Agreement. Mr. Warwick submits that he accepted the purported repudiation and now wishes to remain a minority shareholder of Leeder Automotive Inc.

[3] It is clear based on the documentary evidence that there has developed a break down in the former relationship between Mr. Warwick and his spouse (a former minority shareholder of Leeder) and the majority shareholder (through a holding company), officer and director, John Leeder, and his spouse.

[4] For the reasons that follow, the application is dismissed.

[5] The primary issue to resolve is whether Leeder’s conduct in the manner in which it implemented the valuation process set out in the Shareholders’ Agreement amounted to a substantial failure of performance such as to constitute a repudiation of the share purchase transaction or, put another way, showed by conduct an intention not to be bound by the terms of the Shareholders’ Agreement governing the share purchase transaction (Place Concorde East Limited Partnership v. Shelter Corporation of Canada Limited (2006), 2006 CanLII 16346 (ON CA), 211 O.A.C. 141 (C.A.), at paras. 49, 51; Spirent Communications of Ottawa Ltd. v. Quake Technologies (Canada) Inc., 2008 ONCA 92, 88 O.R. (3d) 721, at paras. 35-36).

[6] The main grounds of alleged non-compliance with the Shareholders’ Agreement advanced by Mr. Warwick are:

(a) Leeder’s failure to close the transaction within the stipulated 20-day period following acceptance;

(b) Leeder’s reliance on property appraisals conducted by its own long time real estate brokers, Cushman & Wakefield some months before Mr. Warwick delivered his Notice of Intent to Sell (which were subsequently confirmed to be accurate), rather than retaining a mutually agreeable independent business valuator pursuant to Article 12.2 of the Shareholders’ Agreement; and

(c) Leeder’s reliance on the financial valuation of its assets, including its goodwill, performed by its accountants, BDO Canada (“BDO”), on a Notice to Reader basis did not comply with Article 12.1 and 12.3 of the Shareholders’ Agreement.

[7] The second issue is a determination of the appropriate remedy.

Background and History of the Transaction and Dispute

[8] Many of the essential facts are not in dispute and form a helpful chronology of this dispute.

[9] Leeder operates three Volkswagen car dealerships in the Greater Toronto Area and owns four commercial real estate properties.

[10] The Shareholders’ Agreement includes a buy-sell provision that can be triggered by any shareholder seeking to sell their shares. The provision could not be initiated, however, against any unwilling shareholder to force a sale of their shares.

[11] Each year financial statements of Leeder were prepared by BDO, and approved by the board of directors, and the shareholders.

[12] In 2017, Leeder received a settlement in relation to the Volkswagen TDI emissions scandal, called the TDI Settlement. Leeder received approximately $5,000,000.00 from the TDI Settlement and it was reflected in its 2017 financial statement as earnings for that year.

[13] Mr. Leeder received a bonus in 2017 that included credit for the funds received from the TDI Settlement as a component of Leeder’s profit made that year.

[14] In March 2020, Leeder contacted Cushman & Wakefield to undertake appraisals of its real estate holdings, as the minority shareholders (including Mr. Warwick) had indicated they may wish to sell their respective shareholdings in Leeder. The idea was to start to get a handle on the financial status of the company for purposes of determining the approximate share value.

[15] Cushman & Wakefield are qualified real estate property valuators and Leeder had used them multiple times over the years to provide appraisals. The respective appraisal reports were completed in and around March and April 2020 and were distributed to the shareholders.

[16] On June 26, 2020, Mr. Warwick provided notice under Article 8.2 of the Shareholders’ Agreement (the buy-sell provision) of his intention to sell all of his shares in Leeder. At around the same time, the four other minority shareholders submitted similar notices.

[17] On that same day, Leeder contacted its accountants, BDO, and instructed them to prepare a valuation “calculated according to the Shareholders’ Agreement” and provided the “relevant pages” of the Shareholders’ Agreement.

[18] At the time of his notice, Mr. Warwick owned (and still owns) 2,532 shares, which reflects a 5.958% stake in Leeder.

[19] On July 7, 2020, Cushman & Wakefield confirmed their real estate appraisals prepared earlier as being accurate and current.

[20] The total appraised value of the four properties, according to Cushman & Wakefield, was $41,870,000.00.

[21] Leeder did not consult with Mr. Warwick (or any of the other four minority shareholders)with respect to its decision to rely on Cushman & Wakefield for the real estate appraisals of its four properties required under Article 12 of the Shareholders’ Agreement (the buy-sell implementation provision).

[22] On July 16, 2020, Leeder delivered a notice to purchase Mr. Warwick’s shares as required under the buy-sell provision.

[23] On that same day, Leeder sent the final year-end financial statements and internal financial statement to end of May 2020 to each of the vendor shareholders, including Mr. Warwick.

[24] On July 28, 2020, Leeder sent the draft BDO unaudited valuation report for the year ending December 31, 2019, to each of the vendor shareholders, including Mr. Warwick. The draft report stated under the Note entitled Goodwill and Intangible Assets, that the TDI Settlement had been deducted from the 2017 earnings in calculating the goodwill “to normalize the net income”. The after-tax valuation of Leeder’s goodwill was $8,750,635. The goodwill valuation is relevant to the determination of the shares under the buy-sell implementation provision.

[25] On August 2, 2020, Leeder sent an email enclosing Cushman & Wakefield’s appraisal reports with respect to the four properties to the minority shareholders. Leeder also stated that the report completed by BDO “was consistent with the Shareholders’ Agreement except for the TDI Settlement”.

[26] On August 4, 2020, Leeder distributed BDO’s final valuation report required under the buy-sell implementation provision. However, by this time one of the vendor shareholders had raised concerns about the propriety of BDO having excluded the TDI Settlement from the 2017 earnings in the process of normalizing the three-year period of earnings (from 2017 – 2019). Mr. Warwick was also concerned. Accordingly, Leeder offered, on a “gratuitous” basis, to bridge the difference, and apply one half of the TDI Settlement amount into the valuation. This increased the valuation of the shareholders’ equity for purposes of determining the share price from $28,015,792 to 28,955,368.

[27] Of note, BDO’s final valuation report shows in the Notice to Reader that, in adjusting the financial statements, approximately five million dollars less tax, was deducted from Leeder’s income. This is coincident with the approximate value of the TDI Settlement. Furthermore, the Notice to Reader also confirms that the report is based on information provided by management, that it has not performed an audit or review engagement, and that it expresses no assurance concerning the veracity of the statements in its report. This is important, as will be seen shortly.

[28] On August 5, 2020, one of the vendor shareholders inquired about making the share purchase transaction tax friendly to the vendors by making the share sale eligible as a capital gain.

[29] Leeder agreed and incorporated the co-applicant for this sole purpose.

[30] On August 13, 2020, Mr. Warwick declined the offer to purchase by Leeder.

[31] On August 14, 2020, Leeder rejected Mr. Warwick’s advice and asked him “to do the right thing” and close the transaction. On the same day, Mr. Warwick replied that “I do not wish to sell my shares at your valuation”.

[32] On August 31, 2020, Warwick proposed a new, increased, share price at which he would be prepared to sell his shares, but Leeder declined, and took the position that it already had a deal.

[33] On October 27, 2020, Leeder tendered the closing documents (but not the purchase funds) for the share purchase transaction to Warwick at its valuation price. Mr. Warwick did not execute or return the closing documents.

[34] The other minority vendor shareholders who issued a Notice of Intent to Sell have completed their share purchase transactions at the valuation proposed by Leeder. Mr. Warwick is the only shareholder to take the position that Leeder repudiated the share purchase transaction by failing to have abided by the terms of the buy-sell and buy-sell implementation provisions.

[35] This matter originally came before me on October 22, 2021. However, it was adjourned to February 23, 2022 (with costs reserved). Subsequent to the hearing of this matter, on April 26, 2022, Leeder drew my attention to the recently released decision of the British Columbia Court of Appeal in Blackmore Management Inc. v. Carmanah Management Corporation, 2022 BCCA 117, 60 B.C.L.R. (6th) 213. I received written submissions from both parties in relation to this decision in May 2022.

[36] Rather than reproducing the text of the key contractual provisions, I have appended them to my Reasons (with my emphasis added).

Issue 1: Did Leeder fail to abide by the buy-sell and buy-sell implementation provisions of the Shareholders’ Agreement such as to evince an intention not to be bound?

[37] In order to be successful, Leeder must first establish its entitlement to the relief sought.

[38] Based on the evidence before me, Leeder has established that there was a Notice of Intent to Sell by Mr. Warwick that triggered the buy-sell process under Article 8.2 of the Shareholders’ Agreement. There was also a timely acceptance by Leeder in accordance with the buy-sell provision. Leeder tendered the closing documents, but not funds. While there may be an argument that Leeder did not tender properly, that argument was not pursued. Therefore, I will proceed on the basis that Leeder has made out a prima facie case that there was a share purchase transaction established between Mr. Warwick and itself for the sale of all of his shares pursuant to the provisions of the Shareholders’ Agreement.

[39] Mr. Warwick claims that Leeder failed to properly follow the valuation process prescribed by Article 12 of the Shareholders’ Agreement and that the failure amounted to a repudiation of the share purchase transaction by Leeder, which he accepted. As stated, Article 12 sets out the valuation process used to establish the price per share Leeder must pay to Mr. Warwick.

[40] Therefore, the issue is whether or not Leeder complied with the valuation process in Article 12 of the Shareholders’ Agreement, and if not, did its non-compliance amount to a fundamental breach giving rise to a repudiation of the share purchase transaction under the Shareholders’ Agreement. The burden is on Mr. Warwick to establish that there has been such a fundamental breach as a result of the alleged non-compliance with Article 12.

Legal Framework and Analysis

[41] Repudiation is an exceptional remedy. It will only be appropriate where “the entire foundation of the contract has been undermined, that is, where the very thing bargained for has not been provided” (Place Concorde, at para. 51).

[42] Mr. Warwick argued that the Notice of Intent to Sell coupled with Leeder’s acceptance constituted a separate contract that incorporated, by reference, the buy-sell implementation provision (Article 12) from the Shareholders’ Agreement.

[43] I disagree. I prefer the analysis of the British Columbia Court of Appeal in Blackmore. The Court rejected the characterization of the “shotgun offer” and compulsory “buy-sell provision” of the shareholders’ agreement in that case as a separate standalone contract. The court reasoned that “to invoke a shotgun clause is to rely on a term of an existing contract by which the parties have agreed to a compulsory buyout procedure” (at para. 31). The consequence of this characterization is that the Shareholders’ Agreement as a whole must be considered in examining the enforceability of the share purchase transaction.

[44] This is the appropriate approach to the contractual analysis before me. I have reviewed all of the relevant provisions in the Shareholders’ Agreement beyond Article 8 and Article 12, such as Article 13. I am guided by the principles of contractual interpretation as set out by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at. para. 47, and cited in Blackmore, at para. 32. I have interpreted the buy-sell and buy-sell implementation provisions within the context of the Shareholders’ Agreement as a whole, adopting a “practical, common-sense” approach to determining the objective intentions of Leeder and Mr. Warwick.

[45] However, in light of my finding, below, that the buy-sell and buy-sell implementation provisions constitute a fundamental part of the Shareholders’ Agreement as a whole, the outcome is the same whether the share purchase transaction is characterized as a standalone contract or, as I have found, the implementation of the applicable contractual provisions in the Shareholders’ Agreement.

[46] The share purchase transaction consisted of a Notice of Intent to Sell all of Mr. Warwick’s shares and an acceptance of that offer by Leeder. Leeder effectively had a right of first refusal under Article 8.2 of the Shareholders’ Agreement. Critical to this transaction is the determination of the share price to be paid by Leeder. That amount is to be determined in accordance with the process set out in Article 12 of the Shareholders’ Agreement, which I am referring to as the buy-sell implementation provision.

[47] The whole bargain represented by the share purchase transaction under the Shareholders’ Agreement was that Leeder would pay the “fair market value” of Mr. Warwick’s shares in accordance with the formula and process set out by Article 12.

[48] At its essence, the valuation of the shares is informed by Leeder’s worth which, in turn, is largely driven by two major assets of Leeder: its real estate holdings and its goodwill.

[49] Article 12.1 provided that Leeder’s accountants, in this case BDO, were to prepare financial statements for the fiscal period ending on the “Valuation Date”.. The accountants were to apply generally accepted accounting principles (“GAAP”) “consistent with” those used for the prior fiscal year. The accountants were not charged with valuing the real estate or the goodwill which processes were governed by Articles 12.2 and 12.3 respectively.

[50] Article 12.2 provided for the appraisal of the real estate holdings. It required that within 20 days following Leeder’s acceptance of Mr. Warwick’s offer, an “independent business valuator” was to be agreed upon by the shareholders, and directed to determine the “Fair Market Value” of the real estate properties owned by Leeder as at the Valuation Date. If the shareholders could not agree on a business valuator, then there was to be an application to a judge with a request to appoint the independent business valuator.

[51] Pursuant to Article 12.3, the formula for valuing the goodwill of Leeder was set out. The fair market value of the goodwill was to be the equivalent of 2.5 times the average annual net income of Leeder and its subsidiaries, “determined on a consolidated basis over the course of the last three completed fiscal years of operation…”.

[52] I will digress to note that Mr. Warwick characterized Article 12 as a “shotgun buy-out” provision. I respectfully disagree with that characterization.

[53] As noted by the Court of Appeal for Ontario, in Western Larch Limited v. Di Poce Management Limited, 2013 ONCA 722, 117 O.R. (3d) 561, at paras. 41 and 42, the function of a shotgun buy-out provision is to provide a mechanism under a shareholders’ (and other) agreements that forces a shareholder out of a business, involuntarily. To use the words of Lauwers J., at para. 42, “the operation of such a provision involuntarily expels a party from what is usually a viable business venture” and is therefore “seen to be a draconian remedy”. For this reason, courts will insist on strict, but not perfect, compliance with such provisions, having in mind the commercially reasonable expectations of the contracting parties.

[54] In my view, Article 12 is not a true shotgun buy-out provision because it cannot be used to initiate a sale of shares against an unwilling vendor. However, once the offer is accepted, this provision does operate in a similar manner insofar as the offeror vendor cannot withdraw from the transaction unilaterally. See: FSC (Annex) Limited Partnership v. Adi 64 Prince Arthur L.P., 2020 ONSC 5055, 152 O.R. (3d) 568, for a similar situation in which the buy-out provision was treated as a “shotgun” buy-out provision.

[55] I agree with Leeder that the Shareholders’ Agreement does not address a situation in which a vendor shareholder seeks to withdraw from the buy-sell process once Leeder has accepted the Notice of Intent to Sell those shares.

[56] Accordingly, my analysis will proceed around a determination of whether or not the share purchase transaction was repudiated by Leeder based on the alleged breaches of Article 12 when considered in the context of the Shareholders’ Agreement as a whole. This in turn will require an analysis of the five factors set out in Place Concorde and repeated in Spirent Communications in order to determine whether the breach was fundamental:

(a) The ratio of the party’s obligation not performed to the obligation as a whole;

(b) The seriousness of the breach to the innocent party;

(c) The likelihood of repetition of the breach;

(d) The seriousness of the consequences of the breach;

(e) The relationship of the part of the obligation performed to the whole obligation.

[57] The Court of Appeal for Ontario in Spirent Communications, added that in considering whether an anticipatory breach amounted to a fundamental breach such as to deprive the innocent party of substantially the whole benefit of the contract, the court must determine whether by the offending party, “by express language or conduct, repudiates the contract or evinces an intention not to be bound by the contract before performance is due”. Furthermore, in order to determine whether the requisite intention has been demonstrated by the offending party, the court adopts an objective standard (Spirent Communications, at para. 37).

Breach #1: Failure to Close Within the Stipulated Time Period

[58] The closing date under Article 8.2 of the Shareholders’ Agreement ought to have been August 5, 2020. The date Leeder tendered the closing documents was in or around October 27, 2020.

[59] However, one of the reasons for this delay was in order for Leeder to respond to a request by the offeror minority shareholders, including Mr. Warwick, to structure the sale of their shares in a manner that would allow favourable tax treatment to them.

[60] Leeder complied and incorporated the co-applicant.

[61] This took time.

[62] In addition, Mr. Leeder advised that Leeder was continuing to work with its bank to arrange the necessary financing and would aim to complete the transaction as soon as possible (as per Article 13.10).

[63] There is no evidence from Mr. Warwick as to how he was prejudiced by this delay, or that he insisted on the transaction closing in or around August 5, 2020. Indeed there continued to be negotiations around the structuring of this transaction, and the valuation of Leeder throughout August. Financing was not secured by Leeder until October 19, 2020.

[64] I do not find that this delay materially impacted Mr. Warwick. The ratio of this technical breach relative to the transaction, based on the evidence, was minor. Mr. Warwick had already notified of his intention not to complete the transaction on August 13, 2020 and the length of delay in the circumstances of this case was not the major component of this failed transaction. This is more of a technical breach than a substantive one in the circumstances of this transaction, and Article 13.10 provides some flexibility in terms of taking all steps necessary to complete a purchase and sale transaction “as soon as possible”.

[65] It does not, in isolation, amount to a fundamental breach which deprived Mr. Warwick of substantially all of the bargain reflected by share purchase transaction under the Shareholders’ Agreement.

Breach #2 – Improper Reliance on Valuation of Leeder’s Commercial Real Estate Properties

[66] This is a more serious complaint.

[67] While Cushman & Wakefield are, no doubt, competent real estate appraisers, their unilateral choice by Leeder is problematic and inconsistent with what is mandated by Article 12.2.

[68] First, the actual appraisals were done in advance of the Valuation Date of the end of May 2020 (variously in March and April) and then confirmed to be accurate on July 7, 2020. Article 12.2 expressly provides that the appraisal to determine fair market value of the real estate properties as at the “Valuation Date”.

[69] More importantly, however, is the fact that Cushman & Wakefield were not agreed upon by Mr. Warwick as the “independent business valuator” under Article 12.2. It is a commercially reasonable provision in situations such as this where a price is yet to be determined at the date of the offer and acceptance that the formula prescribed to ascertain the fair market value price be strictly adhered to and performed by an independent qualified professional mutually acceptable to the vendor and purchaser. Cushman & Wakefield were Leeder’s long standing real estate appraisers. Based on the evidence, I cannot draw the inference that Mr. Warwick agreed to Cushman & Wakefield or that they were “independent”. Mr. Warwick was not even asked for his agreement to the use of Cushman & Wakefield. Mr. Leeder just went ahead and unilaterally used them.

[70] Furthermore, the appraised value of the four properties was a significant component of the valuation of the shares and therefore the ultimate purchase price or “fair market value” of Mr. Warwick’s shares. It cannot be said to be a minor or trivial aspect of this transaction.

[71] In applying the relevant factors from Place Concorde, the ratio of the financial component reflected by the real estate appraisals is significant in relation to the overall valuation of the company and, in turn, Mr. Warwick’s shares under the buy-sell implementation provision of Article 12.2.

[72] The breach is serious – Mr. Warwick was not even consulted in the appointment of Cushman & Wakefield, contrary to the express terms of Article 12.2 which calls for a mutually agreeable appointment.

[73] The likelihood of repetition is a neutral factor based on the evidence.

[74] The consequence of this breach is arguably serious. The appraisals were not performed as of the correct date and were not originally performed pursuant to the requirements of Article 12.2. However, the court does not have evidence of a competing appraisal on which to properly assess the consequence in terms of the monetary value.

[75] Finally, the real estate appraisals are a significant component of the valuation that led to the establishment of the fair market value of Mr. Warwick’s shares under the buy-sell implementation provisions. As such it is an integral part of the obligation to be performed (a determination of the purchase price) and is fundamental to the obligation as a whole (the performance of the share purchase transaction under the Shareholders’ Agreement).

[76] What appears to have happened here is that Leeder simply by-passed the strict requirements of Article 12.2 without any explanation.

[77] In my view, this event of non-compliance is sufficient to deprive Mr. Warwick of substantially the deal he bargained for when he issued his Notice of Intent to Sell and Leeder accepted it pursuant to the buy-sell provisions of the Shareholders Agreement.

Breach #3: Improper Preparation of Financial Statements and Valuation of Leeder’s Goodwill

[78] Similarly, Leeder breached Articles 12.1 and 12.3 when it instructed BDO to prepare the financial statements for it on a Note to Reader basis, to revise (or “adjust”) the 2017 financial statements to exclude the TDI Settlement from the net annual income, and calculate the goodwill based on that instruction. The exclusion of the TDI Settlement funds lowered the three-year average annual net income which, in turn, is used to calculate the goodwill under Article 12.3.

[79] BDO is Leeder’s long-time accounting firm. BDO has prepared Leeder’s Financial Statements going back to at least the 2017 fiscal year.

[80] Leeder does not concede that it instructed BDO to revise the 2017 financial statements. However, its contention is not convincing.

[81] The 2017 financial statements, as approved by the directors and shareholders of Leeder, included the TDI Settlement funds as net income.

[82] The income reported on the 2017 financial statements was apparently changed by BDO, after it prepared a first draft of the “valuation report”, by removing the TDI Settlement from the previously reported 2017 net income. This change was reflected in the final “valuation report” (Adjusted Combined Financial Statements) relied upon by Leeder in the share valuation. Leeder insists that this “normalization” of the three-year net income was done in exercise of BDO’s professional judgment and had nothing to do with instructions from Leeder. However, Leeder did not offer any evidence, including that of its own accountants, as to the impetus behind removing the TDI Settlement funds from the 2017 income.

[83] Rather, in advance of the cross examination of Mr. Leeder, and in response to a request from Mr. Warwick’s lawyer, Mr. Leeder produced an email dated July 13, 2020, from BDO to him providing a copy of the “preliminary draft financials” (Exhibit 4 to the cross examination of Mr. Leeder). In the email, Mr. Girolmeto of BDO states that the draft financials are only a “Notice to Reader engagement” and are not in accordance with GAAP (this Note to Reader engagement is reflected in the final valuation report as well). Second, the email states that the goodwill calculation included the net incomes from 2017 with no normalization provision for the TDI Settlement. In other words, the TDI settlement funds were included as income in the draft valuation report, consistent with the approved 2017 financial statements. The draft goodwill calculation reflecting the TDI Settlements shows a three-year average of $4,753,023 and a calculated goodwill of $11,882,558 (2.5 times the average annual net income over a three-year period, consistent with Article 12.3).

[84] Also in advance of the cross examination of Mr. Leeder, and in response to a request from Mr. Warwick’s lawyer, Leeder disclosed an email from BDO dated July 15, 2020 (Exhibit 5 on Mr. Leeder’s cross examination) enclosing the second version of the draft “Adjusted Combined Financial Statements based on your (Mr. Leeder’s) initial comments”. BDO notes in this email that the adjusted financial statements have been “updated to include the 2017 VW Settlements in normalizing the net income calculations used for Goodwill”. This draft valuation report excluded the TDI Settlements as did the final valuation report of BDO.

[85] Again, no convincing evidence was provided by Leeder to clarify whether BDO removed the TDI Settlement revenue from the final valuation report based on instructions from Mr. Leeder. Leeder had the ability to secure this evidence through BDO. Mr. Leeder’s affidavit evidence is somewhat vague on this important point. He deposes “it was not my unilateral right to change the BDO Valuation Report” and “it is critical to note that the valuation is not ‘my valuation’”. However, there is no direct statement regarding what instructions he verbally gave to BDO after receipt of the preliminary draft report which included the TDI Settlement funds. Furthermore, the effectively retroactive revision to the 2017 financial statements do not appear to have been approved by Board or shareholder resolution. It is reasonable to draw an adverse inference that Leeder instructed BDO to remove the TDI Settlement revenue from its draft valuation report, and BDO complied and “normalized” the income from that year.

[86] Furthermore, the “valuation report” prepared by BDO poses problems on the face of that document. The name of the document prepared by BDO is not a “valuation” report. It is called an adjusted balance sheet and is stated to be “Unaudited – see Notice to Reader” on each of the subsequent pages reflecting the various combined balance sheet and financial statements. In its covering letter, called “Notice to Reader”, BDO states that it has “compiled” the adjusted balance sheet “on the basis of information provided by management”. It further specifies that the adjusted combined financial statements are not audited or a review engagement, and that the reader should be warned that the report may not satisfy the reader’s requirements. The so-called “valuation” report does not say that it has been prepared pursuant to Article 12.1 and/or 12.3. There is no certificate from BDO certifying that the valuation report has been done in compliance with Article 12.1 or 12.3.

[87] Most notably, as a Notice to Reader engagement, the financial statements and balance sheet prepared by BDO simply reflect a compilation of information by them based on information provided by the company without any assurances by BDO that the information was accurate. Similarly, under this type of engagement, no opinion is provided by the accountants. Accordingly, it was not prepared through the application of generally accepted accounting principles, contrary to Article 12.1. Only audited and review engagements require the exercise of some level of judgment by the accountants in compliance with GAAP. The type of engagement under which BDO was retained by Leeder also belies Mr. Leeder’s contention that BDO exercised its professional judgment and independently determined to exclude the TDI Settlement funds. In short, Mr. Leeder’s evidence is not credible on this point.

[88] Leeder nonetheless relies, in part, on Article 12.1 for its proposition that the financial statement prepared by BDO as to its Book Value is final and binding on Mr. Warwick. However, Leeder did not engage its accountants to prepare financial statements that accord with the requirements of Article 12.1. Accordingly, Article 12.1 does not assist Leeder.

[89] Again, applying the five factors from Place Concorde, and for the reasons above stated, I find that the financial statements prepared by BDO and relied upon as the basis for the valuation of Leeder’s book value is non-compliant with Article 12.1. It flows that therefore the value of the goodwill, reflected in BDO’s financial statements, similarly is not compliant with Article 12.3. This noncompliance is a fundamental breach of the buy-sell implementation provisions of the Shareholders’ Agreement and substantially deprived Mr. Warwick of the bargain he had in the Shareholders’ Agreement under the five-part test set out in Place Concorde for the same reasons as provided in my analysis of the real estate property valuation.

[90] In the end, it was a commercially reasonable expectation for Mr. Warwick to assume that when he issued his Notice of Intent to Sell his shares, and Leeder accepted, that the valuation process for determining what price Leeder would pay for his shares would be consistent with that set out in Article 12 and be at least substantially complied with. In fact, the evidence demonstrates that Leeder had the same expectation (though it had a different interpretation of the material articles).

[91] I also do not accept Leeder’s argument that Mr. Warwick was simply manipulating the process to negotiate a higher share price than was arguably warranted (in part due to Mr. Warwick’s pre-existing position that the multiplier of 2.5 times the average annual net income to determine the goodwill was too low) and this represented a breach of Mr. Warwick’s duty of good faith negotiation (Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494). Once the buy-sell provision is triggered, there is no negotiation. The buy-sell implementation provision determines the price of the shares.

[92] It is clear to me on the basis of the evidentiary record that both Leeder and Mr. Warwick were engaged in gamesmanship to a degree. For example, Leeder offered “gratuitously” to add half of the TDI Settlement income back into the goodwill calculation as incentive for the vendor shareholders to complete the share purchase transactions. Mr. Warwick, alone, refused and maintained his position that the entire TDI Settlement income factored into this valuation. There is also evidence to the effect that there was some sort of breakdown in the personal friendship between Mr. Leeder’s spouse and Mr. Warwick’s spouse that may have been an impetus for these parties playing “hardball”. However, in the end, this gamesmanship and animosity does not factor into my analysis.

[93] The breaches of and non-compliance with Articles 12.1, 12.2 and 12.3 (identified as Breaches #2 and 3 above) are sufficient on their own to satisfy the exceptional remedy of repudiation, but there is no doubt when taken together they reach that threshold. The basis by which Leeder agreed to have Mr. Warwick’s shares valued was totally undermined by its conduct and essentially deprived Mr. Warwick of the very thing bargained for under the Shareholders’ Agreement.

[94] It is also clear that Mr. Warwick accepted the repudiation in a timely manner. I do not accept Leeder’s submission that Mr. Warwick took seven weeks to communicate his refusal to accept Leeder’s valuation. He was not in possession of all of the material documents illustrating the basis of the valuation until August 4, 2020, when he received the finalized BDO valuation report, which is less than two weeks to the date of his acceptance of the repudiation. Furthermore, there were discussions regarding structuring these transactions in a tax friendly way that were initiated on August 5, 2020. A less than two-week time period to communicate acceptance of Leeder’s repudiation was not unreasonable in the circumstances of this matter.

What is the appropriate remedy?

[95] Under the law of repudiation, the innocent contractual party can elect whether to continue with the contract in the face of the breach, or terminate it.

[96] Mr. Warwick accepted the repudiation and terminated the share purchase transaction, as I have found he was entitled to do.

[97] Accordingly, the share purchase transaction initiated under Article 8.2 is at an end, and Mr. Warwick maintains his position as a minority shareholder of Leeder.

[98] The application is dismissed.

[99] I have Mr. Warwick’s Cost Outline which was uploaded to CaseLines. I do not appear to have Leeder’s Cost Outline.

[100] If the parties cannot agree on costs, then I will receive Mr. Warwick’s costs submissions within five business days from the release of these reasons. Leeder will then have five business days within which to respond and to deliver their Cost Outline. The respective submissions shall not exceed three double-spaced pages and are to be delivered by email to my judicial assistant.

Justice S. Vella

Date: September 23, 2022

APPENDIX

Key Contractual Provisions of the Shareholders’ Agreement

The contractual provisions of the Shareholders’ Agreement most germane to this analysis are:

ARTICLE 8 – RIGHTS OF FIRST CONSIDERATION

8.2 Prior to entering into any discussions with any Third Party concerning the purchase and sale of any shares, the Shareholder(s) seeking to sell certain of his, her or its shares of the Corporation shall provide written notice to each of the other Shareholders and to Leeder of his, her or its intentions. Within twenty (20) days following receipt of such notice, LeederCo (or Leeder, at their option) shall be entitled by written notice (for purposes of this section, the “Notice”) to the Shareholder(s) who wishes to sell his, her or its shares (collectively, “the Vendor”) and to the other Shareholders to purchase such issued and outstanding shares of the Corporation owned by the Vendor. If LeederCo (or Leeder) does not deliver a Notice within such twenty (20) day period it shall be deemed to irrevocably indicate that it does not wish to purchase such shares of the Corporation owned by the Vendor. If LeederCo (or Leeder) delivers a Notice, then it shall be required to purchase all of the shares of the Corporation offered for sale by the Vendor (the “Purchased Shares”), and the transaction of purchase and sale in question shall take place at the Place of Closing and at the Time of Closing on the date which is twenty (20) days following receipt by the Vendor of the Notice.

ARTICLE 12 – VALUATION

12.1 Upon the provisions of ARTICLE 7 or ARTICLE 8, as the case may be, becoming applicable, the Corporation shall cause its auditors or accountants, as the case may be, to prepare financial statements for the Corporation as at and for the fiscal period ending on the Valuation Date. In preparing such statements, the auditors or accountants, as the case may be, shall use generally accepted accounting principles applied on a basis consistent with those used in the preceding fiscal year as if the statement date was the fiscal year end of the Corporation, with the exception that only the Book Value of the assets (other than the Lands, the value of which will be determined by a valuator in accordance with Section 12.2 and which will be excluded from such statements, and other than the goodwill of the Corporation, the value of which shall be determined in accordance with Section 12.3) and will be included in such statements after deducting accumulated depreciation to the date of such statements as well as any other reserves established in accordance with generally accepted accounting principles, consistently applied, shall be reflected.

12.2 Within twenty (20) days following the occurrence of the event giving rise to the transaction of purchase and sale in question pursuant to ARTICLE 7 or ARTICLE 8, as the case need be, an independent business valuator, expertised in the appraisal and valuation of commercial real estate in the GTA, to be agreed upon by the shareholders, shall determine the Fair Market Value of the Lands owned by the Corporation as at the last state of the month preceding that in which the applicable event occurs (the “Valuation Date”).

If the Shareholders fail to choose an independent business valuator within twenty (20) days following the said event, then such independent business valuator shall be chosen by a judge, having appropriate jurisdiction, sitting in the City of Toronto upon the application of any of the Shareholders. In valuing the Lands, the valuator shall take into account and apply generally accepted accounting and valuation principles. However, if the event in question is the death or disability of Leeder, the valuator shall not have regard to the occurrence of his disability or death or imminent possibility therefore. Further, the valuator shall not apply any minority discount with respect to the value of any Shareholder’s shares of the Corporation shall not take into account any proceeds of insurance which may be received by the Corporation pursuant to ARTICLE 11. The valuation arrived at by the valuator, made as an expert and not as umpire or arbitrator, shall, in the absence of fraud, be final and binding, medical errors accepted, and no appeal shall lie there from.

12.3 The goodwill of the Corporation shall have a Fair Market Value of two and a half (2.5) times the average annual net income of the Corporation and its Subsidiaries, determined on a consolidated basis over the course of the last three (3) completed fiscal years of operation of the business. If the Corporation and its Subsidiaries have been operating the business for less than three (3) fiscal years prior to the Valuation Date (or any such fiscal years reflect less than 365 days of operation), a similar average calculation shall be made based on the lesser number of actual completed fiscal years (of at least 365 days in length) of operation. If the Corporation and its Subsidiaries have operated the Business for less than one (1) fiscal year (of at least 365 days in length) prior to the Valuation date, the Fair Market Value of the goodwill of the Corporation shall be determined by an independent business valuator, to be agreed upon by the shareholders, on similar terms and conditions, mutatis mutandis, as set out above in Section 12.1 in connection with the valuation of the Lands, provided that such independent business valuator shall have expertise in relation to the valuation of goodwill and intangibles, rather than commercial real estate.

12.4 If there is any disagreement among the Shareholders as to the Book Value of any assets or liabilities of the Corporation other than the Lands or goodwill of the Corporation, the decision of the auditor or accountant, as the case may be, of the Corporation, made as an expert and not as an umpire or arbitrator, as set out in a written certificate signed by him or her, shall, in the absence of fraud, be final and binding, clerical errors excepted, and no appeal shall lie there from. The said auditor or accountants, as the case may be, may retain such experts as he or she may deem necessary in order to assist him or her in making any valuation and the costs thereof shall be paid by the Corporation.

ARTICLE 13

13.10 From and after the occurrence of an event giving rise to a transaction of purchase and sale to which this Article applies until the Time of Closing, the Shareholders shall not do, nor cause, nor permit to be done anything except what which is in the ordinary course of business of the Corporation or any Subsidiary or the Corporation. Further, the parties hereto covenant and agree that from and after the occurrence of an event giving rise to a transaction of purchase and sale to which this Article applies, they shall do all things necessary or desirable to cause the transaction of purchase and sale to be completed as soon as possible.