COURT FILE NO.: CV-22-00682603-00CL

COURT FILE NO.: CV-21-00667401-00CL

DATE: 20221031

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: MARIA MARSILI, as the Estate Trustee for the estate of SILVIO MARSILI, Applicant

AND:

438056 ONTARIO LIMITED AND CESIDIO COPPOLA also known as JESSE COPPOLA, Respondents

AND RE: CESIDIO COPPOLA and 438056 ONTARIO LIMITED, Applicants

AND:

THE ESTATE OF SILVIO MARSILI, Respondent

BEFORE: Justice Cavanagh

COUNSEL: Christopher Lee and Wendy Ngai, for the Maria Marsili as Estate Trustee for the Estate of Silvio Marsili

Kevin Sherkin and Eric Sherkin for Cesidio Coppola and 438056 Ontario Limited

HEARD: October 6, 2022

ENDORSEMENT

Introduction

[1] There are two applications before me. The issue in each application is the valuation of the shares (the “Shares”) that were held by the late Silvio Marsili in 438506 Ontario Limited (the “Company”). The Shares represent 49% of the equity of the Company.

[2] Silvio Marsili died on January 1, 2021. Under an agreement made as of June 16, 1982 between Mr. Marsili and Cesidio Coppola, the owner of 51% of the shares of the Company, upon the death of either shareholder, the other shareholder agreed to purchase the shares of the deceased shareholder at fair market value, with closing to take place within 90 days after the death of the shareholder.

[3] The parties each retained professional business valuators to value the shares. However, the parties were unable to agree on the fair market value of the shares.

[4] Cesidio Coppola and the Company commenced an application against the Estate of Silvio Marsili (the “Estate”) on August 19, 2021. They seek an Order that the Estate comply with the agreement by selling the shares to Mr. Coppola. The applicants in this application also seek a declaration that the respondents acted in a manner that is oppressive contrary to section 248 of the Ontario Business Corporations Act in respect of the Company.

[5] Maria Marsili as the Estate Trustee for the Estate commenced a separate application against Cesidio Coppola and the Company a few days later. The applicant in this application seeks an order directing Cesidio Coppola to purchase the Estate’s shares in the Company for the fair market value of the shares, without discount. In addition, the applicant seeks a declaration that the respondents have acted oppressively, orders for production of documents, information, an accounting, and other relief.

[6] On June 15, 2022, the applicant in the Marsili application amended the notice of application to claim an order for the sale of property municipally known as 300 Bradwick Drive, Vaughan, Ontario (the “Bradwick Property”) pursuant to the Partition Act.

[7] Both applications were ordered to be heard together. In both applications, the essential dispute is about the valuation of the Shares held by Maria Marsili as executor of the Estate.

[8] The agreed valuation date is January 1, 2021.

Background

[9] The Company owns three operating companies in a similar industry – industrial machinery. The operating companies provide steel metalworking and manufacturing equipment services with specializations. The operating companies are managed by the same management team. Consolidated financial statements are available for the Company.

[10] The business valuator retained by the Coppola applicants is Vimal Kotecha of Richter Advisory Group Inc. (“Richter”). Richter prepared a draft report dated March 15, 2021 that was provided to the Marsili applicants on March 17, 2021 accompanied by a draft term sheet. The Coppola applicants expressed their intention to have the purchase transaction completed by the end of March 2021.

[11] The Marsili applicant requested documents and information so that she could complete her own independent valuation of the Shares. Although documents were provided by the Coppola applicants, not all of the documents requested by the Marsili applicant were provided.

[12] On May 6, 2021, 2021, Richter completed its final report regarding the fair market value of the Shares. As a result of receipt of additional information and documents, Richter provided an updated valuation on October 5, 2021.

[13] During 2021 and into 2022, Maria Marsili, through her legal counsel, engaged in communications with Cesidio Coppola and the Company, through their legal counsel, with respect to requests for documents and information needed for their expert valuator to value the Shares. A motion was brought that was resolved. On March 17, 2022, Justice Gilmore released an endorsement stating that counsel had worked to resolve all outstanding production issues such that the expert retained by the Marsili applicant is able to complete his share valuation. The endorsement states that the parties are now ready to move forward to set a litigation timetable and a hearing date.

[14] The business valuator retained by the Marsili applicant is Ashtok Bhatt of AB Valuations Inc. (“ABV”). ABV delivered a report dated May 9, 2022 responding to Richter’s report and giving its estimate of the value of the Shares.

[15] Richter prepared a reply report dated July 21, 2022 responding to ABV’s report.

[16] ABV prepared a rebuttal report dated August 12, 2022 providing comments and its opinion on Richter’s reply report.

[17] Richter determined the fair market value of the Shares using the capitalized cash flow method under the income approach to valuation. According to Richter, the capitalized cash flow method involves the following steps:

a. Analysing the Company’s historical earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal year 2017 to fiscal year 2020 and adjusting for non-recurring and unusual revenues/expenditures to determine a normalized EBITDA that would have been earned in the ordinary course of business.

b. From the estimated maintainable EBITDA, deduct income taxes and sustainable capital reinvestment, to determine the after-tax maintainable discretionary cash flow on a debt-free basis. Then, such amount is capitalized by the desired rate of return. The rate of return reflects the Company’s estimated weighted average cost of capital (“WACC”).

c. To the capitalized cash flow for the business, the tax shield on fixed assets is added to arrive at the Company’s total enterprise value (“TEV”). Adjusting for interest-bearing debt, net redundant assets (liabilities) and excess/(deficient) net working capital, if any, from TEV will yield the en-bloc fair market value (“FMV”) of the equity.

[18] In its October 5, 2021 report, Richter determined that the fair market value of the Shares at the valuation date is between $3,355,000 at the low end and $3,855,000 at the high end, with a mid-point of $3,615,000. Richter applied a minority and marketability discount in the range of 10% to 15%.

[19] In ABV’s report dated May 9, 2022, ABV agreed with Richter that the appropriate valuation method for the Company as at the valuation date is the capitalized cash flow method under the income approach. ABV explained that this approach contemplates the continuation of the business by the purchaser and is based upon the purchaser’s desire to acquire the future cash generating potential of the business. This approach assumes a continuing business operation with potential for maintaining cash flow from operations at a level that will provide a reasonable return on investment.

[20] According to ABV, the capitalized cash flow approach involves capitalizing the estimated maintainable after-tax cash flow from operations by a multiple, which serves as a measure of the rate of return required by the prospective purchaser of the business reflecting, among other factors, the risk inherent in achieving the determined level of maintainable cash flow. ABV applied the capitalized cash flow methodology on an enterprise basis. Using this approach, free cash flows are determined prior to the interest expense and are capitalized using a multiple that considers the company’s weighted-average cost of capital (“WACC”) and the expected future growth rate of cash flows.

[21] ABV estimated the fair market value of the Shares at the valuation date, after consideration of a minority/marketability discount of 5% to 10%, to be in the range of $6,337,000 to $6,535,000. The midpoint of this range is $6,436,000.

[22] Each of Mr. Kotecha and Mr. Bhatt provided affidavits and each was cross-examined out of court. Transcripts were available for the hearing of these application.

[23] I have reviewed the reports and the transcripts. After hearing submissions from counsel, I am satisfied that I can make findings with respect to the matters in dispute between the parties and that it is not necessary for me to hear viva voce evidence from the two valuators.

Issues

[24] In his reply report, Richter states that, based on their review of ABV’s report, ABV’s estimate of value is significantly overstated for reasons that fall into two categories:

a. ABV uses incorrect assumptions which led to an overstatement of the equity value of the Company.

b. ABV made errors in determining the normalized EBITDA which had the effect of overstating the equity value of the Company.

[25] ABV explained in its rebuttal report why, in its view, its estimate is correct.

[26] The categories of differences between ABV’s opinion of value of the Shares and Richter’s opinion of value of the Shares, as identified by Richter in its reply report, explain why the two valuation experts reached different opinions of value.

[27] I address the categories of issues identified in Richter’s reply report and Richter’s explanation of these issues, and the issues within each category, and I consider ABV’s responses to the issues raised by Richter.

(1) Alleged errors in valuation methodology

[28] I first explain the valuation approach followed by ABV (and by Richter). This provides context for the alleged errors in valuation methodology identified by Richter.

[29] In ABV’s first report, it states that its commentary is based on the WACC calculations as contained in the Richter valuation report. Richter determined the WACC for the Company to be in the range of 16.20% to 18.30%. The cash flow multiple (or capitalization rate) is comprised of the WACC, net of an estimate for future growth. Richter estimated the capitalization rate to be in the range of 14.20% to 16.30%. This translates into a cash flow multiple of approximately 6.1x to 7.0x. ABV also used this multiple.

[30] ABV determined the value of the business and operating assets of the Company as representing the fair market value of the enterprise (total debt plus equity). ABV states that to estimate the fair market value of the equity of the Company, the debt of the Company is normally subtracted and adjusted for in redundant assets.

[31] ABV explains that redundant assets are assets that are not required in the day-to-day operations of the business and therefore do not influence the going-concern value of the net operating assets. To arrive at the net tangible asset backing of the Company, ABV adjusted the reported book value of the assets and liabilities to their respective fair market values, and ABV eliminated assets and liabilities that may be redundant to the operations. One is these adjustments is for excess cash. ABV considered available debt proceeds borrowed against excess accounts receivable to be part of redundant assets.

[32] ABV added $1,060,000 as notional loan proceeds (available to be drawn on the Company’s line of credit against accounts receivable) to available cash ($5,842,854) totaling $6,902,854, and deducted this amount (as part of redundant assets/liabilities and long-term debt) to calculate an adjusted book value of the Company’s assets at January 1, 2021. ABV assumed that the fair market values of all assets and liabilities at the valuation date are equal to their net book values unless otherwise adjusted. ABV deducted the notional interest expense ($31,000) for the notional $1,060,000 operating line loan because otherwise the value of the Company would be artificially inflated.

[33] The effect of treating notional loan proceeds from the Company’s line of credit ($1,060,000) as a redundant asset was to increase the estimated value of the shares. The effect of deducting the notional interest on the notional operating line loan was to decrease the estimated value of the shares.

[34] Richter says that (i) inclusion of the notional loan proceeds as a redundant asset, and (ii) deduction of notional interest on this notional debt and then using after interest cash flows which are then capitalized at a multiple derived from the WACC are errors in valuation methodology in three respects:

a. First, the WACC is to be used on pre-interest cash flows not after interest cash flows.

b. Second, ABV assumed that the Company had excess working capital as at the valuation day when, if the calculation had been done properly, ABV would have seen that there is a working capital deficiency which needs to be deducted to arrive at equity value.

c. Third, it is an error to extract notional cash to increase the equity value of the Company (when the cash was never on the books of the Company) and the calculation would leave the prospective buyer with a $1,060,000 debt obligation (which was not there to begin with).

[35] Richter explains that when one uses the “enterprise value approach” to determining the equity value of a company (which both valuators did), as opposed to the “equity value approach”, the valuator uses pre-interest cash flows capitalized by a WACC. Richter explains that by deducting notional interest on an operating line ($31,000), the resulting cash flows that ABV incorrectly used represent after-interest cash flows which are then capitalized by a WACC.

[36] Richter states that the purpose of using a WACC on pre-interest cash flows is to reflect the optimal capital structure within the multiple being used.

[37] Richter explains that the addition of notional debt causes a number of issues: (a) interest on the notional bank debt converts pre-interest cash flows to after-interest cash flows, (b) the effect is to increase equity value by $1,060,000 by adding this amount to the cash balance, (c) a prospective purchaser is treated as having $1,060,000 in additional debt without a downward adjustment in the purchase price, and (d) when the $1,060,000 is added to fair market value but deducted to arrive at tangible asset backing it creates an overstatement of goodwill by $2 million.

[38] Richter explains that the addition of $1,060,000 in notional debt does not agree with the implied debt / total enterprise value ratios used in determining the WACC which assumes an optimal debt / total enterprise value of 30%, which ABV accepted. Richter calculates that inclusion of $1,060,000 as notional debt implies a debt / total enterprise value of 15%, not 30%, as stated in the WACC calculation, which results in an internal inconsistency between the assumed notional debt and the assumptions in the WACC.

[39] ABV delivered a rebuttal report. ABV explains that it considers its methodology in respect of the $1,060,000 to be preferable to the approach taken by Richter because there is recognition for an optimum working capital, about which management of any company would need to be cognizant. ABV explains that the notional operating line of $1,060,000 is a current liability which is properly a redundant liability. ABV explains that, therefore, it is necessary to include the notional interest on this operating line to complete the cycle, because non-consideration would result in overstating the value of the Company.

[40] ABV explains that its approach to calculation of working capital is preferable to that followed by Richter. ABV explains that to maximize firm value, management should target an optimal capital structure that minimizes the company’s weighted average cost of capital. Under this approach, the Company would be treated as using its excess working capital to achieve an optimal capital structure and maximizing shareholder value. ABV includes a table showing that the adjusted current ratio (current assets/current liabilities), after eliminating the cash, advances to shareholders and income taxes receivable, is well above the industry average.

[41] The Marsili applicant submits, relying on ABV’s opinion, that Richter’s approach disregards the reasonable assumption that a prospective purchaser of the Shares would strive for an optimal capital structure to maximize value for the Company. She submits, relying on ABV’s opinion, that an inherent issue with Richter’s approach is that it presumes that working capital has been optimized, which is not the case.

[42] Both Richter and ABV accept that the valuation approach should be based on an optimal capital structure. Richter says that under the enterprise value approach, the optimal capital structure is reflected in the WACC. ABV does not directly address this evidence in its rebuttal report. ABV says that it is necessary to make a notional financing adjustment to reflect the optimal capital structure because the Company has excess working capital.

[43] In support of her submissions, the Marsili applicant relies on the course notes of the Canadian Institute of Charter Business Valuators (“CICBV”), Level 1, Summer 2018 Edition to show that the ABV approach accords with proper valuation principles, and that this approach should be preferred to Richter’s approach.

[44] In Module 3 of the CICBV course notes, the authors of the notes explain that using the income approach to valuation, valuators can generally determine fair market value under two different perspectives: (i) unlevered or “debt-free” approach (resulting in enterprise value), determined using WACC, and (ii) levered or “debt-included” approach (resulting in equity value), determined using ROE (return on equity). The authors, at p.102, state that when using the unlevered approach, “a leverage adjustment” is not made. Under both approaches, there is an assessment of the underlying net tangible assets to, among other things, identify redundant assets.

[45] The Marsili applicant relies on the CICBV notes under section 3.3.3, entitled “The Levered Approach”. In this section, the authors explain that in the levered or debt-included approach, the normalized cash flows include interest expense on an appropriate level of debt, and that a leverage adjustment (either positive or negative) may be required. The authors explain that debt-service costs (i.e. interest) and debt are treated differently between the enterprise value and equity value approach.

[46] The Marsili applicant relies, in particular, on an example given in the section entitled “The Levered Approach” of an under-levered balance sheet (too little debt in relation to equity) described at pp. 110-111 of the CICBV notes where a notional financing adjustment is made to allow the valuator to determine the value of the business on the basis of proper capitalization using multiples of normal equity levels. The assumption underlying the notional financing adjustment is that the shareholders of the company would borrow additional debt and withdraw the extra money for themselves. This is described as “hidden redundancy” which, if not recognized, might result in understatement of the value of the business.

[47] I have reviewed the CICBV notes upon which the Marsili applicant relies to assist me to evaluate the evidence given by Mr. Bhatt of ABV and the evidence given by Mr. Kotecha of Richter with respect to the proper approach to be taken by a valuator on this issue. Having done so, I conclude that the sections of the notes upon which the Marsili applicant relies do not apply to the valuation approach followed by ABV and Richter because these passages are stated to apply to the “levered approach", an approach not followed by Richter and ABV.

[48] Mr. Kotecha explains that under the “enterprise value approach”, which both valuators followed, the purpose of using a WACC on pre-interest cash flows is to reflect the optimal capital structure within the multiple being used. Mr. Kotecha’s evidence on this issue is consistent with the CICBV notes. The fact that ABV must adjust for interest payable on notional debt when, under the enterprise value approach (the unlevered approach), the normalized cash flows include interest expense on an appropriate level of debt leads me to prefer Mr. Kotecha’s evidence because the valuator is required to use pre-interest cash flows.

[49] I prefer the evidence of Mr. Kotecha of Richter over the evidence of Mr. Bhatt of ABV on this issue. I conclude that the proper determination of fair market value of Shares must not use the notional addition of $1,060,000 as a redundant asset or an adjustment for interest on the corresponding notional debt.

[50] Mr. Kotecha concluded in his Reply report the working capital of the Company as at the valuation date approximated a normal level. He made no working capital adjustment. There should be no downward adjustment for working capital made to the conclusion in the ABV report.

(2) Alleged errors in EBITDA normalization

[51] The second category of issues raised in the Richter reply report is alleged errors in EBITDA normalizations. I address each alleged error below.

Rent adjustment for Building at 300 Bradwick Drive

[52] The Company’s operating companies leased premises at the Bradwick Property from a related company, 800807 Ontario Inc. (“800807”). 800807 entered into ten-year leases with the operating companies which expired on December 31, 2021. The corporate group of the Company continues to operate out of this building.

[53] In its report, ABV noted that a real estate appraisal could not be obtained. Given this, ABV assumed that market rent was approximately equal to actual rent.

[54] Richter states that ABV did not adjust the related party lease to market terms. Richter obtained information from the Coppola applicants that the building has 34,000 square feet. Richter consulted with a third party about market rental amounts on a per square foot basis and made an adjustment on the basis that market rents are higher than the actual rents.

[55] Richter’s opinion is that the failure to make this adjustment results in an overstatement of the equity value in the amount of $547,884.

[56] The Marsili applicant objects to the use of information provided to Richter to make the adjustment that, they submit, has not been proven and is not accepted. She contends that the square footage for the building has not been proven by admissible evidence, and she does not accept the information as accurate. The Marsili applicant also objects to the use of information provided by third party consultants. She points out that she was not given access to the building when access was requested, so she and ABV were not able to verify the square footage of the building. Counsel for the Coppola applicants states that there was no refusal to grant access, but he accepts that access was not given after requests were made.

[57] In Turk v. Turk, 2017 ONSC 6889, the trial judge attached no weight to the opinion of value of real estate by a business valuator who was not qualified to provide such an opinion. The trial judge noted that it was clear to the parties that there was a risk that without evidence from a qualified real estate appraiser, no weight would be given to the opinion of the business valuator.

[58] The issue of the market rents for the building was a contentious one. The Marsili applicant required evidence of the square footage and the market rents per square foot. The Marsili applicant tried to obtain information to allow her to determine whether market rent differed from actual rent. The Coppola applicants could have proven the facts on which Richter relies for the proposed adjustment, but did not do so. They could have done a survey. They could have tendered evidence from a qualified expert of market rents per square foot. They could have allowed access to the building to the Marsili applicant to determine the square footage, but did not do so. In the absence of admissible evidence of the square footage of the building and market rents on a square foot basis, there is no evidentiary foundation for the proposed adjustment.

[59] I do not accept that Richter has shown that the proposed adjustment should be made. There should not be an adjustment to normalize EBITDA for rent.

Bonus reversal adjustment

[60] In ABV’s report, they include a bonus accrual in 2018 the amount of $539,259 as a financial obligation of the Company.

[61] After its first report, Richter changed its report based on discussions with the Company’s accountant and removed this accrual on the ground that it was partially reversed in 2019 with the remainder reversed in 2020. Mr. Kotecha’s evidence is that the reversal entries have been verified via journal entries in the general ledger of the Company for the respective years. Richter’s opinion is that not adjusting for the reversal results in an overstatement of the equity value in the amount of $681,000.

[62] ABV states that it requested information showing the reversal of the reversal of the bonus has not been provided with evidence in the Company’s general ledger showing the reversal of the accrued bonus.

[63] At the hearing, I was directed to the trial balance for the Company for the year ended December 31, 2020 showing a partial reversal of the accrued bonus in the amount of $218,603.85. This is consistent with Mr. Kotecha’s affidavit that he verified the reversal of the bonus by looking at journal entries. I was also directed to a journal entry for Centennial Material Handling, one of the operating subsidiaries, showing a reversal in 2019 of the accrued bonus in the amount of $281,396.

[64] I accept Mr. Kotecha’s evidence that he verified the reversal of management bonuses. There is no evidence that amounts accrued as bonuses were ever paid.

[65] This adjustment to EBITDA to account for reversal of the accrual for management bonuses should be made.

Foreign Exchange Adjustment

[66] Richter states that ABV failed to deduct a foreign exchange gain in 2017 in the amount of $495,000. Richter’s opinion is that the foreign exchange gain in 2017 was an unusual and non-recurring item that should be adjusted for. Richter’s opinion is that the failure to make this adjustment results in an overstatement of equity value in the amount of $810,000. The Coppola applicants rely on evidence from Mr. Bhatt that sales were reported in Canadian dollars.

[67] The Marsili applicant disputes that the foreign exchange gain should be adjusted for as an unusual and non-recurring event. She points out that, in its report, Richter identified foreign exchange exposure as one of four negative factors for the Company because materials within CML Machinery Inc. are sourced from abroad and sales by Olympic Manufacturing Limited are largely to U.S. customers. In ABV’s rebuttal report, they say that they did not consider the foreign exchange gain as an unusual or non-recurring item because it arose in the course of normal operations of the Company. Mr. Bhatt states that he requested but did not receive an explanation or details of what caused this gain and, in the absence of this information, ABV determined that an adjustment is not appropriate.

[68] It is accepted that the Company, through its operating subsidiaries, conducts business with suppliers and customers in the U.S. Foreign exchange was identified by Richter as a negative factor in the Company’s operations. In the absence of evidence with respect to the particular transaction that gave rise to the gain in question, I prefer the evidence of Mr. Bhatt on this point that there is insufficient information available to justify an adjustment.

[69] No adjustment to EBITDA should be made for the foreign exchange gain.

Related party salaries

[70] Both ABV and Richter normalized related party compensation. They differ in the amount of market expected compensation required to replace the related parties. There are four related parties who worked for the Company and received compensation. Cesidio Coppola also worked for the Company but did not receive compensation.

[71] ABV says that to replace these persons, the Company would need to hire a CEO ($250,000), an operations manager ($150,000), and a foreman ($90,000) at an aggregate annual cost of $490,000.

[72] Richter relies on research that found CEO compensation to be reported at a median compensation of $608,000 for somewhat comparable corporations within the industry. The citation is to a Wall Street Journal article of CEO compensation for Hammond Manufacturing, a U.S. public company. Richter also relies on information provided by a compensation advisor that a CEO of a similar sized operation in the GTA would attract market compensation in the range of $400,000 to $500,000. The other roles would be in addition to this amount. Mr. Kotecha’s evidence is that having regard to this information, he believes that the related party market adjusted compensation of $800,000 is reasonable.

[73] One of the related party employees is Antonio Coppola, the son of Cesidio Coppola. Mr. Kotecha agreed on cross-examination that Antonio was not coming to work at the Company very often but continued to be paid his salary. He did not disagree when it was put to him that much of his duties were done by a person hired for $45,000 a year (“That could be true”).

[74] I do not regard Hammond Manufacturing, a much larger public company in the U.S., to be a proper comparable. I rely on the answers to questions on the cross-examination of Mr. Kotecha that a CEO of a public company has additional responsibilities including public securities compliance and that public companies are usually much larger than the Company.

[75] The Coppola applicants were asked to provide information about the duties of the related parties who were working at the Company but this information was not provided. I take this failure to provide information into account in my assessment of the evidence.

[76] I prefer the evidence of Mr. Bhatt that the related party employees could be replaced with three outside executives at a compensation cost of $490,000. This is the amount of the adjustment that should be made.

Professional Fees

[77] Richter says that professional fees should be normalized based on fees charged over 4 years from 2017 to 2020 rather than only in 2017 and 2018, as was done by ABV. Richter’s opinion is that the fees over these four years is more representative than fees over 2017 and 2018.

[78] The professional fees in the records of the Company over the four years reflect charges for such fees. There is no evidence that would support an adjustment of these fees to normalize them by eliminating any of the years.

[79] Professional fees should not be normalized by excluding fees in any one or more of the four years. The fees for 2017-2020 should be taken into account.

Gross profit adjustment: Write-down of work in process and finished goods

[80] ABV added back $243,672 to increase gross profit in 2020. In a note to ABV’s first report, ABV states that they requested but were not provided with a sufficient explanation for the non-consideration of the work in progress and finished goods in Centennial, one of the operating companies. ABV accounted for this by taking 1.1% of sales being the difference in gross margin for 2020 and the 2 year average for 2018 and 2019 for Centennial, calculated at $49,826. ABV states that, further, CML had inventory written-off for $193,846 which was not explained despite several requests. ABV made an adjustment for these amounts in the amount of $243,672.

[81] Richter, in its reply report, states that these items were addressed in emails from counsel for the Coppola applicants to counsel for the Marsili applicant. Richter states that as is customary, an inventory count was performed at year-end and, as a normal procedure of the inventory count, old, or unsaleable goods are written off. Richter states that the Company was closed from mid-December to mid-January 2020 and had no new sales during this time, therefore, no inventory change would have occurred during this time. Richter states that financial statements were reviewed independently by the accountants to the Company and that no unusual inventory issues were flagged during the review.

[82] The Coppola applicants advised through counsel that the Company’s accountant had advised that the write-down of inventory was based on management’s experience and knowledge of the inventory which was used to mark down the inventory to its current market value, and no specific documentary back-up exists. The inventory write-down was based in Cesidio Coppola’s professional judgment. The Coppola applicants advised through counsel that the write-off was on account of there being a lot of old machines in inventory that the Company decided to write down due to poor sales of those machines and competition from Chinese machines that had driven prices down.

[83] When he was examined, Fred Coppola was asked about the inventory write-down and he responded that he has no knowledge of it and was not involved in the write-down. He did not discuss it with Cesidio Coppola.

[84] When Mr. Kotecha was cross-examined, it was put to him that there is no write-down of inventory shown in the financial records for any year other than 2020. Mr. Kotecha agreed that he did not review documents showing inventory adjustments for CML in 2017 or 2018. He testified that the write-down could have been made in other entries in the financial records. He agreed that he does not know what the inventory adjustment was for CML in 2017 or 2018. He agreed that a change in accounting methodology should be accompanied by a note and that there is no note in the financial statements showing a change in methodology for 2020 showing a different methodology being used to write-down inventory from the methodology used in 2017, 2018, and 2019.

[85] I have considered the evidence before me and the submissions of counsel. The Marsili applicant has not shown that the write-down of inventory was done dishonestly to artificially reduce the valuation of the Company. The write-down was not questioned by the Company’s accountant. An explanation was provided for the write-down. It is usual for such write-downs to be made, and the fact that similar write-downs are not shown in earlier years does not mean that the write-down for 2020 was not proper.

[86] The adjustment to gross profit made by APV in the amount of $243,672 should not be made.

Weighting

[87] In its reply report, Richter notes that ABV places a greater weighting on the years further away from the valuation date than on those years closer to the valuation date. Richter’s opinion is that this is unusual because a prospective buyer would be most interested in recent earnings. The ABV report places a 40% weighting on 2017, 30% on 2018, 20% on 2019, and 10% on 2020.

[88] I do not agree with the assumption made by ABV that years further back from the valuation date should be given more weight than years closer to the valuation date.

[89] Richter uses an equal weighting for each year. Given the uncertainties in 2020 because of the pandemic, I prefer the approach taken by Richter. The years 2017 to 2020 should be given equal weighting.

(3) Contingent liabilities

[90] Richter adjusted the TEV by contingent liabilities related to (i) severance payments to Anthony Dominelli, the son in law of Silvio Marsili and (ii) moving expenses. This is shown in Appendix F to Richter’s first report.

[91] With respect to the contingent liability for severance payments, Richter noted that management decided to terminate the employment of Mr. Dominelli and Richter states that the termination of his employment was contemplated at or near the death of Mr. Marsili, therefore, a contingent liability exists at the valuation date related to the severance payments. Richter relies on information that the Company agreed to pay severance of $85,712 to Mr. Dominelli resulting in an after-tax payment of $72,998.

[92] Richter states its understanding that the Company’s existing lease will expire on December 31, 2021 and that it understands that the lease is currently being negotiated and there is no certainty as to the lease renewal. Richter calculated a range of moving costs of $305,000 to $370,000 and applied a 50% probability factor resulting in a contingent liability amount related to moving expenses ranging from $152,587 to $185,242, with a midpoint at $168,915.

[93] Mr. Dominelli’ s employment was terminated on March 26, 2021. The position of the Marsili applicants is that there is no evidence that the termination of Mr. Dominelli’s employment was contemplated on the valuation date. They point to Richter’s draft report in which he does not refer to any contingent liabilities even though Mr. Kotecha had had numerous telephone calls with Fred Coppola and had not been told that Mr. Dominelli would have his employment terminated. The Company’s accountant had not told Mr. Kotecha that Mr. Dominelli’s employment would be terminated.

[94] Based on the evidentiary record, I am not satisfied that at the valuation date, it was contemplated that Mr. Dominelli’s employment would be terminated and that there may be liability associated therewith.

[95] With respect to moving expenses, Richter did not include a contingent liability for moving expenses in its draft report. Mr. Kotecha had reviewed the lease when he prepared the draft report and he would have seen that the lease was not expiring until December 31, 2021. Mr. Kotecha was not provided with documents about whether the lease would be renewed or not.

[96] The evidence does not support a conclusion that liabilities for severance payments to Mr. Dominelli or for moving expenses were reasonably contemplated by the Company at the valuation date. If they were contemplated, it is difficult to understand why Richter did not refer to these contingent liabilities in its initial draft report. Information obtained after that date should not be considered. I prefer the opinion of Mr. Bhatt on this issue.

[97] The amounts described by Mr. Kotecha as contingent liabilities should not be used in the valuation of the Shares.

(4) Minority Discount

[98] The fourth category of difference between the two business valuators is whether there should be a minority and lack of marketability discount and, if so, the rate to be used.

[99] The ABV report considers a minority and lack of marketability discount of 5% to 10%. The Richter report concludes that a minority and lack of marketability discount of 10% to 15% is proper.

[100] The valuation is being done pursuant to an agreement, not based on an order of the court following a finding of oppression. In my view, it is proper to use a minority discount in these circumstances. See Irwin v. D.W. Coates Enterprises ltd., 1983 CanLII 629 (BC SC).

[101] Both experts agree that a minority and lack of marketability discount of 10% is within the range of reasonableness.

[102] I conclude that the minority and lack of marketability discount to be used should be 10%.

Application for an order for the sale of the Property

[103] The Marsili applicant seeks an order (i) declaring that, as estate trustee of Silvio Marsili’s estate, she holds a 50 percent undivided beneficial interest in the Bradwick Property, and (ii) an order for the sale of the Bradwick Property and distributing the net proceeds of sale equally between Cesidio Coppola and Maria Marsili as estate trustee.

[104] Sections 2 and 3 of the Partition Act, R.S.O. 1990, c. P. 4 permit any person with an interest in land to bring an application for partition or sale. In Greenbanktree Power Corp. v. Coinamatic Canada Inc. (2004), 2004 CanLII 48652 (ON CA), 75 O.R. (3d) 478 (C.A.), the Court of Appeal for Ontario held that co-tenants should only be deprived of the statutory right to compel partition or sale in limited circumstances. The Coppola applicants do not assert that if such an order were to be granted, they would suffer hardship of such a nature as to amount to oppression.

[105] I grant the application for an order directing that the Bradford Property be sold and that the proceeds of sale be distributed equally between Cesidio Coppola and Mari Marsili as estate trustee.

Disposition

[106] In Pilch v. TemboSocial Inc., 2014 ONSC 5590, D. M. Brown J., as he then was, decided an application involving valuation of shares of a company where the valuation approaches taken by two expert valuators were substantially the same but their conclusions differed. Justice Brown made findings on the key issues in dispute between the experts and set out his findings in his reasons. He then directed the valuation experts to each prepare a revised valuation opinion incorporating his findings.

[107] I propose to follow the same approach.

[108] I direct the valuation experts to prepare revised valuation opinions using the methodologies in their reports but incorporating the findings made in these reasons. Counsel are asked to agree on a date for the exchange of the revised reports. The revised reports should be exchanged on that date. Counsel are directed to provide the revised reports to me. Upon receipt of the revised reports, if there is still a material difference between the valuation opinions, I will decide whether supplemental written submissions are needed.

[109] This portion of the applications is adjourned on this basis.

[110] I grant the relief under the Partition Act requested in the Marsili application. I ask counsel to provide me with an approved form of order for this relief.

[111] I will ask for submissions as to costs, if not agreed upon, when I release my decision on the share valuation issue.

Cavanagh J.

Date: October 31, 2022