Court File and Parties

COURT FILE NO.: CV-22-00688006-0000 DATE: 20230809 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: TIANCAI WU, YAMIN WANG and 10480169 CANADA INC. , Applicants – and – ZEWEI ZHANG and XUAN WANG, Respondents

BEFORE: E.M. Morgan J.

COUNSEL: Lou Brzezinski, Alex Fernet Brochu, and Anja Perc , for the Applicants Andrew Francis , for the Respondents

HEARD: August 3, 2023

Reasons for Decision

[1] The individual Applicants (herein referred to as the “Applicants”) are co-shareholders with the Respondents in the corporate Applicant, 1040169 Canada Inc. (“104 Inc.”). The main asset of 104 Inc., and the one with which the present dispute is concerned, is a property municipally known as 71 Bruce Street, Oshawa (the “Property”).

[2] The Applicants together own 70% of the shares of 104 Inc. (40% for Mr. Wu, 30% for Ms. Y. Wang), and the Respondents together own 30% of the shares (15% for Mr. Zhang and 15% for Ms. X. Wang).

[3] The Applicants claim that the Respondents have acted oppressively toward them. They allege that the Respondents defrauded them in their acquisition of the shares in 104 Inc. and that they have acted prejudicially to their interest as shareholders. The Applicants seek a number of remedies under section 241 of the Canada Business Corporations Act (“CBCA”). These include a declaration of the Respondents’ wrongdoing, the removal of the Respondents as directors of 104 Inc., and the cancellation of the shares of the Respondents in 104 Inc.

[4] The evidence shows that the Respondent, Zewei Zhang, found the Property during his search for an investment property. It was a parking lot that Mr. Zhang recognized could potentially be developed into a high-rise residential complex.

[5] The Applicant, Tiancai Wu, deposes in his affidavit that he jointly found the Property with Mr. Zhang. However, I see no other evidence in the record to support that assertion. Mr. Wu does not appear to have received any listings of properties, or documents relating to the Property, or any of the preliminary offers that went back and forth between Mr. Zhang and the sellers prior to the Agreement of Purchase and Sale being concluded.

[6] I do not find Mr. Wu’s claim to have been involved in this purchase to be credible. One does not get involved in the purchase of an investment property without receiving or reviewing a single document. There is nothing in the record that points to Mr. Wu’s presence in the researching, finding, negotiating, and purchasing of the Property.

[7] In October 2017, Mr. Zhang entered an Agreement of Purchase and Sale to purchase the Property for $3,300,000 (the “APS”). After entering into the APS, Mr. Zhang approached the Applicants about becoming investors in the project. Mr. Zhang advised the Applicants that he would sell shares in the Property based on a total price of $3,850,000. The Applicants agreed to the price, which was negotiated between the parties operating at arm’s length. The sale to 104 Inc. took place by way of an assignment of the APS from Mr. Zhang to 104 Inc.

[8] The Applicants and, in addition, Mr. Zhang and his wife, Xuan Wang, subsequently became shareholders and directors in 104 Inc. That company was formed by Mr. Zhang to take title to the Property. Mr. Zhang assigned the APS to 104 Inc. based on the $3,850,000 price he had negotiated with the Applicants.

[9] The Applicants are experienced and sophisticated in real estate. There is no suggestion that the bargain was beyond their comprehension or that they were not adequately advised in buying their share. In fact, both Mr. Zhang and Mr. Wu attended at the offices of the lawyers for 104 Inc. to review documents relating to the assignment of the APS from Mr. Zhang to 104 Inc.

[10] Mr. Wu now states that Mr. Zhang failed to disclose that 104 Inc. was, in effect, buying the property from Mr. Zhang himself, and not from an arm’s length seller. However, Mr. Wu does not appear to have ever questioned this arrangement, despite it being self-evident in the documentation that he reviewed. He signed all of the documentation necessary for the transaction. He knew about the assignment, which was patent in the documentation and never hidden from him, and agreed or acquiesced to it. Had he not agreed to 104 Inc. taking an assignment of the APS from Mr. Zhang, the conveyance of the Property would never have occurred.

[11] The Applicants claim that the Respondents acted contrary to the Applicants’ reasonable expectations as shareholders by not disclosing the particulars of the profit Mr. Zhang earned when he assigned the APS to 104 Inc. in January 2018. That profit reflected the difference between the $3,300,000 price of the Property under Mr. Zhang’s APS and the Applicants’ proportionate share of the $3,850,000 value placed on the Property when the Applicants purchased their shares in 104 Inc.

[12] In fact, the record establishes that Mr. Zhang advised the Applicants that he would be paid a finder’s fee for the purchase of the Property. This fee was to reflect the price difference between the two transactions: (1) his own purchase of the Property under the APS with the initial seller, and (2) his assignment of the APS to 104 Inc.

[13] While it was disclosed to the Applicants that Mr. Zhang had bought the Property himself and was assigning the APS to 104 Inc., the specific details of Mr. Zhang’s purchase of the Property were not disclosed. To be clear, the Applicants were aware that Mr. Zhang was being compensated for finding the Property and arranging for its assignment to 104 Inc., but they did not know how much Mr. Zhang’s compensation would be.

[14] In December 2000, several years after the closing, in response to an inquiry by Mr. Wu, Mr. Zhang produced a version of a Statement of Adjustments that appears to disguise the true nature of what Mr. Zhang called a finder’s fee – i.e. a purchase and assignment, or ‘flip’ – of the Property by Mr. Zhang to 104 Inc. This home-made version of the Statement of Adjustments was printed on the real estate lawyer’s letterhead but was not a document produced by that lawyer. It was, according to Mr. Zhang, produced by a company that he found on the internet.

[15] I will pause here to note, parenthetically, that although there is no direct evidence that Ms. X. Wang was involved in the 2020 altered version of the Statement of Adjustments, Applicants’ counsel submit that she would have known about the falsity, as the Applicants characterized it, of the original Statement of Adjustments provided to the Respondents at closing. The agreement under which 104 Inc. acquired the Property lists the Respondent, Ms. X. Wang, as the purchaser’s real estate agent. Applicants’ counsel contend that in that capacity she would have known about the undisclosed profit made on the assignment by Mr. Zhang, and thus would have known that the original Statement of Adjustments was to that extent deceptive.

[16] The Respondents’ explanation for the closing price as it appears on the original Statement of Adjustments is that Mr. Zhang’s acquisition of the Property was none of the Applicants’ business. Mr. Zhang insists that the assignment to 104 Inc. this was done at arm’s length and that he breached no obligation to the Respondents in doing so.

[17] In cross-examination, Mr. Zhang’s explanation for falsifying the December 2020 Statement of Adjustments was that he was under pressure due to the threats made against him by the Applicants. He also says that he is not a fluent English speaker, and so did not meet with the real estate lawyer to have him modify the Statement of Adjustments in a proper way.

[18] Mr. Zhang went on to explain during his cross-examination that, in his view, the version he gave the Applicants was the accurate version in that it reflected the purchase price to which the Applicants had agreed. The initial transaction under which Mr. Zhang bought the Property, and whose purchase price was never disclosed to the Respondents, is referred to by Mr. Zhang as his “business secret”.

[19] Between October 25, 2017 and February 1, 2018, the Applicants and the Respondents made the following contributions towards the purchase of the Property:

a) October 25, 2017: $350,000.00, paid to the vendor’s listing brokerage, based on the following contributions: Applicants - $245,000.00; Respondents - $105,000.00;

b) January 11, 2018: $100,000.00, paid to the Vendor’s listing brokerage, based on the following contributions: Applicants - $70,000.00; Respondents - $30,000.00;

c) From January 26 to January 31, 2018: Applicants paid $1,225,000 and Respondents paid $525,000 to Shapiro Real Estate and Business Lawyers.

[20] The Respondents submit that, in fact, the Applicants’ reasonable expectations have not been undermined or oppressed. They argue that the Applicants received precisely what they expected to receive in entering their agreement with Mr. Zhang and in investing in the Property at the $3,850,000 price point offered to them by Mr. Zhang.

[21] The acquisition of the Property by 104 Inc. closed on February 1, 2018. Mr. Zhang ultimately received the assignment fee once the purchase by 104 Inc. was completed. He did not use the profit earned on this transaction to make his own contribution toward the purchase price of the Property, as the Applicants contend. That would not have been feasible, given that the assignment profit was not delivered to him until after the purchase of the Property by 104 Inc. was completed.

[22] Having said that, Applicants’ counsel submits that Mr. Zhang received the assignment profit at the closing of 104 Inc.’s purchase, and so was in a position to quickly reimburse himself for his acquisition of the shares. That timing does make sense, although its cogency is premised on the argument that the assignment profit was not legitimately earned. The timing itself establishes very little.

[23] The Respondents further submit that in reality the Applicants have suffered no loss. The record shows that in recent years, the Property’s value has increased significantly, with offers from prospective buyers indicating that it is now valued as high as $12,250,000. All of the shareholders of 104 Inc. stand to benefit significantly from the increase in the Property’s value, and, consequently, in the value of their shares.

[24] As the Property’s value has increased, so has the animosity between the shareholders. The Respondents contend that in September 2020, Mr. Wu threatened acts of violence against Mr. Zhang in an effort to pressure him into giving up control of 104 Inc. Subsequently, in August 2022, Mr. Wu threatened to have Mr. Zhang and Ms. Wang criminally charged and imprisoned to pressure them to give up their shares in 104 Inc. According to evidence in the record, Mr. Wu went so far as to suggest that Mr. Zhang’s daughter will be in jeopardy as a consequence of Mr. Zhang’s actions if he does not give up his shares.

[25] I do not know how seriously to take this threat. Context is very important in assessing evidence of this nature, and I do not really have the full context of the conversation.

[26] By way of explanation, Mr. Wu says that he just happened to have a copy of the Criminal Code with him when he encountered Mr. Zhang, and that he merely took the opportunity to point out to Mr. Zhang the criminal consequences of fraud. The Respondents, through their counsel, respond to this by indicating that it is nonsensical to think that Mr. Wu, a non-legally trained person, would have coincidentally been carrying around a copy of the Criminal Code of Canada. They say that Mr. Wu’s purpose in mentioning the criminal law in the context of a civil dispute was to intimidate the Respondents and to attempt to extract a settlement from them that he might not otherwise be able to achieve.

[27] As I indicated at the hearing, a discussion like this, which contains a stark warning of arrest and prosecution, could be a version of extortion. Alternatively, it could be the matter-of-fact statement by an upset person spelling out their legal options. On the basis of the record before me, I cannot tell which description – the threatening one or the innocuous one – conforms with reality. While a trier of fact might be able to determine which description is accurate after hearing the witnesses recount their evidence, on paper it is nearly impossible to make that determination.

[28] In a separate argument, the Respondents submit that the entire Application is time barred, having been commenced more than two years after the closing of 104 Inc.’s acquisition of the Property. The Applicants, on the other hand, contend that they did not know of Mr. Zhang’s secret profit and deception of them until making further inquiries years after the closing.

[29] In general, a limitation period is not tolled if the party bringing the claim sat on its hands; at the same time, a limitation period does not start to run until the party bringing the claim has, through the exercise of due diligence, discovered its existence: Albert Bloom Limited v. Longdon Transit Commission, 2021 ONCA 74, at para 38. The facts going to the limitation issue are not definitively established in the record before me, and so remain a matter of credibility and dispute.

[30] Counsel for the Respondents submit that, separate from the liability issues which they contest, the draconian remedies sought by the Applicants go much further than necessary to redress any alleged oppression relating to the mark-up imposed on the purchase and sale of the Property by Mr. Zhang. Under the circumstances, it is hard not to agree with that view.

[31] Based on the offers received for the Property which, as indicated, go as high as $12,250,000, the Respondents’ 30% interest in 104 Inc. is worth several million dollars. Cancellation of the Respondents’ shares and removal of them as directors of 104 Inc. would result in a windfall to the Applicants as the remaining shareholders. Moreover, it would give the Applicants absolute control over the corporation. That is not something that the Applicants ever expected to have, and so does not appear to be a measure designed to remedy a breach of their reasonable expectations as shareholders: Naneff v. Con-Crete Holdings Ltd..

[32] Realistically, any removal of the Respondents as shareholders in 104 Inc. would likely require expert evidence. The shares would have to be valued – i.e. the Property would have to be appraised – so that compensation could be calculated for any cancelled shares. Compensation for any wrongdoing found to have been done to the Applicants would then be deducted from the present value of the Respondents’ shares.

[33] Any remedial approach that deprives the Respondents of their shares in 104 Inc. but that does not take into account the present value of those shares would be more punitive than compensatory. Respondents’ counsel submit that the Applicants’ seeking of an uncompensated forfeiture of the Respondents’ shares is done for more for tactical than remedial purposes: Catalyst Fund General Partner I Inc. v. Hollinger Inc., at paras 53, 55 (Ont CA). It is the Respondents’ position that the Applicants are attempting to gain a quick windfall profit in the guise of seeking a remedy, since an important part of the evidence required to fashion any appropriate remedy is not part of the record.

[34] Respondents’ counsel point out that Rule 38.10 of the Rules of Civil Procedure authorizes the court to convert an Application to an action. Likewise, section 241(3)(n) of the CBCA authorizes the court to order the trial of any issues.

[35] The allegations in the record put material facts directly in dispute. There are conflicting versions of events about the content of supposed oral agreements, there is conflicting evidence about the arrangement between the parties with respect to the acquisition of the Property, and there is conflicting evidence about when, exactly, the parties reached an agreement. Given current business practices, surprisingly little of what was discussed between the parties was recorded in writing.

[36] Moreover, both sides have levelled serious allegations against each other. These include fraud, threats of arrest and even of violence and death, and various forms of extortion. In addition, the importance and impact of the Application and the relief sought by the Applicants is highly significant in that they are seeking to seize the Respondents’ shares in a company that owns a Property valued in the range of $12,250,000 based on offers received.

[37] In my view, despite the fact that an oppression remedy most typically proceeds by way of application, a trial with viva voce evidence is required in order for a proper determination of the issues to be made here: Metropolitan Toronto Condominium Corporation No. 747 v. Korolekh, 2010 ONSC 4448, at para 57. With material facts in dispute, serious issues of credibility at stake, and a weighing of complex evidence necessary to the analysis of the transactions in issue, the matter will benefit from an exchange of pleadings and full discovery: Fort William Indian Band v. Canada.

[38] The matter should therefore proceed by way of an action: Metropolitan Toronto Condominium Corporation No. 965 v. Metropolitan Toronto Condominium Corporation No. 1031, 2014 ONSC 4458, at para 13. A trier of fact must be in a position to conduct an in-depth and nuanced inquiry into the business relationship between the parties. Under the circumstances, it is this kind of analysis that will be available with a trial and that is required to achieve a just determination of the matters in dispute: see Macreanu v. Godino, 2020 ONSC 535, at paras 105-106.

[39] Furthermore, allegations of shareholder oppression are necessarily fact-specific. What is just and equitable is judged by the reasonable expectations of the shareholders in the context of the specific relationships at play; conduct that may be oppressive in one situation may not be in another: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 SCR 560, at para 59. It does not appear to me to be feasible to engage in that kind of close factual analysis of this dispute based on the paper record alone.

Disposition

[40] This Application is to be converted to an action. The Applicants are to serve a Statement of Claim within 30 days of the date hereof, and the Respondents are to serve a Statement of Defense within 30 days of receiving the Statement of Claim. The Applicants are to serve a Reply, if their counsel deems it necessary, within 20 days of receiving the Statement of Defense.

[41] After the exchange of pleadings, the timelines set out in the Rules for all subsequent stages of the action shall apply. The cross-examinations conducted to date shall count as examinations for discovery. The examinations may otherwise proceed as set out in the Rules, but any examinations of persons already cross-examined here shall not repeat what has been covered in those cross-examinations.

[42] Costs of this Application are reserved to the trial judge or judge making a final disposition of the action.

Date: August 9, 2023 Morgan J.