Court File and Parties

COURT FILE NO.: CV-19-625172 RELEASED: 2023/08/08 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Weining Tan v. MadShare Inc., Junyu Zeng, Reed Zhao, Realjaja Group Inc., Lionsgate Investment Inc., Yangfan Yuan, Changzhong Xu and HouseSigma Inc.

BEFORE: Associate Justice Graham HEARD: August 1, 2023

APPEARANCES: Emily Durst for the plaintiff Heyla Vettyvel for the defendant HouseSigma Inc. A. Subzwari for the Madshare Inc. defendants

Endorsement

(Plaintiff’s and defendants’ motions to compel production of documents refused at examinations for discovery)

[1] The plaintiff Weining (William) Tan alleges that in September 2016 he was approached by the defendant Zeng to discuss writing a U.S. patent for the defendant MadShare Inc. and to join MadShare as a founding shareholder. Mr. Tan’s work was primarily to develop algorithms for an application called HouseSigma which would employ artificial intelligence in real estate sales and investment.

[2] Mr. Tan and Mr. Zeng agreed to terms of employment, effective February 2, 2017, whereby Mr. Tan would be named a Co-Founder of Madshare Inc. and its Chief Science Officer, and, inter alia, Mr. Zeng would transfer to him 100,000 of his common shares in Madshare. There was to be a shareholder’s agreement which the defendants contend contained a three-year reverse vesting, one-year cliff clause, meaning that Mr. Tan would not become a shareholder in Madshare Inc. until he had been employed for one year. Mr. Tan, and the defendants Mr. Zeng, Mr. Zhao and Mr. Xu executed a Unanimous Shareholders Agreement (“USA”) on February 2, 2017.

[3] Mr. Tan alleges that he completed the algorithms and software code for the HouseSigma application, the first phase of which was released to the public in September, 2017, and that “it quickly became a very popular application.” Despite the success of the HouseSigma application, Mr. Zeng terminated Mr. Tan’s employment with MadShare without notice on October 30, 2017.

[4] Mr. Tan alleges that following the termination of his employment with Madshare, Madshare did not exercise its option to buy back his shares and he remained an inactive shareholder. On December 21, 2017, Mr. Zeng informed Mr. Tan that he was not a registered shareholder of Madshare as his employment did not pass the one-year “cliff stage” provided for in the USA.

[5] HouseSigma Inc. was incorporated on July 9, 2018. Also on July 9, 2018, by way of an Assignment and Transfer Agreement (“ATA”), all of MadShare’s intellectual property in the HouseSigma App was transferred to the defendant HouseSigma Inc.. The consideration for the transfer was the issuance of shares in HouseSigma Inc. to the existing shareholders of MadShare, identified as the defendants Mr. Zeng, Mr. Zhao and Lionsgate Investment Inc.. Mr. Tan, who alleges that he remained an inactive shareholder of MadShare, received no notice of the ATA, and received no consideration for the transfer of the shares and intellectual property rights.

[6] In February, 2022, Mr. Tan obtained an order amending his statement of claim to add HouseSigma Inc. as a defendant. He seeks a declaration that he holds a 10% interest in HouseSigma Inc. and an order that the defendants be compelled to purchase his shares for fair market value.

[7] The issues in the action are whether Mr. Tan became entitled to the 100,000 shares in MadShare before the termination of his employment on October 30, 2017 and by extension became entitled to shares in HouseSigma Inc., and if so, what is the value of those shares, and what damages, if any, is he entitled to arising from his termination.

[8] On this motion, Mr. Tan seeks production of documents from both MadShare Inc. and HouseSigma Inc. for the purpose of determining the value of their shares. Specifically, in item (b) of his notice of motion, Mr. Tan seeks an order compelling HouseSigma Inc. to produce annual financial statements from 2018 to date, detailed general ledgers from 2018 to date, details of wages paid to all shareholders and related parties and of non-recurring revenues or expenses included in the financial statements in each of the five fiscal years prior to the “valuation date”, T2 corporate income tax returns for the fiscal years ending 2018 to present, and the shareholders’ ledger for the corporation from 2018 to present.

[9] In item (a) of his notice of motion, Mr. Tan also moves to obtain the same categories of documents from MadShare Inc. from 2017 to date.

[10] In addition to responding to the plaintiff’s motion against it, HouseSigma Inc. moves to compel production of documents from the plaintiff, as set out below.

Motion of the plaintiff re: refusals of the MadShare Inc. defendants

[11] Counsel for the plaintiff advises that the response provided by the MadShare Inc. defendants in the affidavit of Mr. Zeng sworn July 19, 2023 is sufficient to address the motion today. There was some disagreement at the hearing between the plaintiff’s and MadShare’s counsel as to the form and content of the order in relation to MadShare, and counsel agreed to confer to attempt to resolve the issues in that regard.

Motion of the plaintiff re: refusals of the defendant HouseSigma Inc.

[12] Plaintiff’s counsel submits that the focus of Mr. Tan’s claim is that MadShare’s transfer of the HouseSigma App to HouseSigma Inc. entitled him to shares in HouseSigma Inc. and his motion is to obtain the information required to value those shares.

[13] The issue on the motion is whether the documents sought by the plaintiff are relevant to the issues in the action. As stated by the Supreme Court of Canada in Glegg v. Smith & Nephew Inc., 2005 SCC 31, at para. 21, “relevance [at examinations for discovery] is assessed mainly in relation to the allegations set out in the pleadings.” Relying on Holbrook v. FX Displays Packaging Logistics Inc., 2017 ONSC 4757, at para. 39, the plaintiff submits that financial records required to reach a valuation of shares in an oppression claim are relevant documents, so the HouseSigma Inc. financial records are relevant to the issue of the valuation of the HouseSigma Inc. shares.

[14] Mr. Tan submits that the relevance of the documents in issue are established by the following paragraphs in the Statement of Claim (“S/C”):

• 1(b): He claims a declaration that he has a 10% ownership in HouseSigma Inc.;
• 1(c): He claims an order requiring the Defendants to purchase his ownership interest in MadShare Inc. or HouseSigma Inc. for fair market value;
• 1(j): He claims inter alia (ii) an order that the Defendants or one of them purchase the shares of the Plaintiff, (iii) an Order providing valuation and directions with respect to the sale of the shares, and (iv) an Order compensating him as an “aggrieved person” under s. 248(3)(j) of the oppression remedy provision of the Business Corporations Act, R.S.O. 1990, c. B. 16;
• 42,44-47,51: He alleges oppressive conduct by “the Defendants”, which include HouseSigma Inc..

[15] Plaintiff’s counsel submits that, while the motion is concerned with production issues based on the pleadings, much of HouseSigma’s response to the motion is concerned with the merits of the action. The valuation date for the HouseSigma Inc. shares is a significant issue. HouseSigma’s position is that the valuation date is the date of the Assignment and Transfer Agreement of July 9, 2018. Mr. Tan submits that he is a current shareholder of HouseSigma Inc. and is therefore entitled to recover the current value of his shares.

[16] The plaintiff seeks an order (S/C paras. 1.(b) and 38) that he “has a 10% ownership in HouseSigma Inc.”, i.e. that he is a current shareholder of HouseSigma Inc.. These pleadings and his claim in para. 1(c) for an order requiring the defendants to purchase his ownership interest in HouseSigma Inc. “for fair market value” open the door to a valuation of the HouseSigma Inc. shares based on their current value. The appropriate valuation date is to be determined at trial, not on this motion.

[17] HouseSigma Inc. submits that they will be prejudiced by disclosure of relevant documents which constitute “sensitive information” because HouseSigma Inc. has other competitors who would benefit from the information. In response to HouseSigma’s argument that Mr. Tan may misuse the records sought, the plaintiff acknowledges that he is bound by the deemed undertaking in Rule 30.1.01:

30.1.01(1) This rule applies to (a) evidence obtained under, (i) Rule 30 (documentary discovery), (ii) Rule 31 (examination for discovery), . . . (3) All parties and their lawyers are deemed to undertake not to use evidence or information to which this Rule applies for any purposes other than those of the proceeding in which the evidence was obtained.

[18] Counsel for HouseSigma Inc. submits that the documents in issue are not relevant for three reasons:

1. The plaintiff has not sought a valuation of the HouseSigma shares in the statement of claim.
2. The single act of oppression alleged occurred on July 9, 2018 and the Business Corporations Act does not enable a plaintiff seeking an oppression remedy to pick the most favourable possible valuation date.
3. The statement of claim pleads breach of contract, which is the date of the transfer of the technology, which occurred on July 9, 2018, so documents subsequent to 2018 are not relevant.

[19] With respect to the first of these submissions, counsel for HouseSigma refers to S/C para. 1(g) where the plaintiff seeks “orders permitting full disclosure, an accounting, and valuation of MadShare Inc. ” (emphasis added) but seeks no similar order with respect to HouseSigma Inc.. Similarly, in S/C paragraph 68, the plaintiff seeks “a full accounting and audit of the Corporation [i.e. MadShare Inc.] and the Defendants’ respective shareholdings.”

[20] With respect to the second submission, counsel relies on S/C para. 38, in which the plaintiff pleads that as of July 9, 2018 he remained an Inactive Shareholder of MadShare and/or an Existing Shareholder under the ATA, so that “accordingly, he has a 10% interest in HouseSigma Inc..”

[21] With respect to their third submission, counsel relies on S/C para. 40(d) in which the plaintiff alleges that the breach of contract by the defendants (which include HouseSigma Inc.) includes that they “failed to purchase the Plaintiff’s shares as at the date of the ATA.” Further, in paragraph 48, addressing the defendants’ alleged oppressive conduct, the plaintiff pleads:

48 The Plaintiff states that the Corporation [i.e. MadShares Inc.] assigned the intellectual property rights of the HouseSigma Application to HouseSigma, a non-arm’s length party, for less than fair market value.

[22] Based on this pleading, the plaintiff’s oppression claim, which is the foundation for his claim for valuation of the HouseSigma Inc. shares and by extension for the production order sought on this motion, can only relate to the July 9, 2018 ATA, so only HouseSigma’s documents from 2018 can be relevant to the valuation of those shares.

[23] With respect to the appropriate valuation date for the HouseSigma shares, their counsel refers to Booth v. Alliance Windsor Insurance Brokers, 2007 ONCA 805, at paras. 6, 7, and 10-12:

6 . . . [T]he respondent sought a declaration that the appellants acted in an oppressive manner contrary to s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16. As relief, the respondent sought an order valuing his common shares and requiring the appellants to pay the value of those shares to him. 7 . . . On May 30, 2006, after a lengthy trial, the trial judge found that the appellants’ conduct had been oppressive, and he ordered that the appellants buy the respondent’s common shares valued as of September 30, 2005, (the most recent financial year end of the corporate appellant). . . . 10 The appellants do not challenge the trial judge’s finding of oppression. 11 The appellants argue only that the trial judge erred in selecting September 30 2005 as the valuation date for the common shares. They argue he should have used the date of the respondent’s termination in December 2001 or the date the respondent commenced his action, July 17, 2002. 12 In determining the valuation date for valuing shares in cases like this the court should select the fairest date based on the particular facts. There is no rigid rule or formula. Rather, all of the circumstances of the case must be considered in making the decision. See Chiaramonte v. World Wide Importing Ltd. (1996), 28 O.R. (3d) 641 (Ont. Gen. Div.) at 656

[24] On the issue of the appropriate valuation date for the HouseSigma Inc. shares, their counsel also refers to Bimman v. Neiman, 2017 ONCA 264, at para. 52:

52 Valuation is more art, than an exact science; mathematical certainty is not demanded, because it is not possible: Debora v. Debora (2006), 83 O.R.(3d) 81 (Ont. C.A.). A valuation exercise must look at the situation as of the valuation date. Hindsight information generally is not relevant to the valuation exercise, except for the purpose of measuring the accuracy of projections or testing the assumptions used by valuators [citations omitted].

[25] HouseSigma’s counsel also submits that there would be prejudice to HouseSigma Inc. if it were ordered to produce documents, owing to the competitive nature of the business. They rely on statements in the affidavit of its CEO, the defendant Mr. Zeng, to the effect that Mr. Zeng is concerned that Mr. Tam may misuse its documents because he has misrepresented in his LinkedIn profile and in his corporation TaaCam Inc.’s website that he was a co-founder and Chief Science Officer of HouseSigma Inc. and that HouseSigma was one of his clients.

Ruling:

[26] The issues on the motion are whether the HouseSigma Inc. documents sought on this motion are relevant to the plaintiff’s oppression claim and if so, whether those documents should be produced only for 2018, because the alleged oppression is based on the July 9, 2018 ATA, or until the present, based on a possible valuation of the HouseSigma Inc. shares as of the date of trial.

[27] HouseSigma Inc. submits that the only oppressive conduct alleged on their part is the transfer of MadShare’s intellectual property in the HouseSigma App in exchange for shares in HouseSigma Inc., so the plaintiff appears to be seeking a valuation of only the MadShare Inc. shares. Regardless, counsel also submits that allegations in the statement of claim do point to a specific valuation date for the HouseSigma Inc. shares, being July 9, 2018, the date on which those shares were issued to the shareholders of MadShares Inc..

[28] I disagree with HouseSigma’s submission that the documents that would assist in the valuation of the HouseSigma Inc. shares are not relevant because the plaintiff has not sought a valuation of the HouseSigma shares in the statement of claim. The following pleadings in paragraph 1 of the statement of claim, read together, constitute a claim for the valuation of the HouseSigma Inc. shares:

1. The Plaintiff claims, as against the Defendants [which include HouseSigma Inc.] . . . : (b) . . . a declaration that the Plaintiff has a 10% ownership in HouseSigma Inc. . . (c) an order requiring the Defendants, [again including HouseSigma Inc.] or any one of them, to purchase the Plaintiff’s ownership interest in MadShare Inc. and/or HouseSigma Inc. . . . for fair market value ; . . . (i) declarations pursuant to section 248 of the Ontario Business Corporations Act, R.S.O. 1990 c. B. 16 (the “Act”), that: (i) the acts or omissions of MadShare Inc. and/or HouseSigma Inc. , or any of its affiliates, has effected or threatens to effect a result that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of the Plaintiff as shareholder . . . ; (j) interim and permanent Orders pursuant to section 248 of the Act : . . . (ii) an Order that the Defendants, or one of them, purchase the shares of the Plaintiff; (iii) an Order providing valuation and directions with respect to such sale ; [emphasis added throughout]

[29] Specifically, implicit in the plaintiff’s claims for orders that the defendants (including HouseSigma Inc.) purchase his ownership interest in HouseSigma Inc. “for fair market value” and “providing valuation and directions with respect to such sale”, is that a valuation of what the plaintiff contends should be his HouseSigma Inc. shares will be required.

[30] I therefore accept that the categories of documents set out in item (b) of the plaintiff’s notice of motion and in paragraph [8] above are relevant to the issue of the valuation of the HouseSigma Inc. shares.

[31] HouseSigma Inc. submits, in the alternative, that if they are required to produce financial documents that would assist in the valuation of its shares, any such production should be limited to 2018, based on the July 9, 2018 ATA that resulted in the transfer of the HouseSigma App to HouseSigma Inc. in exchange for the issuance to the MadShare Inc. shareholders of shares in HouseSigma Inc..

[32] Based on Booth v. Alliance Windsor Insurance Brokers, supra, “In determining the valuation date for valuing shares . . . all of the circumstances of the case must be considered in making the decision”. Further “there is no rigid rule or formula.” These statements mean that the trial judge hearing this case could ultimately arrive at one of a number of possible valuation dates for the HouseSigma Inc. shares including the July 9, 2018 date of the ATA as the date of the allegedly oppressive conduct against the plaintiff, or the date of trial on the basis that Mr. Tan continues to be a shareholder.

[33] The point is that I cannot speculate as to what the trial judge will conclude in this regard so the scope of production of documents relevant to the valuation of the HouseSigma Inc. shares must take into account a range of possible valuation dates. As one of the possible valuation dates is the date of trial, HouseSigma Inc. shall produce the documents in item (b) of the notice of motion to the present.

[34] HouseSigma Inc. also submits that it should not be required to produce the requested documents because in recent years, it has faced significant competition from companies seeking to offer similar services to the public, and the disclosure of its commercially sensitive financial information to the public would cause it significant harm. It relies on the statements in Mr. Zeng’s affidavit to the effect that he is concerned that Mr. Tam may misuse its documents because he has misrepresented in his LinkedIn profile and in his corporation TaaCam Inc.’s website that he was a co-founder and Chief Science Officer of HouseSigma and that HouseSigma was one of his clients.

[35] In response to HouseSigma’s argument that Mr. Tan may misuse the records sought, the plaintiff acknowledges that he is bound by the deemed undertaking in Rule 30.1.01, which applies to evidence obtained through documentary and oral discovery and, as indicated above, stipulates that:

30.1.01(3) All parties and their lawyers are deemed to undertake not to use evidence or information to which this Rule applies for any purposes other than those of the proceeding in which the evidence was obtained.

[36] Mr. Zeng’s evidence that Mr. Tan misrepresented his status in relation to HouseSigma Inc. does not lead to the conclusion that he would breach the deemed undertaking rule if the documents sought were ordered to be produced. However, to ensure that the plaintiff is aware of his obligations under Rule 30.1.01(3), the order that HouseSigma Inc. produce the documents in section (b) of the notice of motion hereby includes a term that Mr. Tan is bound by Rule 30.1.01(3) in respect of all documents produced.

Motion of the defendant HouseSigma Inc. re: plaintiff’s refusals

[37] Part of Mr. Tan’s claim is for damages for wrongful dismissal arising from the termination of his employment with MadShare Inc. as of October 30, 2017. From 2014 until February 2, 2017, when he commenced employment with MadShare, he was self-employed through TaaCam Inc., a federally incorporated company of which he is the sole officer and director. With respect to his employment with MadShare Inc., Mr. Tan alleges that:

• he was an “Employee Shareholder” of MadShare (S/C para. 54);
• he was induced by the defendants to stop working for his own companies to work for MadShare (para. 55);
• he was induced to accept the position of Co-Founder of MadShare Inc. based on the representations of the defendant Zeng, and he accepted a reduction in pay as a result of those representations (paras. 57 and 58).

[38] In their statement of defence (para. 25) HouseSigma Inc. pleads that if the plaintiff suffered any damages, he failed to mitigate his damages.

[39] At Mr. Tan’s examination for discovery, his counsel took under advisement the defendants’ request for production of his income tax returns for 2013-2018 and of the financial statements of his corporation TaaCam Inc. for 2013-2018.

[40] Counsel for HouseSigma Inc. submits that the documentation requested from Mr. Tan is relevant to his allegation that he accepted a reduction in pay to work for MadShare Inc., and also to the defendants’ allegation that he failed to mitigate his damages. Specifically, in 2013, Mr. Tan worked for IMAX and his salary at IMAX could be used to test his allegation that “he accepted a reduction in pay” when he agreed to work for MadShares Inc.. With respect to the post-termination documents requested from TaaCam Inc., Mr. Tan’s discovery evidence is that he operated through TaaCam after October 2017 but took no money from it, so he may have had earnings through TaaCam that were not reflected in his personal income tax returns.

[41] Plaintiff’s counsel submits that the requested documents going back to 2013 are not relevant to the allegations relating to his termination in 2017. Counsel also submits that, although the notice period with respect to the plaintiff’s termination would extend into 2018, his income tax returns and TaaCam Inc.’s financial statements for 2017 and 2018 would reflect personal or his corporation’s income for those entire years and would not be limited to any reasonable notice period following October 30, 2017.

Ruling:

[42] Relevance of documentary evidence under Rules 30.02(1) and 30.06 is determined by the pleadings. The plaintiff has pleaded that he was induced by representations made by the defendant Zeng to accept both the position at MadShares Inc. and a reduction in pay. Documents that would reflect his income prior to his employment at MadShares Inc. would enable the defendants to test this allegation and are therefore relevant. His employment with Madshares began in February, 2017 and his relevant pre-employment income would be for a reasonable period leading up to February 2, 2017. The plaintiff’s pre-employment income would also be some indication of what would constitute reasonable post-termination mitigation. A reasonable starting point for the plaintiff to produce both his personal and corporate records would be 2015, or approximately two years before his employment with Madshares Inc. began.

[43] In his statement of claim (para. 61), the plaintiff claims that “he is entitled to reasonable notice of the termination of his employment in an amount not less than five months”. Based on the plaintiff’s own assessment of a reasonable notice period, the notice period would extend into 2018. I accept that annual tax returns and financial statements likely do not reflect income for each individual month, but they would reflect whether the plaintiff had earnings other than from MadShares in 2017 and from any source in 2018. Any such information would be the basis for reasonable enquiries that could plausibly enable any monthly income during the notice period to be ascertained.

[44] For these reasons, I conclude that the plaintiff’s personal income tax returns and the financial statements of TaaCam Inc. for 2015-2018 are relevant to the plaintiff’s claims and shall be produced.

Costs

[45] Counsel advised that they were not able to agree on costs and, despite the requirement in rule 57.01(6), they did not exchange costs outlines or file costs outlines at the hearing. If counsel can still not agree on costs, they shall exchange costs outlines on August 11, 2023 at 4:00 p.m. and deliver written submissions not exceeding three pages, the plaintiff by August 18, 2023 and the defendant by August 25, 2023. They shall file their costs submissions with ATC Teanna Charlebois (teanna.charlebois@ontario.ca). If they can agree to the disposition of costs, they shall inform Ms. Charlebois forthwith.

ASSOCIATE JUSTICE GRAHAM Date: August 8, 2023