Court File and Parties
Court File No.: CV-22-00683918-0000 Date: 2023-12-15 Superior Court of Justice - Ontario
Re: Peter McGrath and Setter Capital, Inc., Applicants And: Simren Desai, SSD Enterprises, The Hiive Company Limited, Hiive Markets Limited and Hiive Technology Limited, Respondents
Before: Vermette J.
Counsel: Daniel Z. Naymark and Terrence Liu, for the Applicants Cynthia Spry and Aaron Gold, for the Respondents
Heard: November 24, 2023
Endorsement
1This is an oppression application. In this motion, the Applicants move for an interlocutory Order:
a. prohibiting the Respondents from taking any steps that would reduce the shareholdings of the Applicants in The Hiive Company Limited, Hiive Markets Limited and Hiive Technology Limited (collectively, “Hiive”) to below 30% of Hiive’s overall shares;
b. prohibiting the Respondents from entering into any shareholder agreement in respect of Hiive, except with the express, written consent of the Applicants or further order of this Court;
c. prohibiting the Respondents from distributing any amounts to shareholders, whether in the form of a dividend or other disbursement pursuant to a Trigger Event (defined below), without the Applicants’ consent or further order of this Court;
d. prohibiting the Respondents from making any payments by Hiive to non-arm’s length parties, other than reasonable salary amounts to Hiive employees and its directors, except with the consent of the Applicants or further order of this Court;
e. prohibiting the Respondents from using or disclosing confidential or proprietary information relating to the business of Setter that is outside of the scope of the information listed in the Investment Agreement (defined below);
f. prohibiting the Respondents from taking any steps to sell, divest, transfer or otherwise dispose of any Hiive assets, other than for fair market value to an arms-length party, except with the consent of the Applicants or further order of this Court;
g. requiring Hiive to retain sufficient cash on hand to pay out the Applicant Peter McGrath’s Guaranteed Dividend (defined below);
h. invalidating the salary raise given to the wife of the Respondent Simren Desai, Sarah Huggins, in the face of this motion; and
i. requiring the Respondents to provide the Applicants with access to Hiive’s books and records to which shareholders are entitled under the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”).
2The relief set out above is the relief sought by the Applicants in their Factum. The relief they originally sought in their Notice of Motion was slightly different.
3The Respondents have brought a cross-motion for an order that this Application proceed as an action and that it be consolidated with, or heard at the same time as or immediately after, the action commenced by the Respondents in Court File No. CV-23-00704696-0000 (“Action”).
4I dismiss the Applicants’ motion as they do not meet the test for an interlocutory injunction. However, the Respondents’ cross-motion is granted.
5I will first deal with the Applicants’ motion.
A. FACTUAL BACKGROUND
1. The parties
6The Applicant Setter Capital, Inc. (“Setter”) is an Ontario corporation that carries on business as a broker-dealer in the secondary market for private securities. The Applicant Peter McGrath is Setter’s principal.
7The Respondent Simren Desai was previously employed as Setter’s Managing Director, Head of Venture Capital. His last day at Setter was January 31, 2022. The Respondent SSD Enterprises (“SSD”) is a sole proprietorship that is operated by Mr. Desai.
8The Respondent The Hiive Company Limited (“THCL”) is an Ontario corporation incorporated in August 2021. Mr. Desai and his wife, Sarah Huggins, are the directors of THCL. The Respondents Hiive Markets Limited (“HML”) and Hiive Technology Limited (“HTL”) are also Ontario corporations that were incorporated in August 2021. They are wholly owned subsidiaries of THCL. HTL recently amalgamated with THCL. THCL, HML and HTL are collectively referred to as “Hiive”. Hiive operates an online marketplace for secondary transactions in private venture capital backed companies.
2. Investment Agreement
9On July 22, 2021, SSD and Mr. McGrath entered into an agreement entitled “Investment Agreement” regarding a business described as follows: “an online marketplace for secondary transactions in private venture capital backed companies […] with natural expansions of business lines in the future as determined by its management and shareholders in their sole and collective discretion” (“Business”). The Business was to be transferred to a Canadian corporation or group of affiliated corporations. The parties agreed that the initial funding of the Business would be US$1.3 million, with Mr. Desai funding US$1 million and Mr. McGrath funding US$300,000.
10The Investment Agreement states that 60% of the initial stock of the new corporation would be issued to Mr. Desai or his family, 25% would be issued to Mr. McGrath or a designee, and 15% would remain unissued. Of the 15% that remained unissued, 10% would be held for arm’s length employees who receive shares as an incentive or compensation, and 5% would be held until December 31, 2023 and then released in accordance with the provisions of the Investment Agreement (“Reserved Shares”).
11The Investment Agreement provides that Mr. McGrath’s shares in the new corporation “may be issued to him after Newco’s formation but must be issued prior to” the end of Mr. Desai’s employment at Setter, which ended up being January 31, 2022.
12The Investment Agreement also provides that Mr. Desai was going to be the Chief Executive Officer of the Business and manage it “in his sole discretion to maximize value for shareholders with standard oversight from a board of directors typical of private technology companies.” Mr. McGrath or his designee was going to be “a passive investor with pro rata voting rights”.
13Section 5 of the Investment Agreement lists the consideration to SSD for Mr. McGrath’s 25% stake in the Business. The consideration includes the following:
a. Flexibility given to Mr. Desai since January 1, 2020 [sic] to pursue the Business while still employed at Setter.
b. Permission to Mr. Desai to work reduced hours at Setter for full pay. Mr. Desai had “complete freedom to pursue the Business and any related or required activities subject to his ongoing employment obligations to Setter.”
c. Investment of US$300,000 by Mr. McGrath into the Business. The funds could be called at any time after the execution of the Investment Agreement, even prior to the issuance of shares to Mr. McGrath.
d. After the end of Mr. Desai’s employment with Setter, the Business “may solicit any Setter contact, client or customer in any capacity including as customers or service providers of the Business”.
e. Provision of reference materials by Setter to Mr. Desai, subject to certain terms.
f. The Business could solicit and hire three Setter employees, subject to certain terms.
g. Provision of certain information by Setter, including a list of co-buyers and information on 100 companies chosen by the Business.
14The Investment Agreement states that the Reserved Shares are to be issued to Mr. McGrath or his designee in the event the Business does not complete one of three “Trigger Events”. If a Trigger Event is completed, then the Reserved Shares are to be issued to Mr. Desai or SSD in May 2024. One of the Trigger Events is described as follows in the Investment Agreement:
Receive a bona fide term-sheet from an arms-length investor for a capital raise of at least $US 3 million prior to December 31, 2023 and subsequently close a capital raise of at least $US 3 million from an arm’s length investor (who may or may not be same party who provided the initial term-sheet), prior to April 30, 2024.
15The Investment Agreement also provides that if a Trigger Event is not completed, or if the Business “effectively becomes a traditional broker-style model similar to that of Setter” at a time prior to 2023, then Mr. McGrath would receive as a dividend payment on a yearly basis a proportionate share of all revenues corresponding to his current shareholding percentage, after certain deductions (“Guaranteed Dividend”).
16The Investment Agreement states the following regarding the new corporation’s shareholder agreement:
All standard shareholder rights, such as anti-dilution and tag along rights and any other rights which are standard and customary in shareholders agreements for companies of this stage and nature, will be afforded to [Mr. McGrath and his designees] and will be documented in Newco’s shareholder agreement. The parties both acknowledge and represent that neither has received legal advice on what constitute standard rights in this context.
3. Breakdown in the relationship between the parties
17There is a significant amount of evidence before me with respect to the events that followed the execution of the Investment Agreement. Given my conclusion below, I find it unnecessary to discuss it in detail. It suffices to say that many issues arose between the parties in relation to the implementation of the Investment Agreement. Ultimately, Mr. McGrath was never issued shares in Hiive and Mr. Desai took the position that Mr. McGrath had repudiated the Investment Agreement in March 2022, which Mr. McGrath denies.
4. The Application
18This Application was commenced on July 12, 2022. Among other things, the Applicants seek:
a. a declaration that the Respondents have engaged in conduct that is oppressive, unfairly prejudicial to, or that unfairly disregards, the Applicants’ interests contrary to section 248 of the OBCA, and an order prohibiting them from continuing to act in a manner that is oppressive, unfairly prejudicial to, or that unfairly disregards the Applicants’ interests;
b. a declaration that Setter is the sole legal and beneficial owner of 25% of the common shares of Hiive (“Setter Shares”), and an order that the Setter Shares vest in Setter;
c. an order directing Hiive to issue the Setter Shares to Setter;
d. in the alternative, a declaration that the Respondents have breached the Investment Agreement and an order for specific performance of the Investment Agreement;
e. in the further alternative, an order imposing a constructive trust over 25% of the common shares in Hiive in favour of the Applicants;
f. to the extent necessary, an order to regulate Hiive’s affairs by amending the articles or by-laws and creating or amending a unanimous shareholder agreement;
g. an order removing Mr. Desai and Ms. Huggins as directors of Hiive and appointing independent directors in their place; and
h. in the alternative, an order requiring the Respondents to compensate Setter for the value of the consideration paid or contributed by Setter in exchange for the Setter Shares, or requiring the Respondents to purchase the Setter Shares for a purchase price equal to the greater of the fair market value of the Setter Shares without deduction or discount for a minority holding of shares or the value of the dividend payments expected to be received by Mr. McGrath or his designee.
19The parties have filed voluminous affidavit evidence in the Application, i.e., more than 4,500 pages of materials (including exhibits). On August 1, 2023, the Application was scheduled to be heard for a full day on January 9, 2025.
5. Evidence regarding irreparable harm
20The Applicants state in their Factum that this motion for an interlocutory injunction was “necessitated by court backlogs delaying the hearing of the underlying application to early 2025”, and that they seek to enjoin the Respondents from taking steps in the meantime that would frustrate the availability of the relief sought in the Application. They point out that the Respondents have refused to voluntarily refrain from taking such steps and their position is that the Respondents have improperly taken some steps after being served with this motion. They summarize their position as follows:
The applicants face irreparable harm without an injunction and the balance of convenience favours it. The applicants seek tailored interlocutory relief necessary to ensure that success on their application will not be Pyrrhic, chiefly preservation of shares and company assets while Desai remains in sole control. Desai expressly refuses to agree to protective terms.
21Mr. McGrath gives the following evidence in his affidavit regarding the issue of irreparable harm:
Without any visibility into Hiive’s affairs and with Desai taking the position that he is entitled to do whatever he pleases with Hiive as if I were not a shareholder, I am concerned that I may succeed on the ultimate application in 2025 only to discover that that success has been rendered hollow by steps taken by Desai in the meantime. In particular, I am concerned that I will become entitled to a Guaranteed Dividend (or have already) but that by the time this matter can be heard, Hiive will have paid out that money and will not be able to pay accrued dividends, rendering that entitlement unenforceable as a practical matter. I am also concerned that Hiive will change the shareholdings of Setter or enter into a shareholder agreement or a new USA, contrary to the terms of the Investment Agreement, which would make it impossible for me to affirm the shareholder status I am seeking in this litigation. Finally, I am concerned that Desai may distribute Hiive assets to non-arm’s length parties.
22The Applicants complain that Hiive entered into agreements with a number of investors in September 2023 under which the investors became entitled to Hiive shares. The Applicants also complain about the salary raise that Ms. Huggins was given in late September 2023 (from CAN$385,000 per year to CAN$470,000 per year). They argue that the Respondents’ conduct in taking these steps was inappropriate and high-handed because they were deliberately taken in contravention of pending injunctive relief.
23Mr. Desai’s evidence is that granting the relief requested by the Applicants would cause irreparable harm to Hiive. Among other things, he states the following in his affidavit:
By contrast to [Mr. McGrath]’s total lack of irreparable harm if the injunction is not granted, the effect on Hiive of granting the injunction would be catastrophic. It will very likely destroy the company.
In this injunction motion, [Mr. McGrath] is effectively asking this Court to prevent Hiive from properly compensating its employees (through bonuses or stock options), and throttle Hiive’s access to cash – and subject all Hiive’s salaries and other payments to [Mr. McGrath]’s determination of whether they are “reasonable” or not. This would be paralyzing.
An early stage technology company like Hiive, operating in a fiercely competitive market like ours, cannot possibly survive or compete, let alone thrive, under such constraints. If Hiive cannot properly compensate its employees, they will leave, and no new employees will replace them. If Hiive cannot change its capitalization, it will be unable to raise money and/or will be offside its agreements with its investors, and it will not be able to grow.
Even one of these, taken alone, would likely cause the company to fail.
As described above, Hiive already has a shareholder agreement dated October 5, 2022. Without it, we would not have been able to issue shares to employees, and would have been offside our agreements.
Without the ability to fundraise through arm’s length investors, and enter into shareholder agreements with these individuals, Hiive would lose the cash required to grow its business. It would also lose the crucial network, track record, influence and credibility provided by raising outside venture capital.
Any restriction on Hiive’s ability to pay bonuses or grant stock options would also be catastrophic. Part of Hiive’s business model is to pay lower salaries and incentivize employees through lucrative bonuses, including stock options. If we cannot incentivize employees in this way, the business will suffer. We will not be able to keep or attract top talent, and employee performance will be severely impacted. Hiive must retain the freedom to offer options to attract and retain talent, and to reward existing employees. Such employee compensation is common in private technology companies such as Hiive, as [Mr. McGrath] well knows (given that Setter is in the business of brokering shares obtained under such plans).
Any restriction in granting stock options will also place Hiive in breach of a number of its existing agreements. For example, Hiive will soon need to issue additional options to its Chief Technology Officer. The restrictions [Mr. McGrath] seeks would expose Hiive to significant litigation risk, including by our investors, employees and other interested parties.
24Mr. Desai’s evidence is that as of the date of his affidavit, i.e., September 29, 2023, Hiive was an active and growing business with more than US$7 million in cash and current receivables. Hiive is profitable and was able to repay a portion of Mr. Desai’s shareholder loan (approximately CAN$1.7 million) in August 2023 out of the net profits for that month alone.
25Mr. Desai points out that the United States Financial Industry Regulatory Authority requires HML to maintain strict net capital requirements. He also notes that Hiive operates in a highly-competitive market, and that its competitors are well-capitalized and growing rapidly. According to Mr. Desai:
Given how well capitalized and ambitious these competitors are, Hiive is in a race against time, and any constraint that would slow us down or limit our flexibility or agility could very well destroy us altogether.
B. DISCUSSION – MOTION FOR INTERLOCUTORY INJUNCTION
1. Applicable test
26In order to obtain an interlocutory injunction, a moving party must satisfy a three-part test (see RJR – MacDonald Inc. v. Canada (Attorney General), 1994 117 (SCC), [1994] 1 S.C.R. 311 at 348 (“RJR”)):
a. There is a serious issue to be tried.
b. The moving party will suffer irreparable harm if the injunctive relief is not granted.
c. The balance of convenience favours granting the injunction.
27When the type of injunction sought by the moving party is a mandatory interlocutory injunction, the first element of the test requires the moving party to demonstrate a strong prima facie case that it will succeed at trial. This entails showing a strong likelihood on the law and the evidence presented that, at trial, the moving party will be ultimately successful in proving the allegations set out in the originating notice. A mandatory injunction directs the defendant to undertake a positive course of action, such as taking steps to restore the status quo, or to otherwise “put the situation back to what it should be”, which is often costly or burdensome for the defendant. In characterizing an interlocutory injunction as mandatory or prohibitive, the motion judge has to look past the form and the language in which the order sought is framed in order to identify the substance of what is being sought. See R. v. Canadian Broadcasting Corp., 2018 SCC 5 at paras. 15, 16, 18 (“CBC”).
i. Serious issue to be tried vs. Strong prima facie case
28In this case, the parties disagree as to whether the injunctive relief sought is mandatory or not. In addition, the Respondents argue that the strong prima facie case test applies when injunctive relief is sought in an oppression action.
29I do not agree with the Respondents that the strong prima facie case test invariably applies in an oppression case. While this is suggested in some cases, doubts have been raised regarding such a stand-alone principle: see, e.g., Nada v. Besada, 2002 ONSC 2940 at para. 14. Further, I note that most of the authorities relied upon by the Respondents were decided before the decision of the Supreme Court of Canada in CBC, which discusses the applicability of the strong prima facie case test. Most importantly, in all of the cases relied upon by the Respondents, there was another basis to apply the strong prima facie case, such as the seeking of a mandatory injunction.
30In Gazit (1997) Inc. v. Centrefund Realty Corp., 2000 2277 at paras. 76-78 (Ont. S.C.) (“Gazit”), Blair R.S.J. (as he then was) stated that the strong prima facie case applied “where what is being sought is […] interlocutory relief based upon oppression remedy principles”. However, he concluded that the strong prima facie case applied in that case for a number of reasons. One of the reasons was that the “relief claimed is at least akin to that of a Mareva order, since what is being sought is a security-before-judgment type of order which will tie up Centrefund’s assets, preclude it from making payments in accordance with its contractual obligations to the Related Parties, and limit its ability to carry on its business in the ordinary course”: see Gazit at para. 78.
31In Amaranth L.L.C. v. Counsel Corporation, 2005 36453 (Ont. S.C.J.) (“Amaranth”), C. Campbell J. found that the strong prima facie case test was applicable to the motion for interim relief before him. While he referred to the statement in Guzit to the effect that the higher test was appropriate where interlocutory relief was sought based on oppression remedy principles, he concluded that it made practical sense to apply the higher test in that case because the effect of the relief sought involves, in effect, execution before judgment: see Amaranth at paras. 11 and 15. The relief sought in that case was an interim order requiring the respondent to place US$16 million (which represented the alleged value of the applicant’s shares) in a segregated trust account pending the determination of the application or, alternatively, requiring the respondent to advise the applicant of proposed asset purchase of any magnitude pending the hearing: see Amaranth at para. 2. Some of the relief sought in the present case is very similar to the relief sought in Amaranth.
32In my view, most of the relief sought by the Applicants is relief to restrain the Respondents from parting with their assets (including funds) so that they may be preserved in case the Applicants’ claim succeeds. This is especially the case with respect to the Applicants’ claim to the Guaranteed Dividend. Thus, the Applicants are, in effect, seeking execution prior to judgment. See Aetna Financial Services v. Feigelman, 1985 55 (SCC), [1985] 1 S.C.R. 2 at 10-11. Based on the authorities referred to above, the strong prima facie case test applies to the request for such relief.
33Further, some of the relief requested by the Applicants is in the nature of a mandatory interlocutory injunction, such as the relief seeking to preserve assets that are the subject matter of the dispute, i.e., the Hiive shares that Mr. McGrath says he is entitled to receive. As set out in Mr. Desai’s evidence, Hiive has entered into a number of agreements and the relief sought to protect the alleged shareholding of Mr. McGrath would require the Respondents to undertake a positive course of action, including taking steps to restore the status quo or to otherwise “put the situation back to what it should be”: see CBC at para. 15.1 Thus, the strong prima facie case test also applies to this type of relief.
ii. Irreparable harm and balance of convenience
34The word “irreparable” refers to the nature of the harm suffered rather than its magnitude. It is harm that either cannot be quantified in monetary terms or that cannot be cured, usually because one party cannot collect damages from the other. However, the fact that one party may be impecunious does not automatically determine the application in favour of the other party who will not ultimately be able to collect damages, although it may be a relevant consideration. See RJR at 341.
35Irreparable harm must be real and substantial. The evidence establishing irreparable harm must be clear and not speculative. Bald allegations or general beliefs or concerns, without factual underpinning establishing a reasonable likelihood of irreparable harm, do not satisfy this requirement. See Dilico Anishinabek Family Care v. Her Majesty the Queen (Ontario), 2020 ONSC 547 at para. 8 (Div. Ct.) and U.S. Steel Canada Inc. (Re), 2023 ONCA 569 at para. 27.
36The Applicants submit that where interim relief is sought under subsection 248(3) of the OBCA, the court “has discretion to forego compliance with either or both of the irreparable harm and balance of convenience requirements of the [interlocutory injunction] test where fairness so dictates.” Subsection 248(3) of the OBCA provides that the court may make any interim or final order that it thinks fit in connection with an oppression application under section 248 of the OBCA.
37The Applicants rely on the decision of Pepall J. (as she then was) in Le Maitre Limited v. Segeren, 2007 18735 at para. 30 (Ont. S.C.J.) (“Le Maitre”), where she stated the following:
It seems to me that generally the principles for the granting of interlocutory injunctive relief should be applicable to section 248(3) interim relief that is in the nature of an injunction. This is in the interests of predictability and certainty in the law. As such, typically, a moving party should not expect to obtain interlocutory injunctive relief unless it is able to successfully address the factors to be considered on such a motion. That said, there may be some circumstances where interim relief pursuant to section 248(3) is merited absent all of the traditional considerations associated with an interlocutory injunction. The dictates of fairness may be so overwhelming that it may be appropriate to forego compliance with any one or all of the balance of convenience, irreparable harm or an undertaking as to damages. In my view, such an approach is consistent with the broad nature of the oppression remedy, the language of section 248(3), and with cases such as […].
38As noted by Perell J. in Lakhani v. Gilla Enterprises Inc., 2019 ONSC 1727 at para. 37 (“Lakhani”), Le Maitre stands for the proposition that, generally speaking and except in rare circumstances, the principles for granting interlocutory injunctive relief apply when injunctive relief is sought in the context of an oppression case.
39I find that the test for interlocutory injunctive relief applies in this case. As was the case in Lakhani, it cannot be said in this case that the dictates of fairness are so overwhelming that it is appropriate to forego compliance with any part of the test. See Lakhani at para. 38. In my view, while there may be weaknesses in the Respondents’ case and questions can be raised with respect to some of their conduct, the same can be said about the Applicants and their case.
40Further, in the current context of backlog and scarce judicial resources, where the provision of urgent hearing dates for urgent matters is difficult at times, I see no valid reasons to allow parties in oppression cases to obtain urgent dates and scarce resources for interlocutory injunction motions – which are presumed to be urgent – if the matter is not truly urgent and does not involve alleged irreparable harm.
2. Application to this case
i. Strong prima facie case
41Given my view on the issue of irreparable harm, I find it unnecessary to address the issue of whether the Applicants have met the first part of the test for an interlocutory injunction, with one exception. The exception relates to the relief sought in the Application to preserve Mr. McGrath’s alleged right be a 25% or 30% shareholder of Hiive.
42The request for this relief is based on the premise that the Applicants would be able to obtain, in effect, an order for specific performance of the Investment Agreement (either at common law or under section 248 of the OBCA) with respect to the issuance of shares to Mr. McGrath.
43The Applicants state in their Factum that “the Court of Appeal has endorsed specific performance for purchases of shares in private companies.” The authority cited in support of this statement is UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd., 2009 ONCA 328 (“UBS”). In UBS, the Court of Appeal recognized that specific performance may be ordered in connection with the shares of a private company because such shares may not be readily available on the market and valuation can be difficult. The Court of Appeal also stated that “[t]he uniqueness of the property that is the subject of the contract is one, non-determinative factor in deciding the appropriateness of specific performance.” Other factors that play a role in the specific performance analysis include the inadequacy of damages as a remedy and the behaviour of the parties: see Lucas v. 1858793 Ontario Inc. (Howard Park), 2021 ONCA 52 at para. 77 (“Lucas”).
44I note that the UBS case was about the purchase and sale of 100,000 shares of the Montreal Exchange (Bourse de Montréal Inc.). Thus, the UBS case was dealing with very different circumstances, and did not involve a small startup company run by a couple. I also note that whether specific performance is to be awarded is a question that is rooted firmly in the facts of an individual case and depends on what would better serve justice between the parties. See Lucas at para. 71.
45I am not satisfied that the Applicants have shown a strong prima facie case with respect to the relief they seek in the Application in the nature of specific performance regarding the issuance of Hiive shares. In other words, I am not satisfied that there is a strong likelihood on the law and the evidence presented that the Applicants will ultimately be successful in obtaining this relief.
46While shares in Hiive could be characterized as “unique”, it is my view that the Applicants’ interest in Hiive’s shares is monetary. Given that they have not been involved in Hiive’s operations, “it is hard to imagine what legitimate interest they could have, other than a purely monetary one as shareholders.” See Kuksis v. Physical Planning Technologies Inc., 2004 36070 at para. 31 (Ont. S.C.J.) (“Kuksis”). If only money is at stake, then damages are an adequate remedy. As pointed out by the Court of Appeal, “money damages are well-suited to satisfy purely financial interests”: see Lucas at para. 78.
47Further, there is no evidence that a valuator would be unable to determine a fair value for the shares that the Applicants may be entitled to hold in Hiive. If the shares can be valued, then any harm related to such shares can be compensated by damages. See Kuksis at para. 30.
48In any event, given the equitable nature of the remedy sought and the fact that the relationship between the parties is irretrievably broken, I find that it is highly unlikely that a court would exercise its discretion to allow Mr. McGrath to become a 25% or 30% shareholder of Hiive which, again, is a small startup company run by a very small number of people. In light of the conduct of the parties, such an order would, in my view, be a recipe for more disputes and more litigation, which would ultimately have a detrimental effect on Hiive (including its employees and clients). Thus, such an order would not be the best remedy to serve justice between the parties.
49Accordingly, I conclude that the strong prima facie case test is not met with respect to the relief in the nature of specific performance that is sought by the Applicants in the Application. Consequently, the request for such relief in the Application does not provide a basis for the interlocutory relief that the Applicants are seeking on this motion.
ii. Irreparable harm and balance of convenience
50The parties’ evidence regarding irreparable harm is discussed above.
51The Applicants state the following in their Factum on this issue:
In any event, the record on this motion shows that the applicants will suffer irreparable harm if interlocutory relief is not granted. The applicants continue to be excluded from Hiive’s business affairs and denied their shareholder rights. The respondents have no visibility into what is happening at Hiive or what cash or asset transactions are being carried out in their absence. The respondents have made their intentions clear – they will continue to sell shares in Hiive. Without the orders sought, the applicants have no way to ensure that there will be any shares left to obtain by the time the underlying application is heard in January 2025.
As noted above, the Court of Appeal has endorsed specific performance for purchases of shares in private companies [footnote reference to the UBS case]. If this relief is frustrated, it is unlikely that the applicants would be able to recover a damages award in lieu of it. The current valuation of Hiive, based on the only draft Term Sheet that the respondents have provided from its recent fundraising round via the SAFE Agreements used a valuation of US$77 million. This would put the applicants’ monetary damages at approximately US$19.25 million at 25% of shares and $25.66 million at 30%, plus any amounts accrued for McGrath’s Guaranteed Dividend. Hiive has only raised about US$4.225 million and will be unable to pay that level of award. The lack of means to pay such an award is a factor favouring injunctive relief.
52I have already addressed above the UBS case and the relief sought by the Applicants regarding the issuance of Hiive shares. This leaves the issue of whether the Applicants will suffer irreparable harm as a result of an alleged inability to collect damages from the Respondents. As set out above, Mr. McGrath’s evidence on this point is based on general concerns that he will ultimately be unable to enforce a judgment.
53I find that the Applicants have failed to establish that they would suffer irreparable harm if the injunctive relief is not granted. In my view, Mr. McGrath’s evidence and concerns on the issue of harm are speculative. As stated above, bald allegations or general beliefs or concerns are insufficient to satisfy the requirement of showing irreparable harm.
54Further, and in any event, I conclude that the balance of convenience favours the Respondents. I accept the Respondents’ evidence that it is more likely that Hiive will be financially successful if the injunctive relief is not granted. Thus, it is more likely than not that the Applicants will be able to enforce a monetary judgment if the requested injunction is not granted.
55Accordingly, I decline to grant the relief sought by the Applicants.
56I now turn to the Respondents’ cross-motion.
C. ADDITIONAL FACTUAL BACKGROUND
57In addition to the factual background set out above regarding the motion for injunctive relief, the following additional facts are relevant.
58On August 18, 2023, Mr. Desai and THCL commenced the Action against Mr. McGrath and Setter. Among other things, Mr. Desai and THCL seek damages for breach of contract, misappropriation of personality, breach of confidence, and intentional interference with contractual and/or economic relations. Mr. Desai alleges that Setter breached his employment agreement and owes him more than US$1.4 million on account of commissions and vacation pay. Mr. Desai and THCL also claim damages in relation to Mr. McGrath’s alleged breaches and repudiation of the Investment Agreement.
59Mr. McGrath and Setter have served a Statement of Defence and Counterclaim. The counterclaim is against Mr. Desai only. In the counterclaim, Setter seeks damages in the amount of $5.44 million against Mr. Desai for breach of contract or unjust enrichment. Mr. McGrath seeks a declaration that Mr. Desai has acted in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards his interests, as well as various orders under section 248 of the OBCA. Mr. McGrath’s claims are in relation to the Investment Agreement and Mr. McGrath’s alleged status as a minority shareholder of Hiive.
D. THE APPLICANTS’ POSITION ON THE CROSS-MOTION
60The Applicants consent to the consolidation of the Application with the Action, but only if the consolidation can be effected in a way that avoids prejudicial delay to the determination of the Application, which was started over a year before the Action and has been scheduled for a hearing in January 2025. In the Applicants’ view, prejudice can be avoided if their motion for an interlocutory injunction is granted (which it is not, as set out above), or hearing dates for a consolidated hybrid trial comparable to the January 2025 hearing date currently fixed for the Application can be obtained (which is unlikely given the early stage of the Action and the fact that it is not ready to be set down for trial). The Applicants otherwise oppose consolidation because, they submit, it would cause undue delay to the Application. The Applicants concede that at least one of the criteria in Rule 6.01(1) of the Rules of Civil Procedure is met in this case, but their position is that the balance of convenience does not favour a consolidation order.
61The Applicants argue that any disadvantage from the Application and Action proceeding separately can be mitigated by ordering that: (a) the findings in the Application bind the parties in the Action, and (b) the deemed undertaking rule is waived as between the two proceedings.
62The Applicants also propose procedural terms in the event of a consolidation.
63The Applicants’ position is that the issue of conversion is moot if this Court grants consolidation. If consolidation is not granted, the Applicants state that the issue of conversion should be deferred to the application judge.
E. DISCUSSION – CROSS-MOTION
64Given that I have not granted the interlocutory injunction sought by the Applicants and I cannot ensure that a consolidated hybrid trial could take place in early 2025, the Applicants do not consent to the relief sought by the Respondents on the cross-motion. I now turn to the consolidation issue.
1. Consolidation or hearing together
i. Applicable legal test
65Rule 6.01(1) of the Rules of Civil Procedure provides as follows:
Where two or more proceedings are pending in the court and it appears to the court that,
(a) they have a question of law or fact in common;
(b) the relief claimed in them arises out of the same transaction or occurrence or series of transactions or occurrences; or
(c) for any other reason an order ought to be made under this rule,
the court may order that,
(d) the proceedings be consolidated, or heard at the same time or one immediately after the other; or
(e) any of the proceedings be,
(i) stayed until the determination of any other of them, or
(ii) asserted by way of counterclaim in any other of them.
66The underlying purpose of this rule is to avoid multiplicity of proceedings, to promote expeditious and inexpensive determination of disputes, and to avoid inconsistent judicial findings. The threshold question is to determine whether any of the criteria under Rule 6.01(1) have been met. If so, the court must still consider whether the balance of convenience requires the order. See Coulls v. Pinto, 2007 46242 at paras. 18-20 (Ont. S.C.J.), Abdulrahim v. Air France, 2010 ONSC 5542 at para. 53, and Windrift Adventures Inc. v. Ontario (Animal Case Review Board), 2023 ONCA 690 at para. 10.
67As noted by D.M. Brown J. (as he then was) in CN v. Holmes, 2011 ONSC 4837 at para. 1, while a multiplicity of legal proceedings should be avoided as far as possible, multiple proceedings might be required in some circumstances to secure the just, most expeditious and least expensive determination of disputes, in accordance with Rule 1.04 of the Rules of Civil Procedure. Whether there should be one proceeding or two “turns on the particular facts of any case and the various litigation-related considerations attaching to any case.”
68In 1014864 Ontario Ltd. v. 1721789 Ontario Inc., 2010 ONSC 3306 at para. 18 (“101 Ontario”), Master Dash (as his title then was) set out a non-exhaustive list of seventeen factors that the court may consider when determining whether to order that two matters be tried together.2
ii. Application to this case
69At least two criteria under Rule 6.01(1) have been met: (a) the Application and the Action have questions of law and fact in common, and (b) the relief claimed in the two proceedings arises out of the same transaction or occurrence or series of transactions or occurrences. As a result, the question to determine is whether the balance of convenience requires an order that the Application and the Action be consolidated or heard together.
70In my view, the balance of convenience favours such an order. I have considered the factors set out in 101 Ontario. I note the following:
a. The issues in the Application and the Action are inextricably interwoven.
b. The relief sought in the Application and the Action overlaps.
c. There will be a significant overlap of evidence and witnesses in the two proceedings.
d. The parties are essentially the same and the lawyers are the same.
e. There is a risk of inconsistent findings if the proceedings are not joined. In my view, the Applicants’ suggestion that this risk can be mitigated by ordering that the findings in the Application bind the parties in the Action is not practical. The judge presiding at the trial of the Action would have a better opportunity to assess credibility than the application judge and, consequently, the trial judge should not be bound in advance as to the conclusions that should be reached.
f. A decision in the Application would not put an end to the Action.
g. The parties will save costs if the two proceedings are tried together.
h. The litigation status of the two proceedings is different, and the consolidation of the two proceedings will delay the determination of the issues raised in the Application. However, this is insufficient to outweigh the other factors that favour consolidation, especially given the overlapping issues and the fact that the dispute between the parties will not be resolved until all the issues in both proceedings are determined. Further, as discussed below, the parties seem prepared to agree on a way forward that would reduce the delay caused by the consolidation.
71Thus, in light of the foregoing and based on this case’s particular facts and litigation-related considerations, I conclude that the just, most expeditious and least expensive determination of the parties’ entire dispute requires that the Application and the Action be consolidated or heard together. As discussed further below, the issue of whether the two proceedings should be consolidated or heard together will be determined after giving to the parties an opportunity to discuss and agree on the next steps.
2. Conversion to an action
i. Applicable legal test
72Under Rule 38.10 of the Rules of Civil Procedure, a judge may order that an application proceed to trial and give such directions as are just. A motion judge may convert an application to an action before the hearing of the application: see Metropolitan Toronto Condominium Corporation No. 965 v. Metropolitan Toronto Condominium Corporation No. 1031, 2014 ONSC 4458 at para. 8 (“MTCC”).
73Where the legislature has stipulated that a proceeding may be brought by application, there is a prima facie right to proceed by application and the matter should not be converted into an action without good reason, such as when the application judge cannot make a proper determination of the issues on the application record: see MTCC at para. 10 and Collins v. Canada (Attorney General) (2005), 76 O.R. (3d) 228, 2005 19819 at para. 29 (S.C.J.) (“Collins”).
74The following factors are relevant to the determination of whether an application should proceed as an action: (1) whether there are material facts in dispute; (2) the presence of complex issues requiring expert evidence and/or a weighing of the evidence; (3) whether there is a need for the exchange of pleadings and for discoveries; and (4) the importance and impact of the application and of the relief sought. See Collins at para. 5 and Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company, 2021 ONCA 159 at para. 48.
ii. Application to this case
75I will discuss the four factors set out above in turn.
76Material facts in dispute. The evidence shows that there are, and will continue to be, material facts in dispute: see 1100997 Ontario Limited v. North Elgin Centre Inc., 2016 ONCA 848 at para. 39. As was the case in Bodkin v. Doe, 2021 ONSC 1852 at para. 22, “there are diametrically opposed factual narratives that are likely central to the determination of the issues in this proceeding.”
77Although contractual interpretation is an objective exercise, the parties do not agree about the relevant surrounding circumstances known to the parties at the time of the formation of the contract. They also disagree on the correct interpretation of the Investment Agreement, and extrinsic evidence may be admissible to resolve ambiguities and interpretive problems: see Simpson v. Canada (Attorney General). 2011 ONSC 5637 at paras. 66-70 and MDS Inc. v. Factory Mutual Insurance Company, 2021 ONCA 594 at para. 44. Further, there are many material facts in dispute regarding alleged breaches of the Investment Agreement. While the record contains numerous e-mails and some recordings of conversations, the parties provide different explanations and interpretations for their various exchanges.
78Presence of complex issues requiring expert and/or a weighing of the evidence. This case raises complex factual issues. The determination of such issues will require a weighing of the evidence and the making of credibility findings with respect to at least some points. Expert evidence is not an important factor in this case. However, I note that evidence of an industry expert may be required on the issue of whether the simple agreements for future equity (SAFE) entered into by Hiive constitute “bona fide term-sheet from an arms-length investor for a capital raise” within the meaning of the Investment Agreement. Further, if the Applicants pursue the alternative relief set out in their Notice of Application, expert evidence will likely be required with respect to the value of the consideration paid or contributed by Setter in exchange for the Setter Shares.
79Whether there is a need for the exchange of pleadings and for discoveries. While the record is already very large, there appears to be a need for discoveries. I am particularly concerned by the fact that Mr. McGrath attached to one of his affidavits e-mails that were responsive to production requests previously made by the Respondents but that had not been produced in response to such requests. I note that the Respondents are at a disadvantage because Mr. Desai does not have access to the e-mails that he sent from his Setter e-mail address.
80The importance and impact of the application and of the relief sought. The substantial resources that have been poured into this litigation show that it is important to the parties. I note that the Application and the relief sought could have a significant impact on the Respondents and their employees.
81In light of the foregoing, I find that there is good reason to order that this Application proceed to trial.
82While I conclude that the Application should not proceed as a “pure” Application, especially since it will be either consolidated or heard together with the Action, there is flexibility as to how the two proceedings will go forward: see the references to the Court’s power to “give such directions as are just” in Rules 38.10(1)(b) and 6.01(2) of the Rules of Civil Procedure.
83The Applicants have proposed procedural terms in their Factum (at paragraph 16), which seemed largely acceptable to the Respondents at the hearing. At the end of the hearing, counsel suggested that if a consolidation was ordered, there should be a subsequent case conference to deal with the details of the consolidation. I agree with this approach. In my view, the parties should have an opportunity to discuss and agree on the next steps. If they agree, they can prepare a draft Order and send it to my assistant for my consideration. If they do not agree, they should let my assistant know and a case conference will be scheduled before me.
F. CONCLUSION
84The Applicants’ motion is dismissed.
85The Respondents’ motion is granted. The parties are directed to discuss and try to agree on the terms of an order outlining the next procedural steps in light of this endorsement. If the parties reach an agreement, they can prepare a draft Order and send it to my assistant for my consideration. If they cannot agree, they are to let my assistant know and a case conference will be scheduled before me.
86If costs cannot be agreed upon, the Respondents shall deliver submissions of not more than three pages (double-spaced), excluding the costs outline, by January 5, 2024. The Applicants shall deliver their responding submissions (with the same page limit) by January 19, 2024. The submissions of all parties shall also be sent to my assistant by e-mail and uploaded onto CaseLines.
Vermette J.
Date: December 15, 2023
Footnotes
- I note that, in light of the definition of “Trigger Event” in the Investment Agreement, the Investment Agreement clearly contemplated a capital raise from an investor or several investors in 2023.
- The factors are the following: (1) the extent to which the issues in each action are interwoven; (2) whether the same damages are sought in both actions, in whole or in part; (3) whether damages overlap and whether a global assessment of damages is required; (4) whether there is expected to be a significant overlap of evidence or of witnesses among the various actions; (5) whether the parties are the same; (6) whether the lawyers are the same; (7) whether there is a risk of inconsistent findings or judgment if the actions are not joined; (8) whether the issues in one action are relatively straight forward compared to the complexity of the other actions; (9) whether a decision in one action, if kept separate and tried first would likely put an end to the other actions or significantly narrow the issues for the other actions or significantly increase the likelihood of settlement; (10) the litigation status of each action; (11) whether there is a jury notice in one or more but not all of the actions; (12) whether, if the actions are combined, certain interlocutory steps not yet taken in some of the actions, such as examinations for discovery, may be avoided by relying on transcripts from the more advanced action; (13) the timing of the motion and the possibility of delay; (14) whether any of the parties will save costs or alternatively have their costs increased if the actions are tried together; (15) any advantage or prejudice the parties are likely to experience if the actions are kept separate or if they are to be tried together; (16) whether trial together of all of the actions would result in undue procedural complexities that cannot easily be dealt with by the trial judge; and (17) whether the motion is brought on consent or over the objection of one or more parties.