Overview

[1] There are two proceedings before the Court. In the first, NowVertical Group Inc. (“NowVertical” or the “Company”) applies for an interim and interlocutory injunction enjoining the respondent, Daren Trousdell (“Trousdell”), from breaching certain negative covenants in a letter agreement dated May 26, 2023 (the “Separation Agreement”) until an arbitrator has ruled on the dispute between the parties. In the second proceeding, Trousdell has brought a motion seeking an order dismissing the NowVertical application pursuant to section 137.1(3) of the Courts of Justice Act, R.S.O. 1990, c. C.4.

Factual Background

[2] The following are the relevant facts for these proceedings.

The Parties

[3] NowVertical is a public company formed under Ontario Business Corporation Act, R.S.O. 1990, c. B.16 (the “OBCA”) having its head office in Toronto, Ontario. It operates a number of software and solutions businesses. NowVertical’s shares are publicly traded. The company is a venture issuer listed on the TSX Venture Exchange under the symbol “NOW”.

[4] The Company has a two-tier share structure which consists of Class A subordinate voting shares, which carry one vote per share, and Class B proportionate voting shares, which carry 100 votes per share.

[5] Trousdell co-founded NowVertical in 2020 and is currently the largest shareholder of NowVertical having shares that represent approximately 30% of the equity in the Company, which shares are held in a holding company, KOAT Holdings LLC (“KOAT”).

[6] Until May 30, 2023, Trousdell was the chief executive officer and the chair of the board of directors (the “board”).

[7] In May of 2023, Trousdell agreed to resign as an officer and director of the Company. Following extensive negotiations, Trousdell and NowVertical agreed to the Separation Agreement. Mr. Trousdell was represented by counsel throughout the negotiations for the Agreement.

The Separation Agreement

[8] The following are the principal provisions of the Separation Agreement that are relevant for this proceeding.

[9] First, section 2 (the “Standstill Clause”) provides that Trousdell will refrain from certain actions regarding control, ownership or influence over the company for the period to December 31, 2024. The Standstill Clause reads as follows:

For a period ending on December 31, 2024, you (including KOAT Holdings LLC, and any other person or entity, directly or indirectly, through one or more intermediaries, controlled by you or acting “jointly or in concert” with you within the meaning of applicable securities laws and regulations) directly or indirectly and in any way, form or manner, shall not without the express prior written consent of the Company:

a. acquire or agree to acquire or make any proposal to acquire or solicit offers to sell any securities, assets or liabilities of the Company or securities or assets of any of the Company's affiliates;

b. sell or agree to sell or make any proposal to sell any securities, assets or liabilities of the Company, or securities or assets of any of the Company’s affiliates except to the extent that the aggregate consideration received from such sales does not exceed more than $125,000 USD per quarter;

c. engage in any short sale or similar transaction that derives value from a decline in the Company’s share price;

d. correspond with other Company shareholders in respect of any matters in this section 2;

e. propose or offer to enter into any merger, amalgamation, plan of arrangement, business combination, take-over bid, restructuring, recapitalization, liquidation or similar transaction involving the Company or any of its affiliates, or to purchase, directly or indirectly, any assets or liabilities of the Company or any of its affiliates;

f. “solicit” or participate in the “solicitation” of, any “proxies” (as such terms are defined under applicable securities laws and regulations) to vote, or to seek to advise or influence any person with respect to the voting of any securities of the Company or any of its affiliates;

g. seek representation on the board of directors or board of managers of, requisition or call a meeting of security holders of, submit any shareholder proposal to, or otherwise seek to control or to influence the management, board or policies of the Company or any of its affiliates;

h. commence, encourage or support any derivative action in the name of the Company or any of its affiliates, or any class action against the Company or any of its affiliates, or any of its or their current and/or former officers or directors;

i. interfere or intercept business opportunities of, or interfere in any way with any contractual relationship or other business of the Company or any of its affiliates;

j. seek any modification to or waiver of any of your obligations under this Agreement; or

k. engage in any discussions or negotiations, conclude any understandings, enter into any agreement or arrangement, or advise, assist or encourage any other person, or publicly or privately announce, disclose, reveal or otherwise evidence intention or desire, in connection with any of the foregoing.

In addition, you agree that for a period ending on December 31, 2024, you shall exercise any voting rights controlled by you, directly or indirectly, in respect of the Company in favor of any resolution put to a shareholder vote that is recommended by the Company’s management or board of directors.

[10] The Separation Agreement also includes the following non-disparagement provision (the “Non-Disparagement Clause”):

At all times from and after the date hereof, you shall not (nor will you cause or cooperate with others to) at any time Disparage (as defined below) the Company or its affiliates, or any of their respective officers, directors, shareholders or other equity holders.

c. For purposes of this Section 5, “Disparage” shall mean to make, or induce any third party to make, any statement or image to any person (including, but not limited to, any statements made via websites, blogs, postings to the internet, or emails and whether or not they are made anonymously or through the use of a pseudonym), whether written or oral and whether expressed as a fact, opinion or otherwise, that disparages, maligns, defames, libels or slanders the party to be protected by the provisions of this Section 5; provided that the foregoing will not preclude you or the Company from making truthful statements as required by lawfully compelled testimony nor shall the foregoing preclude you or the Company from making truthful statements in the context of any contested shareholder meeting after December 31, 2024. You agree to provide full cooperation and assistance to the Company in investigating any Disparaging statements or images if the source cannot be determined on its face.

[11] In exchange for his covenants in the agreement, Trousdell received, among other covenants, a broad release which included a certification that the Company had no claim of any kind against him in his capacity as a director or officer of the Company and a release of any claims that the Company might have had against him in respect of all matters relating to his actions as a director and/or officer of the Company, other than claims arising out of any dishonesty, bad faith or unlawful conduct.

[12] Under section 10(a) (the “Reasonableness Clause”), Trousdell agreed that the negative covenants in the Separation Agreement are reasonable:

Each Party confirms that all restrictions and other provisions in this Agreement are reasonable and valid and all defences to the strict enforcement of such restrictions are waived by such Party.

[13] Under section 10(b) (the “Injunctive Relief Clause”), Trousdell agreed that the Company was entitled to injunctive relief and specific performance in respect of any breach of the Separation Agreement:

Each Party acknowledges, confirms and agrees that any breach by such Party of this Agreement will cause the other Party irreparable harm for which monetary damages would not be a sufficient remedy, and therefore each Party agrees that in addition to all other rights and remedies available to any of them in law or in equity, each Party and the Company’s affiliates shall be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach without any requirement for proof of actual damages or for securing or posting of any bond or other security by the person seeking to enforce the terms of this Agreement. Each Party further agrees that such Party will not oppose the granting of such relief on the basis that the other Party or its affiliates have an adequate remedy at law.

[14] The parties also agreed to a universal arbitration clause in section 10(d) (the “Arbitration Clause”):

This Agreement shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein. The Parties irrevocably attorn to the exclusive jurisdiction of an arbitrator acting pursuant to Arbitration Act, 1991 (Ontario) for any actions or proceedings arising out of or relating in any manner whatsoever to the interpretation or enforcement of this Agreement, it being understood that this clause is intended by the Parties to provide for a universal resort to arbitration. Any arbitration conducted pursuant to this clause shall be kept strictly private and confidential, and the arbitrator’s decision shall be final and binding and not subject to any appeal or judicial review on any question of fact, law or mixed fact and law. Notwithstanding this provision, each Party acknowledges that the other shall have exclusive recourse to the courts of the Province of Ontario for the purpose of obtaining injunctive relief in connection with the enforcement of the restrictive covenants in this Agreement or the specific performance of this Agreement as an interim measure while such arbitration is pending.

The Events Giving Rise to this Application

[15] On October 10, 2023, Trousdell delivered a letter to the new chief executive officer of the company alleging three incidents of disparagement by two directors, Scott Nirenberski (“Nirenberski”) and Andre Garber, as well as a general allegation that the board was attributing a substantial share price decline and the Company’s financial difficulties to him. The letter also stated that “as NOW’s largest shareholder” he and KOAT “strongly believe that the Board should be replaced.” The Company says that this letter was a breach of the Standstill Clause, through which Trousdell had committed not to “engage in any discussions…or privately…disclose, reveal or otherwise evidence intention or desire” in connection with “the management, board or policies of the Company.”

[16] NowVertical’s annual general meeting for 2023 was held on October 13, 2023 (the “AGM”). In the Application materials, NowVertical alleges that Trousdell breached the voting provision of the Standstill Clause by voting the shares of only one of the two classes of shares owned by him in favour of the board which it says skewed the results of the AGM by making it appear that the directors received 3,555,600 less votes than they ought to have received. However, this has not been established in the record before the Court. Accordingly, I have not further considered this alleged default in these Reasons.

[17] On November 22, 2023, Trousdell delivered another letter to NowVertical’s chief executive officer again expressing displeasure with the Company’s directors and asserting that “the incumbent directors are entrenching themselves on the Board, including by attempting to hide the shareholders’ resounding repudiation of their track record of value destruction”. He also stated that “certain members of the Board should be replaced”. The Company says that this letter was another breach of the provisions of the Standstill Clause cited above.

[18] Trousdell then exercised his right as a shareholder under sections 141 and 145 of the OBCA to inspect the Company’s books and records to determine the results of the vote for the directors at the AGM. The proxy rules under the OBCA provide that a shareholder shall either vote in favour of a director or withhold the shareholder’s votes in respect of such director rather than voting against the particular director. The following percentage of votes were withheld for the following directors (which does not include the chief executive officer):

Andre Garber 36.884%

Elaine Kunda 36.991%

Scott Nirenberski 38.034%

Darrell MacMullin 13.107%

Trousdell concluded that the level of withheld votes was significant information that the Company should be disclosing to the shareholders even if it was not legally obligated to do so, which is the Company’s position.

[19] On January 8, 2024, the Company announced that Nirenberski had resigned and that two new directors, David Charron and Chris Ford, had been appointed to the board.

[20] On January 11, 2024, Trousdell delivered a third letter, this time addressed to the board, in which he demanded the immediate resignation of five of the Company’s six directors, failing which he would issue an attached press release within one week (i.e. by January 18, 2024). The content of the threatened press release is described below. The Company says that this letter was a further breach of the provisions of the Standstill Clause cited above, particularly in view of the threat to publish the press release if the Company did not comply with Trousdell’s demand to replace the board.

[21] On January 14, 2024, NowVertical served a notice of arbitration pursuant to the Arbitration Clause (the “Arbitration”). The Notice of Arbitration seeks, among other things, a declaration that Trousdell has breached the Separation Agreement; a declaration that Trousdell has breached his duty of good faith and honest contractual performance; a declaration that Trousdell cannot, directly or indirectly, seek to influence the management, board or policies of NowVertical or its affiliates for the period of the Separation Agreement except as required by the Separation Agreement; an order extending the term of the Separation Agreement for a period equivalent to the period of Trousdell’s breaches; an interim and interlocutory injunction enjoining Trousdell from breaching the Standstill Clause and the Non-Disparagement Clause of the Separation Agreement; and damages in an amount to be determined at trial. The parties have appointed the Hon. Robert Sharpe as the Arbitrator.

[22] NowVertical requested confirmation that Trousdell would agree to a standstill until the injunctive portion of the Notice of Arbitration had been decided by the Arbitrator, including by refraining from issuing the threatened press release. Trousdell did not agree to a standstill and insisted that any injunctive relief would have to be sought in court.

[23] On January 15, 2024, the Company announced the resignation of the Company’s chief executive officer, including his resignation as a director.

[24] On January 16, 2024, after failing to receive the requested confirmation from Trousdell described above, NowVertical served its Notice of Application and Application Record in the present proceedings.

[25] On January 18, 2024, Trousdell issued his threatened press release (the “Press Release”). The Company alleges that the Press Release contains several inaccuracies regarding the voting results at the AGM. More significantly, the Press Release contains numerous statements calling for the replacement of the board and a new direction for the Company.

[26] On January 22, 2024, Trousdell issued his Motion Record seeking dismissal of the Application.

The Press Release

[27] The Press Release reads as follows:

• “The Company has failed to announce that a significant number of shareholders voted against the re-election of NowVertical’s incumbent Board.

• The incumbent Board is directly responsible for significant value destruction and rapid erosion of the Company’s balance sheet.

• NowVertical’s largest shareholders strongly believes that the incumbent Board should be replaced, but was contractually required to vote in support at the recent Meeting.

• If the Company’s largest shareholder had been permitted to vote against the incumbent Board, none of the current directors would have received support from a majority of shareholders, with the exception of Darrell MacMullin.

• Good faith efforts to discuss qualified potential replacements for the incumbent Board were met with delay, resistance, and obfuscation.

• Instead, the resignation and replacement of the Company’s former CEO and recent appointments of David Charron and Chris Ford to the Board, without stakeholder consultation, fail to address the need for fundamental change.

• Each of Elaine Kunda, Andre Garber Darrell MacMullin, David Charron, and Chris Ford should immediately resign from the Board – they do not have the support of a majority of shareholders.

Toronto, Jan. 18, 2024/CNW/ - Daren Trousdell, the founder and largest shareholder of NowVertical Group Inc. (“NowVertical” or the “Company”), through KOAT Holdings LLC, is calling on the Company to immediately publish the voting results in respect of the election of candidates to the Company’s Board of Directors (the “Board”) at the Company’s Annual Meeting on October 13, 2023 (the “Meeting”).

At the Meeting, a significant number of shareholders voted not to support the re-election of Scott Nirenberski, Elaine Kunda, Andre Garber, and Darrell MacMullin to the Board.

Director

Percentage of Votes Represented by Proxy Voted Withhold

Andre Garber

36.884%

Elaine Kunda

36.991%

Scott Nirenberski

38.034%

Darrell MacMullin

13.107%

Mr. Trousdell, who directly or indirectly holds approximately 30% of the Company’s voting shares, only supported the incumbent Board because he was required to under the terms of an agreement with the Company. If he had been permitted to vote his conscience for the benefit of all shareholders, he would not have supported the election of Andre Garber, Elaine Kunda, Scott Nirenberski, and Darrell MacMullin. If Mr. Trousdell had been consulted in any fashion, he would have not supported the appointment of David Charron and Chris Ford, who are unknown to him and were appointed without stakeholder consultation.

The only explanation for the Company’s failure to release the results of the Board election, is that the incumbent directors are attempting to hide from the Company’s owners the resounding repudiation of their abandonment of the Company’s growth strategy, track record of value destruction, and abysmal management of the Company’s balance sheet.

The current composition of the Board, following the appointments of David Charron and Chris Ford, fails to address the urgent need for directors with a unique set of skills, experience, expertise, and shareholder-focused perspective. Needless to say, Mr. Trousdell strongly believes that the incumbent Board should be replaced with directors who are focused on preserving shareholder value and putting NowVertical on a course for sustainable long-term organic and inorganic growth.

Urgent Change is Needed

The incumbent Board has presided over an incredible erosion in shareholder value since Mr. Trousdell resigned as Chair of the Board and Chief Executive Officer on May 30, 2023. The Board has abandoned the Company’s growth strategy in favour of short-term cost cutting. This trend is particularly troubling in light of the significant deterioration in the Company’s cash position since the date of Mr. Trousdell’s resignation, threatening the Company’s ability to meet its short-term financial obligations. The Company’s former auditor, BDO Canada LLP, resigned prior to the Meeting; the Company announced on January 8, 2024 that its Chief Financial Officer is imminently departing; and, the Company’s former CEO has now resigned, after starting to effect positive change. This trend is very concerning.

It is not surprising that the incumbent Board has presided over a tumultuous period for the Company, given its lack of engagement. What else should one expect from directors who are insignificant shareholders or not shareholders at all, without any incentive to drive share price recovery? Mr. MacMullin and Ms. Kunda hold scant shares in the Company. Mr. Garber, who joined the Company after its inception, primarily holds shares received in consideration for his employment by the Company. By refusing to release the results of the director election at the Meeting, the directors have chosen to prioritize their own reputations over maximizing the value of the Company.

Mr. Trousdell has no intention to rejoin the Board or management. He has conveyed that an immediate overhaul of the Board with independent and experienced directors, whose interests are aligned with the Company’s owners, is necessary to prevent further value destruction and to execute rapidly and efficiently on the Company’s strategy for growth.

The Way Forward

Mr. Trousdell remains confident about the value potential of the Company but believes that new leadership is required. He initially approached the Board to constructively discuss potential nominees that could provide the experience and the spark required for the Company to re-invigorate itself with a view to maximizing shareholder value. Unfortunately, these efforts have been ignored.

Shareholders deserve an expert and accountable Board that is laser-focused on share price recovery. A newly reconstituted Board will bring urgency and accountability to the Company. Only under these conditions will the Company be able to regain the type of valuation that it once carried.

Disclaimer

The information contained in this press release is for information purposes only in order to provide the views of Mr. Trousdell and the matters which Mr. Trousdell considers to be of concern to shareholders. The information is not tailored to specific investment objectives, the financial situations, suitability or particular need of any specific person(s) who may receive the information and should not be taken as advice in considering merits of any investment decision. The views expressed herein represent the views and opinions of Mr. Trousdell, based on analyses of Mr. Trousdell and may change at any time.

The information contained in this news release does not and is not meant to constitute a solicitation of a proxy within the meaning of applicable securities laws. Although Mr. Trousdell may ultimately determine to requisition a meeting of shareholders, such a requisition has not yet been submitted, there is currently no record or meeting date and shareholders are not being asked at this time to execute a proxy in favour of any director nominees or any other resolutions that may be set forth in a future requisition.

About Daren Trousdell

Daren Trousdell is a serial technology entrepreneur with over 20 years’ experience starting, growing and exiting great companies. He is the founder and former Chair of the Board and Chief Executive Officer of the Company. Mr. Trousdell also has extensive global M&A experience on both the buy- and sell-side, including deal origination, execution and integration, with many successful transactions ranging in value from $5 million to over $400 million. Mr. Trousdell also co-founded Clip Money Inc., a transformational fintech payments platform. Previously, Mr. Trousdell founded and sold Mindblossom, a leading digital media and technology agency, to Dentsu Aegis Network, and subsequently led North American client strategy and corporate development for the group.

SOURCE Daren Trousdell

For further information: Daren Trousdell, Chief Executive Officer, Phone: 416-365-2155, E-mail: daren@darentrousdell.com”

[28] In summary, the Press Release states that there has been a significant decline in the value of the Company’s shares and a rapid deterioration in its balance sheet, that the board is responsible for this, that the board lacks the skills, experience and expertise required for the Company, that the directors also lack a sufficient share position to be aligned financially with the shareholders and that a new board is required that will refocus on long-term growth and acquisitions rather than short-term cost cutting.

[29] I think it is clear that the purpose of the Press Release was to encourage interested shareholders to “take up the mantle” and propose a new board of directors given Trousdell’s contractual commitment to refrain from doing so until after December 31, 2024. It was not simply to publish the results of the voting for the directors named above at the AGM as Trousdell’s counsel suggested at the hearing of these proceedings.

Analysis and Conclusions

[30] I propose to address the request for injunctive relief first and then to address the request for a dismissal of the motion under s. 137.1 of the Courts of Justice Act. I note that Trousdell suggested that the Court should hear the motion for dismissal first. I do not consider that appropriate in the case of a motion under s. 137.1 where a court is in the position of being able to render a final determination on the proceeding at issue.

The Application for an Interim and Interlocutory Injunction

[31] This Court has jurisdiction under Rules 14.05(3)(d), (g) and (h), sections 6 and 8 of the Arbitration Act and Section 10(d) of the Separation Agreement to grant injunctive relief while the Arbitration is pending.

[32] In Bombardier Transportation Canada Inc. v. Metrolinx, 2017 ONSC 2372, at paras. 55-59, Hainey J. expressed the view, which I adopt, that the appropriate approach to determining an application for injunctive relief pending arbitration involves the usual RJR-Macdonald test which requires (1) an assessment of the merits of NowVertical’s claim that Trousdell has breached the Separation Agreement; (2) demonstration that NowVertical will suffer irreparable harm if the interlocutory injunction is not granted; and (3) demonstration that the balance of convenience favours the granting of the interlocutory injunction. I will address each element of the test in turn.

The Merits of the Applicant’s Case

The Applicable Standard

[33] The assessment of the merits of NowVertical’s claim that Trousdell has breached the Separation Agreement requires an evaluation of the operation of the covenants comprising the Standstill Clause. The parties agree that the standard of proof for the purposes of this Application depends upon whether these covenants are characterized as positive or negative covenants.

[34] The parties are also agreed that the following statement of Brown J. in R v. Canadian Broadcasting Corp., 2018 SCC 5, [2018] 1 S.C.R. 196 at paras. 12 and 15, sets out the applicable principle regarding the standard of proof in injunctive proceedings involving the enforcement of covenants – the standard of proof in respect of negative covenants is “a serious issue to be tried” and in respect of positive covenants is “a strong prima facie case”:

In Manitoba (Attorney General) v. Metropolitan Stores Ltd. and then again in RJR — MacDonald, this Court has said that applications for an interlocutory injunction must satisfy each of the three elements of a test which finds its origins in the judgment of the House of Lords in American Cyanamid Co. v. Ethicon Ltd. At the first stage, the application judge is to undertake a preliminary investigation of the merits to decide whether the applicant demonstrates a “serious question to be tried”, in the sense that the application is neither frivolous nor vexatious. The applicant must then, at the second stage, convince the court that it will suffer irreparable harm if an injunction is refused. Finally, the third stage of the test requires an assessment of the balance of convenience, in order to identify the party which would suffer greater harm from the granting or refusal of the interlocutory injunction, pending a decision on the merits.

In my view, on an application for a mandatory interlocutory injunction, the appropriate criterion for assessing the strength of the applicant’s case at the first stage of the RJR — MacDonald test is not whether there is a serious issue to be tried, but rather whether the applicant has shown a strong prima facie case. 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 and which equity has long been reluctant to compel. Such an order is also (generally speaking) difficult to justify at the interlocutory stage, since restorative relief can usually be obtained at trial. Or, as Justice Sharpe (writing extrajudicially) puts it, “the risk of harm to the defendant will [rarely] be less significant than the risk to the plaintiff resulting from the court staying its hand until trial”. The potentially severe consequences for a defendant which can result from a mandatory interlocutory injunction, including the effective final determination of the action in favour of the plaintiff, further demand what the Court described in RJR — MacDonald as “extensive review of the merits” at the interlocutory stage.

[35] The parties disagree however on whether the covenants in the Standstill Clause are properly characterized as positive or negative covenants, apart from the voting covenant in the last paragraph which the Company acknowledges is a positive covenant.

[36] In this regard, the statement of Brown J. in R v. Canadian Broadcasting Corporation at para. 16 is relevant:

[37] Ultimately, the application judge, in characterizing the interlocutory injunction as mandatory or prohibitive, will have 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 and, in light of the particular circumstances of the matter, “what the practical consequences of the . . . injunction are likely to be”. In short, the application judge should examine whether, in substance, the overall effect of the injunction would be to require the defendant to do something, or to refrain from doing something. [italics mine]

[38] Trousdell argues that all of the covenants in the Standstill Clause are, in effect, positive covenants requiring him to support the board and the Company by silence or otherwise. I do not agree. It is my opinion that, in substance, all of the covenants of the Standstill Clause, apart from the voting covenant in the last paragraph of the Standstill Clause, are more properly characterized as negative covenants because they mandate that Trousdell shall refrain from taking the actions described therein.

[39] As the Company has been unable to demonstrate that Trousdell breached the voting covenant, I have proceeded on the basis that the order sought on this Application is limited to injunctive relief in respect of the covenants in sub-clauses 2(a) through 2(k) of the Standstill Clause.

[40] As all of these covenants are negative covenants, I conclude that the standard of proof regarding the merits of NowVertical’s claims in the Arbitration is a serious issue to be tried.

Is There a Serious Issue to be Tried?

[41] The Company argues that it has demonstrated a serious issue to be tried in respect of its claims in the Arbitration.

[42] As described above, Trousdell’s actions have been directed toward changing the composition of the existing board of the Company in favour of a board composed of individuals having a more substantial financial stake in the Company and a business plan directed toward longer term internal growth and growth by acquisitions rather than focused on shorter-term cost-cutting measures.

[43] NowVertical argues that the provisions of the Standstill Clause, in particular sub-clauses 2(d), 2(f), 2(g) and 2(k), prohibited actions directed toward these ends. On this basis, it says that the transmittal of each of the letters of October 10, 2023, November 22, 2023 and January 11, 2024, in which Trousdell demanded the replacement of the board and a new direction for the Company, breached the Separation Agreement as discussions or negotiations intended to influence the board and the management of the Company. In respect of the letter of January 11, 2024 in particular, the Company argues that the threat to release the attached press release constituted a clear case of seeking to influence the composition of the board. Similarly, the Company says that Trousdell’s issue of the Press Release on January 18, 2024 breached sections 2(d), 2(f) and 2(k) of the Standstill Clause which prohibited Trousdell from corresponding with shareholders or issuing a public announcement directed to influencing the “management, board or policies” of the Company.

[44] Trousdell argues, that on a proper interpretation of the Standstill Clause, the Separation Agreement does not prohibit any of the impugned actions. His position is principally that it could not have been intended that, as the largest shareholder, he would be prevented from communicating his views regarding the board composition. As a matter of interpretation, he says that the language of influencing the board gives too broad a meaning to the term “influence” and that demanding a change in the composition in the board does not fall within “influencing” the board.

[45] This issue requires a contractual interpretation of the Standstill Clause. The principles of contractual interpretation are well-recognized and are set out in, for example, Weyerhauser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007 at para. 65.

[46] In this case, I think the express language of the Standstill Clause, in particular sub-clause 2(f) regarding proxy solicitations and sub-clause 2(g) regarding requisitioning a shareholder meeting or proposing a shareholder resolution in addition to the other provisions referred to above, indicate a clear intention that activities directed toward changing the composition of the board, and, by extension the strategic direction of the board for the Company, are caught by the Standstill Clause.

[47] In this regard, the circumstances at the time of negotiation of the Separation Agreement are relevant. Trousdell was, and remains, the largest shareholder of the Company. The support of a corporation’s largest shareholder is important for maintaining market confidence in the corporation. The Standstill Clause is directed toward preventing Trousdell from communicating to other shareholders and the market more generally a lack of confidence on his part in the board and in the strategic direction of the Company. In this regard, sub-clause 2(b), which prevents any significant sale of his shares, is important in maintaining market confidence. Similarly, the provisions of the Standstill Clause cited above reflect an intention on the part of the parties that Trousdell would be prevented from encouraging other shareholders to take actions directed toward changing the composition of the board or its strategic direction for the Company. The broad introductory language as well as the language in sub-clauses 2(d) and 2(k) indicate an intention that the scope of this prohibition was intended to be as wide as possible.

[48] On the other hand, I think that it can reasonably be argued that nothing in the Standstill Clause prevented private communications from Trousdell to the chief executive officer or the board regarding his views on the appropriate composition of the board or its strategic plan. None of the purposes of the Standstill Clause described above required that Trousdell be prevented from communicating privately with the chief executive officer, who was also a director, or the board collectively, on these matters. They were free to act or refrain from acting on them as they saw fit without any consequences.

[49] On this analysis, the letters of October 10, 2023 and November 22, 2023, being private, did not contravene the Standstill Clause. It is arguable that the letter of January 11, 2024, insofar as it constituted a threat rather than a mere expression of Trousdell’s views on the board composition, contravened the provisions of the Standstill Clause. However, the private nature of that correspondence would also exclude a finding that such letter breached the Standstill Clause for the same reason.

[50] Nevertheless, the standard for a serious issue to be tried - that the Application is neither frivolous nor vexatious – is not a high one. The Company’s position that Trousdell breached the Separation Agreement by sending his two letters to the chief executive officer and his third letter to the board is neither frivolous nor vexatious. It therefore crosses the threshold for a serious issue to be tried.

[51] In addition, and in any event, there is a serious issue to be tried regarding whether the distribution of the Press Release to the public constituted a breach of the Standstill Clause. Trousdell acknowledges that he was prohibited from participating in a proxy solicitation against management pursuant to sub-clause 2(f). Sub-clause 2(k) extends the prohibition to encouraging any other person in connection with any of the activities in sub-clauses 2(a) to 2(j). Trousdell’s actions in publishing the Press Release appear to be directed to exactly that – encouraging a third-party proxy solicitation or shareholder proposal to change the directors.

[52] Trousdell also argues that the Separation Agreement has been repudiated by NowVertical as a result of the alleged incidents of disparagement referred to in his letter of October 10, 2023. Accordingly, he says that there is no enforceable agreement upon which NowVertical can assert its claim against Trousdell for breaches of the Standstill Clause. However, there are two difficulties with this submission.

[53] The alleged instances of disparagement by directors of the Company set out in Trousdell’s letter dated October 10, 2023 have not been established. Trousdell has not provided any direct evidence that the incidents referred to therein occurred. The record before the Court contains only assertions based on hearsay.

[54] In addition, Trousdell did not comply with the requirements for repudiation of a contract by an innocent party, as set out in Brown et al v. the Corporation of the City of Belleville, 2013 ONCA 148 at para. 45. To the extent he wished to rely upon the alleged repudiation, Trousdell was required to clarify and unequivocally communicate to NowVertical his election to treat the Separation Agreement as at an end within a reasonable time of the occurrence of the event(s) upon which he relies for repudiation. However, Trousdell did not assert that the Separation Agreement had been repudiated until his letter of January 12, 2024. In fact, he did the opposite in affirming continuation of the Separation Agreement in both of his earlier letters. Given these two issues, I conclude that there is at least a serious issue to be tried regarding the enforceability of the Separation Agreement.

[55] Based on the foregoing, I conclude that the Company has demonstrated a serious issue to be tried in respect of its claims that Trousdell contravened the Separation Agreement. On this basis, the Company has satisfied the first branch of the test for an injunction.

Irreparable Harm

[56] The Company says that it satisfies this requirement in two respects.

[57] First, it says that, where relief is sought in respect of a negative covenant, there is a presumption of irreparable harm such that injunctive relief will be granted unless the responding party proves that the covenant is invalid. In addition, courts have relied on representations of the type made in clause 10(b) of the Separation Agreement as further support for the presumptive enforcement of negative covenants. As Trousdell has failed to establish any basis for invalidating the Standstill Clause, this is a factor that argues in favour of the Company’s position.

[58] Second, and more importantly, in my view, the Company has demonstrated a real risk of irreparable harm in the form of a negative impact on the goodwill of NowVertical if the injunction is not granted. The Company has established that, so long as the dispute between NowVertical and Trousdell remains unresolved, further publicity of the dispute will raise serious doubts among the investing public regarding the Company’s future thereby threatening its ability to obtain financing and to engage in acquisition transactions. I think it is clear that such damage to the Company’s goodwill is, by its very nature, unquantifiable and non-compensable. In my view, this harm is neither too speculative as Trousdell has argued nor is it similar to a loss of market share, which courts have found to be compensable.

[59] While Trousdell has cited a number of decisions which he says stand for the proposition that speculative harm is insufficient for present purposes, each case must be considered on its own in terms of the remoteness of the possible damage asserted and the type of damage claimed. In Air Canada Pilots Assn. v. Air Canada Ace Aviation Holdings Inc., 2007 CanLII 337 (ON SC), [2007] O.J. No. 89 (S. Ct.) at para. 63, Cumming J. held that there was not even a real and credible possibility on an objective test that the event for which the injunction was sought may occur. This is a far cry from the present circumstances. In Crawford Packaging Inc. v. Dorata, 2020 ONSC 3555 (S. Ct.), the feared harm had not yet occurred. In the present case, however, there is already some evidence, in the form of the email dated January 22, 2024 from a shareholder, who is understood to be independent of the board and of Trousdell, that the Press Release has caused harm.

[60] As a related matter, Trousdell characterizes the relief sought as a quia timet injunction, that is, as an injunction to remind parties of their obligations to others at law, and submits that the present injunction offends the principle that an injunction should issue only to restrain a breach, or a reasonably apprehended imminent breach, of legal obligations: see Boehmer Box LP v. Ellis Packaging Ltd. [2007] O.J. No. 1694 (S. Ct.) at para. 74.

[61] In the present situation, however, I think the record establishes that Trousdell will continue to contravene the Standstill Clause in the absence of injunctive relief. It has been a common theme of Trousdell, since his letter of October 10, 2023, if not before, that the board of the Company needs to be replaced. He may well be correct – the Court is not in a position to assess the merits of his argument. However, his pursuit of a change in the board composition has escalated over time to the point of distribution of the Press Release to encourage other shareholders to take steps to effect such change. This pattern of activity is proof enough, in my opinion, of a “reasonably apprehended imminent breach”. Absent an injunction, I think it is probable that Trousdell will take further actions to encourage other shareholders to change the composition of the board and that such actions would cast further doubt in the market and on the Company’s future direction and financial circumstances.

[62] Given the foregoing, I conclude the Company has established that it will suffer irreparable harm if the injunctive relief is not granted.

Balance of Convenience

[63] In the consideration of the balance of convenience, it is important to note that the requested injunctive relief is of an interim and interlocutory nature to run only until the Arbitrator renders his decision. In this context, the balance of convenience favours the granting of the injunctive relief for the following reasons.

[64] The Company has demonstrated a real risk of irreparable harm if Trousdell is not prevented from engaging in further activities in breach of the Standstill Clause pending the Arbitrator’s decision.

[65] On the other hand, I am not persuaded that Trousdell has demonstrated that he will suffer any real harm during the limited period of the injunction pending the Arbitrator’s award if he is prevented from further expressing his views regarding the suitability of the board and its direction for the Company and thereby is prevented from encouraging or influencing other shareholders to seek a change in the composition of the board by a proxy solicitation or otherwise. Moreover, after the distribution of the Press Release, any interested shareholder already has notice of Trousdell’s views on board composition and the appropriate strategic direction of the Company.

[66] I also do not accept Trousdell’s suggestion that an injunction will have a chilling effect on other shareholders of the Company who might have similar concerns with the present board. There is no evidence to support such a concern and no legal basis for it. Any injunction would be directed to requiring compliance with the Separation Agreement to which only Trousdell is a party and would apply only to Trousdell.

[67] While Trousdell says that he will suffer harm in the form of deprivation of his freedom of expression, an injunction would do no more than compel him to respect the contractual provisions to which he agreed in return for the benefit of other provisions in the Separation Agreement. In short, to the extent Trousdell will in fact suffer such harm if the injunction is granted, it is harm which he accepted as a condition of receipt of the benefits he received under the Separation Agreement.

Conclusion

[68] Based on the foregoing, NowVertical’s application for an interim and interlocutory injunction to enforce sub-clauses 2(a) to 2(k) of the Separation Agreement is granted.

The Motion to Dismiss Under s. 137.1

[69] As mentioned, Trousdell seeks an order dismissing the NowVertical application pursuant to s. 137.1(3) of the Courts of Justice Act.

Applicable Statutory Provisions

[70] The applicable statutory provisions are as follows:

137.1 (2) In this section,

“expression” means any communication, regardless of whether it is made verbally or non-verbally, whether it is made publicly or privately, and whether or not it is directed at a person or entity. 2015, c. 23, s. 3.

(3) On motion by a person against whom a proceeding is brought, a judge shall, subject to subsection (4), dismiss the proceeding against the person if the person satisfies the judge that the proceeding arises from an expression made by the person that relates to a matter of public interest. 2015, c. 23, s. 3.

(4) A judge shall not dismiss a proceeding under subsection (3) if the responding party satisfies the judge that,

(a) there are grounds to believe that,

(i) the proceeding has substantial merit, and

(ii) the moving party has no valid defence in the proceeding; and

(b) the harm likely to be or have been suffered by the responding party as a result of the moving party’s expression is sufficiently serious that the public interest in permitting the proceeding to continue outweighs the public interest in protecting that expression.

Analysis and Conclusions

[71] As a preliminary matter, Trousdell argues that the importance of the principle of preventing proceedings that limit freedom of expression, as set out in s. 137.1 of the Courts of Justice Act, should inform its motion for dismissal of NowVertical’s action. I fully acknowledge the importance of that principle as reflected in the purposes of s. 137.1 as set out in s. 137.1 (1). However, it is also important to note that this motion pertains to interim relief sought pending a determination of NowVertical’s claims against Trousdell in an arbitration. The parties have found no case law that addresses the application of the provisions of s. 137.1 in respect of a proceeding seeking interim and interlocutory relief. I address the significance of these circumstances below.

[72] I also note that, while this Application was originally initiated with a view to obtaining injunctive relief preventing the distribution of the Press Release, the circumstances have changed since the Press Release was published. As of the hearing of this motion, the issue for the Court is whether the negative covenants should be enforced prospectively in respect of activities by Trousdell generally directed toward a change in the composition of the board and in the strategic direction of the Company.

[73] The analysis of the application of s. 137.1 involves two steps. The first requires that Trousdell demonstrate that the “proceeding” arises from an “expression” made by a person that relates to a matter of public interest.

[74] I agree with Trousdell that this Application arises, at least in part, as a result of his distribution of the Press Release and that such action constitutes an “expression” within the meaning of that term in s. 137.1(2). I also agree that the Press Release relates to a matter of public interest. The composition of the board, and the dispute between the board and the largest shareholder of the Company regarding the composition of the board and the strategic direction of the Company, are of interest to the shareholders as well as to potential investors in the Company and potential counterparties with the Company. Accordingly, I conclude that Trousdell has satisfied the burden on him in s. 137.1(3).

[75] Before turning to the second step in the analysis of the application of s. 137.1, it is necessary to clarify the “proceeding” for the purposes of s. 137.1. On this motion, Trousdell seeks dismissal of the Application, not the Arbitration. The Application seeks only an interim and interlocutory injunction pending the Arbitration award. Accordingly, for the purposes of s. 137.1, the “proceeding” is this Application, not the Arbitration.

[76] Section 137.1(4) provides that the Court shall not dismiss the Application if the Company satisfies the Court on three matters: (1) that there are grounds to believe that the Application has substantial merit; (2) that there are grounds to believe that Trousdell has no valid defence to the Application; and (3) that the harm likely to be or that has been suffered by the Company as a result of Trousdell’s expression is sufficiently serious that the public interest in permitting the Application to continue outweighs the public interest in protecting the expression. In my view, the Company has satisfied the burden on it to demonstrate these three requirements for the following reasons.

[77] First, and most importantly, I think that this result necessarily follows from the determination above that NowVertical is entitled to the interim and interlocutory injunction that it seeks on this Application. The determination that the relief sought in the Application should be granted is confirmation on its own that the Application has substantial merit. Conversely, having made that determination, it also necessarily follows that the Court has determined that Trousdell has no valid defence to the request for the interim and interlocutory injunction which is the subject of the Application. It is not necessary to establish that Trousdell has no valid defence to the Arbitration as Troudell suggested.

[78] Secondly, I consider that the test in s. 137.1(4)(b) in the present context is substantially similar to the “balance of convenience” test for the purposes of injunctive relief. Having determined that the balance of convenience in respect of the request for injunctive relief favours the granting of an injunction, I think that the circumstances contemplated in s. 137.1(4)(b) have also been demonstrated. However, to the extent that the relevant considerations for the purposes of this provision extend beyond the balance of convenience, the public interest in the respect for commercial contracts as well as the interim nature of the requested injunctive relief are further significant factors in the Company’s favour. Any freedom of expression consideration in favour of Trousdell must be outweighed by the public interest in enforcing commercial agreements, which were freely entered into by Trousdell and of which he has received the benefit, for the limited period of time prior to the receipt of the Arbitrator’s award. In addition, there is nothing in the injunction granted today that prevents other shareholders from expressing their views and/or taking the action that Trousdell has invited in the Press Release pending the Arbitration award.

[79] Given these findings, s, 137.1 (4) provides that the Court shall not dismiss the Application under s. 137.1(3). Accordingly, Trousdell’s motion for dismissal of the Application is denied.

Conclusions

[80] Based on the foregoing, the NewVertical request for interim and interlocutory injunctive relief is granted with respect to compliance with the provisions of the Standstill Clause, other than the concluding paragraph thereof, and Trousdell’s motion for dismissal of the Application under s. 137.1 of the Courts of Justice Act is dismissed.

[81] If the parties are unable to agree on the costs of this matter, they shall have thirty days to submit costs submissions, not exceeding five pages in length, together with a cost outline as required by the Rules of Civil Procedure.

Wilton-Siegel J.

Released: January 29, 2024

COURT FILE NO.: CV-24-713172-00CL

DATE: 20240129

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

NOWVERTICAL GROUP INC.

Applicant

– and –

DAREN TROUSDELL

Respondent

REASONS FOR JUDGMENT

Mr. Justice H. J. Wilton-Siegel

Released: January 29, 2024

Nowvertical Group Inc. v. Trousdell , 2024 ONSC 595

Case Summary

Overview

Factual Background

The Parties

The Separation Agreement

The Events Giving Rise to this Application

The Press Release

Analysis and Conclusions

The Application for an Interim and Interlocutory Injunction

The Merits of the Applicant’s Case

The Applicable Standard

Is There a Serious Issue to be Tried?

Irreparable Harm

Balance of Convenience

Conclusion

The Motion to Dismiss Under s. 137.1

Applicable Statutory Provisions

Analysis and Conclusions

Conclusions

Counsel

Parties

Areas of Law

Fact Patterns

Issues

Statutory Provisions 5

Legal Tests 3

Legislation 4