Court File and Parties

COURT FILE NO.: CV-24-00721494-00CL DATE: 20241204 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: 2724050 Ontario Inc., Plaintiff AND BAS Sports Group Inc., Reid Acton and Bob Acton Sports Ltd., Defendants

BEFORE: W.D. Black J.

COUNSEL: Tom Arndt, for the Plaintiff Jordan Katz, for the Defendants Brandon Jaffe, for MNP Ltd., (Proposed Inspector)

HEARD: November 25, 2024

Endorsement

Overview

[1] There were two motions before me today. The plaintiff seeks an order appointing an inspector under section 161 of the OBCA to conduct an investigation of the defendants, to be funded by the defendants up to an initial cap of $50,000.00.

[2] The defendants oppose this motion, and bring a cross-motion seeking the appointment of a business valuator at a proposed cost of up to $35,000.00, to be borne in equal measure by the parties. The plaintiff opposes this relief, maintaining that the existing financial records are inadequate to value the business.

[3] The defendants ultimately seek a court-ordered buyout of the plaintiff’s interest in BAS Sports Group Inc. (“BAS”), but by endorsement dated September 25, 2024, Conway J. directed that the defendants’ motion for a court-ordered buyout be deferred pending the hearing of the motion and cross-motion with respect to the competing proposed appointments of court officers.

Brief Conclusion

[4] Having reviewed the extensive materials filed by the parties, and having considered the submissions of counsel, I have decided that these parties have developed irreconcilable differences, and that, given the somewhat limited resources of the defendants, and taking into account the conduct of the parties, the preferred approach is to proceed with the valuation proposed by the defendants.

Relevant Background Facts

A. Origins of the BAS Business

[5] The relevant backdrop to the dispute begins with Reid Acton’s father Bob Acton, who started a community sports academy in the Beaches neighborhood in Toronto in the early 2000s through the defendant company Bob Acton Sports Ltd. (“Bob Ltd.”). That business is said to have been successful, with “thousands” of children participating in the programs it offered over the years.

[6] When Bob Acton died in 2016, Reid Acton (“Reid”), then 27 years of age, took over the Bob Ltd. business. Reid, who was an accomplished hockey and lacrosse player, was already at that time in the process of building a hockey and lacrosse training business for competitive athletes under the name and brand “Beast Athletics” (sometimes referred to as “Beast”). Reid incorporated BAS in 2018 to operate the Beast Athletics business, and also brought the operation of Bob Ltd. under BAS. Reid acknowledges that up to that point, while he had extensive experience in hockey and lacrosse, he had little experience operating a business and little knowledge of proper corporate practices.

B. Initial Meeting of the Parties and Discussion of Potential Investment

[7] Reid met Kevin Zhou (“Kevin”) and Sammi Li-Zhou (“Sammi” and together with Kevin, the “Zhous”), when the Zhous’ son participated in a Beast Athletics program (I believe in Toronto). The Zhous, who are the principals and sole shareholders of the plaintiff, 2724050 Ontario Inc. (“272”), were interested in the Beast business, and engaged a consultant with extensive experience in the lacrosse and hockey industries, Brad Watters, who proposed to the Zhous that they consider investing in Beast Athletics.

[8] More particularly, in March of 2019, the Zhous received a PowerPoint presentation from Mr. Watters called “Beast Purchase Forecast and Growth Strategy”, contemplating the Zhous investing in Beast Athletics and relying on Reid’s experience to help grow Beast Athletics in both Toronto and China, including:

(a) A plan to build Beast Athletics to become the top training business in Toronto and in China;

(b) Running camps in Canada for children from China; and,

(c) Building a “new rink in China for Beast” to generate revenue.

[9] The presentation contemplated that the Zhous would “invest 500K in a growing quality company and inject the Chinese revenue” to generate profits quickly, and to “build out a company without a lot of risk or money”.

[10] The presentation also contemplated that the Zhous would arrange a line of credit for BAS. It did not contain much in the way of financial information about Beast Athletics/BAS, and the Zhous confirmed in their testimony on cross-examination that they never sought or received additional financial information about Beast/BAS, and never engaged anyone to review or analyze the limited financial information that they received.

[11] In the meantime, during the due diligence process related to the Zhous’ potential participation in BAS, Reid confirmed that the business was essentially a one-person operation, and that it had no employees. It did engage independent contractors – the coaches – but had no written contracts with them. Reid also advised that he had no documentation of his sole proprietorship, and that the business had no assets other than unregistered intellectual property and Reid’s goodwill.

C. The Deal and the Agreements

[12] Nonetheless the Zhous decided to incorporate 272 and to invest in BAS. The agreement, as discussed in more detail below, was that through 272 the Zhous would invest $450,000.00 into BAS in exchange for 51% of its shares.

[13] To that end, on November 21, 2019, Reid and 272 executed a series of agreements to give effect to the deal: a Share Purchase Agreement (“SPA”), a Unanimous Shareholders’ Agreement (“USA”), an Employment Agreement, an Escrow Agreement, and a Promissory Note.

[14] At the request of a lawyer advising Reid with respect to the transaction, it was agreed, inasmuch as it would be beneficial to Reid/BAS from a tax perspective, to structure the purchase price to be payable in three instalments:

(a) $200,000.00 on the closing date of November 21, 2019;

(b) $150,000.00 on the first anniversary of the closing date (the “second payment”); and,

(c) $100,000.00 on the second anniversary of the closing date (the “third payment”).

[15] The Promissory Note confirmed 272’s obligation(s) to pay the second and third payments, and the Escrow agreement provided for the tranches of shares to be issued coincident with the second and third payments to be held in escrow (by an escrow agent) pending those payments.

[16] In terms of the ultimate acquisition by 272 of 51% of BAS’s shares, 23% of the shares were issued to 272 on the closing date (when the $200,000.00 instalment was paid) and the balance of 28%, to make up the agreed total of 51% of the shares, was held by the escrow agent, with the second and third tranches of shares to be released to 272 upon receipt of the second and third payments.

[17] As noted, Reid had been operating the Bob Ltd. business under BAS. However, in that the Zhous were only investing in the Beast Athletics/BAS business, and not in Bob Ltd., Reid transferred the Bob Ltd. business out of BAS – to the knowledge and with the agreement of the Zhous – just prior to closing.

[18] The Employment Agreement confirmed that Reid was and would remain the sole officer (President) of BAS, and that his salary in that capacity was to be limited to $50,000.00 per year for the first three years following the closing date.

[19] Each of the parties emphasize different aspects of the various agreements comprising the deal.

[20] A number of those provisions will be discussed in this endorsement, but Reid and BAS (for reasons discussed below), highlight in particular that the SHA included non-competition and confidentiality clauses, one of which set out an express mutual requirement that the parties “not use any Confidential Information for its or his own benefit or purposes of any Person, other than the Corporation (i.e. BAS)”, and that any such disclosure would be highly detrimental to and would irreparably harm BAS.

[21] For its part, among other provisions, 272 highlights that the USA specified that Min & Associates were appointed “Accountants” of BAS, and were to have access to all books of account, records and cheques of BAS and Reid (to the extent they relate to BAS). 272 also points out that unanimous shareholder approval was required for such items as undertaking a new type of business, changing salary or other compensation payable to Reid and/or declaring dividends or other distributions to Reid.

D. The Trip to China

[22] Shortly after the closing date in November of 2019, the Zhous flew Reid and two of Beast Athletics’ coaches to Chengdu, China. Based on discussions with Kevin in particular about the visit to China, Reid expected to see a rink that Kevin had set up to house the Beast Athletics’ operation in China (referred to by the parties as “Beast China” or “Beast East”).

[23] In fact, upon his arrival in China, Reid learned that Kevin had set up an entire rink prominently featuring the Beast Athletics name and brand, including its distinctive “winged lion” logo. The name and logo were displayed at center ice, on the boards, on the Zamboni and on lockers. Kevin’s staff were wearing Beast Athletics branded apparel, and the athletes were wearing Beast Athletic jerseys.

[24] Reid’s evidence is that at the time, he understood that the extensive use of the Beast Athletics brand and logo was in the service of developing a Beast Athletics China operation. Based on that understanding, Reid and the coaches spent a number of days introducing Kevin’s Chinese staff to the training curriculum that Reid had developed for Beast/BAS, and sent to Sammi and her staff information about the Beast Athletics program, including biographies, training videos and design files.

[25] Upon his return to Canada, Reid provided the Zhous with an update about Beast Athletics’ business and met with them in early March 2020.

[26] Shortly after that, the COVID pandemic struck.

E. Impact of the Pandemic

[27] As with many businesses, it appears that BAS was hit hard by the pandemic. Among other impacts, there was limited access to indoor arenas for the training and tournaments at the heart of the Beast business, such that operations and revenues were significantly curtailed. In communications during the early pandemic timeframe, Reid advised Sammi that “Beast got killed”, that he was “battling to create streams of income amidst a pandemic,” that there was “no ice” and that “all lacrosse programs [were] shut down.”

[28] There are allegations by the plaintiff that, commencing during this early pandemic period, Reid was not entirely forthcoming with information about BAS’s financial performance. On the other side, Reid alleges that the Zhous failed to respond to his inquiries about the status and operations of Beast China, and in fact at a certain point stopped responding to him at all.

Allegations that Reid Breached Agreements

[29] 272 also alleges that starting during this timeframe, Reid and BAS began breaching various aspects of the agreement(s) between the parties.

[30] Reid does not deny some of the breaches. For example, 272 expresses a concern that revenues and operations of BAS and Bob Ltd. were co-mingled (after the initial removal of Bob Ltd. from the BAS business). Reid acknowledges, given the adverse effect of the pandemic on BAS’s revenues, that he made the decision to recapture the Bob Ltd. revenues within BAS in order to ensure there were sufficient funds to meet BAS’s expenses.

[31] In addition, contrary to the provision of the agreement that Min & Associates would function as the accountants for BAS, Reid initially kept the financial books of BAS himself. Then, in February of 2021, as the BAS business showed early signs of reviving, Reid hired Leonard Szymanski to prepare BAS’s tax returns and, based on Mr. Szymanski’s recommendation, also engaged a bookkeeper in November of 2021.

[32] In its submissions, 272 makes much of these acknowledged transgressions. It appears to me, however, that Reid, while in various respects technically non-compliant with aspects of the agreement(s) between the parties, was transparent about what he was doing, and made reasonable efforts to respond to the Zhous’ inquiries about the state of BAS’s business.

Observations About Reid’s Efforts and Intentions

[33] Moreover, it is clear to me that Reid’s non-compliance with aspects of the deal was driven, in every case, by a combination of a desire to keep the business afloat and to preserve its resources, and a degree of inexperience about how best to manage the business and its accounts.

[34] In other words, as becomes important in assessing 272’s allegations of oppression to the extent necessary to consider appointing an inspector under OBCA s. 161, I do not find evidence that Reid was dishonest with 272 and the Zhous, nor that he engaged in any intentional misconduct. The shortcomings of Reid and BAS, such as they were, stemmed from well‑intentioned efforts to manage the struggling business during the crippling pandemic. The evidence shows that by and large Reid was making genuine efforts to respond to the Zhous’ inquiries and to provide accurate information.

Concerns about the Zhous’ Conduct

[35] On the other hand, I have considerable concerns about aspects of the conduct of 272 and the Zhous.

[36] These concerns arise in two primary categories.

A. Non-Payment of Substantial Portion of Purchase Price

[37] First, after making the first payment of $200,000.00 at the closing, 272 only paid $50,000.00 of the remaining amount of $250,000.00 required by the agreement to be paid in instalments on the first and second anniversary of the closing date.

[38] Specifically, less than a month before the November 21, 2020 due date for the second payment (of $150,000.00), Sammi proposed to Reid to delay that payment until April of 2021. Ultimately, it was agreed that 272 would pay $50,000.00 on November 21, 2020 (rather than the $150,000.00 required under the agreements) and would pay the balance of $100,000.00 (for the second payment) in April of 2021.

[39] 272 did not comply with the revised agreement. It did not pay $50,000.00 on November 21, 2020 as agreed. It paid that amount on March 18, 2021, but made no further payments thereafter on account of the second payment, and made no payments at all on account of the third payment. In addition, for extended stretches of this timeframe, the Zhous, and in particular Kevin, provided no responses whatsoever to Reid’s repeated inquiries about what was happening with Beast China (which Reid continued to assume was being developed for the BAS business in keeping with the plan contemplated in Brad Watters’ PowerPoint presentation and based on his observations during the trip to China in early 2020.)

[40] 272’s submissions downplay the significance of the breach of 272’s payment obligations, purporting to excuse the non-compliance on the basis of Reid’s alleged shortcomings in providing appropriate financial and other information concerning BAS’s operations. 272 also maintains that the terms of the agreement were such that 272 effectively became a 51% shareholder of BAS on the closing date of November 21, 2019, notwithstanding that 28 of the 51 shares acquired (or to be acquired) by 272 remained in escrow at that time pending payment of the balance of the purchase price.

[41] In my view, at least as at the time that 272 forfeited on the second payment, it could no longer purport to have the standing or exercise the rights of a majority or even equal shareholder.

[42] I should note in that regard that, 272’s late payment of a $50,000.00 portion of the second payment might entitle it, on a pro rata basis, to another five shares (from the 28 shares held in escrow from the time of closing). However, in October of 2021, when Reid raised concerns that 272 was in default of its payment obligations under the Promissory Note, only Sammi responded, saying that she was “no longer involved in [Kevin]’s business operation.” In the circumstances, Reid caused his counsel to provide a Notice of Default letter (contemplated by section 4 of the Escrow Agreement) to require the Escrow Agent to release the remaining 28 securities in escrow to Reid.

[43] The Escrow Agent in turn provided the default notice to Kevin, who did not respond during the 10-day objection period prescribed by the Escrow Agreement. In the result, all of the 28 escrowed shares were returned to Reid on November 9, 2021 without dispute. Reid acknowledged before me that in the circumstances he has an obligation to account to 272 for the $50,000.00 he received in March of 2021 as partial payment of the second payment due in November of 2020.

[44] Following these events there was an hiatus during which Reid did not hear from the Zhous at all. It was only in late 2022, that Kevin “resurfaced”, asked to and in fact met with Reid in Toronto, and renewed the dormant request for information about the BAS business.

[45] To his credit, and again showing his good faith, Reid in fact provided much of the information requested, in early 2023. Having done so, Reid then told Kevin that he would “like to set up a call and discuss this partnership.” Once again, Kevin did not respond. Instead, several months later, Kevin caused a lawyer to send a six-page demand letter on behalf of 272, followed shortly by a statement of claim.

B. The Zhous’ Deceptive Use of “Beast” Brand for Their Own Account

[46] My second set of concerns about the conduct of 272 and the Zhous relates to their unabashed use of the Beast brand and logo to promote their China-based business which, as has become apparent, they (or at least Kevin) view(s) as their own business separate and apart from their investment in BAS.

[47] As noted above, and as is evident in photographs included in the record before me, the Zhous made extensive use of the Beast logo in their Chinese operations, including at center ice in the arena at which their business appears to have been conducted, as well as on uniforms of staff and athletes, on lockers, and elsewhere.

[48] In my view, when he was invited to China to see the arena and the Chinese-based operations, Reid reasonably understood them to be part of an effort to build out the BAS business in China, in keeping with the plan featured in the PowerPoint presentation that Mr. Watters had made to the Zhous just prior to their decision to invest, and in keeping with the overall plan discussed with Reid.

[49] It is apparent that Reid understood that to be the case. As discussed, proceeding on the evident assumption that the Zhous were building the Beast East component of BAS’s overall business, Reid provided BAS training and design materials (among other things) to 272 and the Zhous at and after the time of his visit to China. There can be no reasonable suggestion that Reid did so on any basis other than the assumption that the Zhous’ efforts to build the business in China were part of the overall development and promotion of the BAS business.

[50] At or soon after receiving 272’s statement of claim in August of 2023, Reid learned (and the evidence in the record before me clearly demonstrates), that the Zhous (or at least Kevin), had in fact been building, operating and promoting a business in China for their own account, continuing to use the Beast name, brand and logo, and continuing to exploit strategies that had been part of the plan that Reid shared with the Zhous, after the visit to China in early 2020, on the assumption that the parties would continue to be in business together as co-owners of BAS.

[51] When I put to 272’s counsel my concern about the Zhous’ use of the Beast brand and logo in what 272 now purports to be a separate business operated by Kevin, his answer was not to deny any of the conduct at issue, but rather to submit that I need not worry about that conduct, inasmuch as Reid has not registered any specific intellectual property interest in the brand and logo.

[52] In my view, while that is perhaps a fair observation if this was primarily an intellectual property dispute, it is not answer enough in circumstances in which the Zhous and 272 allege that they have been oppressed and otherwise mistreated by the defendants. I find that the plaintiffs do not come to this court with “clean hands”, and that they have deliberately deceived the defendants into providing the defendants’ confidential information for use, not in the joint business in respect of which the agreements between the parties were made, but instead for the plaintiffs’ own separate business interests.

The Need for the Parties to Separate

[53] I also find that this conduct, and indeed the entire array of allegations back and forth in this matter, is inconsistent with and precludes any suggestion that the parties can continue in business with one another.

[54] It is clear to me that the parties will inevitably have to go their separate ways. The details of this parting, if they cannot be agreed, will have to be the subject of a separate motion before this court (as held by Conway J.), but the observation about the necessary divorce between these parties has implications for the choice of remedy in the motion before me.

Two Potential Choices of Remedy

[55] As noted at the outset of this endorsement, there are two choices of remedy before me.

[56] It is noteworthy that each side agrees that it will be beneficial to insert a court-ordered third-party expert into the fray (hereafter, appreciating that 272 suggests an inspector under s. 161 of the OBCA and the defendants suggest a valuation expert, I am going to refer to these potential experts generically as the “third-party investigator(s)”). I would observe that, albeit the parties have somewhat different agendas associated with their respective suggested third-party investigators, the tasks to be undertaken by whichever third-party investigator is chosen will in many respects be similar or even identical.

[57] That is, it is common ground that the financial records of BAS are somewhat deficient. The plaintiff asserts that the deficiencies are a product of Reid’s deliberate efforts to obfuscate and conceal information. The defendants acknowledge that BAS’s financial information is imperfect, but explain it on the basis that efforts to maintain the relevant books have been something of a patchwork – initially undertaken by Reid, in an effort to save money during the early phase of the pandemic but admittedly without any expertise or experience to guide him, and later by a combination of an accountant and a bookkeeper, but only ever in the form of Notice to Reader (also known as “compilation”) statements.

[58] As discussed above, I do not accept that there was anything deceitful in the substandard accounting efforts of Reid and BAS. His ongoing communications with the Zhous show that he was attempting at all times, in good faith, to provide information that the Zhous sought from time to time.

[59] If this was a bigger business and/or if there was a likelihood that these parties would be continuing their shareholder relationship on an ongoing basis, I would order an audit as an initial matter. Indeed I raised with counsel the potential benefits of doing so. For slightly different reasons, both sides resisted the idea of appointing an auditor. BAS, in particular, emphasized that the cost of that exercise would be disproportionately high relative to the size of the business, and that, as both sides appear more or less to agree, the work of a third party investigator – either an OBCA s. 161 inspector or a valuator – will necessarily bring order and additional clarity concerning BAS’s financial records and circumstances, and will thereby achieve important aspects of what an audit would achieve, and on a more streamlined and cost-efficient basis.

Decision not to Appoint an Inspector Under the OBCA

[60] Having recently had occasion to review the law about the appointment of various types of court officers, I accept the submissions of 272’s counsel that the threshold to appoint an inspector under s. 161 of the OBCA, when the role of the inspector is expressly intended to be in the nature of gathering basic information about the operations and financial results of the entity at issue, is relatively low.

[61] In essence what is required is a prima facie showing that the business or affairs of the corporation are or have been carried out in a manner that is prejudicial to or unfairly disregards the interests of a security holder – including by withholding information to which that security holder is statutorily entitled – or that the respondent(s) have, in relation to the business or affairs of the entity, acted fraudulently or dishonestly.

[62] I find that 272 has not demonstrated evidence sufficient to meet the required prima facie threshold.

[63] While, again, I accept that the extent and quality of information provided by Reid to 272 and the Zhous was imperfect in a number of respects, and that Reid’s adherence to the agreements was also wanting in some respects – for example when he unilaterally decided that he had to reintroduce Bob Ltd.’s revenues into BAS’s business in order for BAS to survive during the pandemic – I also find that any and all such shortcomings were not deliberate or deceitful, that Reid at all times attempted to disclose to 272 and the Zhous the steps that he was taking and why.

[64] In Urbisci v. 2388095 Ontario Ltd., 2018 ONSC 2678, Ryan Bell J. noted that where disclosure of statutorily required information has been imperfect or slow, even where there are some “obvious errors” or “some laxity” in corporate books and records, that does not itself furnish a basis for a prima facie finding of oppression. I find that observation to be apt in the case before me.

[65] I note that the defendants have raised substantive concerns as to the impartiality of the consultants proposed by the plaintiff to act as inspectors. While on the face of it there is considerable merit to those concerns, in light of the plaintiff’s failure to meet the threshold required for the court to appoint a s. 161 inspector, I need not assess those concerns in detail.

[66] As discussed, in contrast to my findings about the alleged misconduct of the defendants, I find that the conduct of 272 and the Zhous was not characterized by good faith, and that the Zhous undisclosed continued use of the Beast brand and logo for their own benefit, was in fact deceitful. It is well established that in order to obtain a discretionary equitable remedy, a party must come to court with “clean hands.” I find that 272 and the Zhous have not done so here.

Appointment of Valuator

[67] In the circumstances, I prefer the remedy suggested by the defendants.

[68] In circumstances similar in certain material ways to the circumstances at hand, in Locke v. Quast, 2016 ONSC 1873, Pierce J. found that the relationship of the parties before her had “broken down” to the extent that a “rapprochement” was “no longer possible.”

[69] Her Honour ordered pursuant to section 207 of the OBCA (cited and relied on by the defendants before me) that the parties were to “agree on a licensed business valuator who shall determine the fair market value of [the relevant shares] with and without a minority shareholder discount.”

[70] I find that a valuation is also an appropriate remedy in this case. As such, I dismiss the plaintiff’s motion, and grant the motion of the defendants.

[71] The defendants have attached as Schedule C to their factum a proposed form of order to appoint a valuator and to guide the valuator’s mandate and conduct. I find the contents of the proposed order to be appropriate, and accordingly I order it.

Costs

[72] While it follows that the defendants are entitled to their costs of this motion, and while both sides have filed costs outlines as required, I was advised by counsel that there had been an offer or offers that might be taken into account on the question of costs.

[73] Accordingly, I ask that the defendants deliver, within five days of the release of this decision, a written submission, not to exceed three pages in length, attaching and discussing any relevant offer(s).

[74] The plaintiff is to respond within five further days, also with written submissions no longer than three pages in length.

W.D. BLACK J. DATE: December 4, 2024