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Ontario Business Corporations Act, Oppression Remedy, Damage, Trial, Appeal, Costs

Law Offices of Nizam Hashmi > Uncategorized  > Ontario Business Corporations Act, Oppression Remedy, Damage, Trial, Appeal, Costs

Ontario Business Corporations Act, Oppression Remedy, Damage, Trial, Appeal, Costs

*Georgakakos v. Georgakakos 2020 ONSC 2256

The appellants were minority shareholders in a family holding company, AG, controlled by their father, the individual respondent. Initially, he owned 51 per cent of the shares of the company and held 40 per cent of the shares in trust for the appellants, with his wife holding the remaining nine per cent. After he and his wife divorced, the wife resigned as a director and transferred her shares to one of the respondent holding companies. AG owned shares in a company that operated a poultry processing operation. Another of the shareholders of that company decided to sell half his shares to the other four shareholders in equal portions. The respondent, rather than having AG purchase the shares, had the shares purchased by one of his own companies, Woodland. In February 2017, the respondent caused Woodland to sell those shares to AG for a profit. To pay for the shares, he caused AG to set the purchase price off against a debt owed by Woodland to AG. Prior to June of that year, AG had never declared a dividend despite having substantial retained earnings. The appellants applied under the Ontario Business Corporations Act (“OBCA”) for relief on the basis that the respondent had breached his fiduciary duty as a director of the company by self- dealing and that the company had carried on its affairs in a way that was oppressive to their interests as shareholders by failing to declare dividends. The application judge dismissed the application as it related to fiduciary duty but agreed that the appellants had been oppressed. However, rather than granting any of the orders sought by the appellants, the judge ordered the appellants to sell their shares to AG. The judge also ordered the appellants to pay the respondent’s costs. The appellants appealed the finding regarding fiduciary duty, the orders with respect to the oppression remedy, and the costs order.

Held, the appeal should be allowed.

The application judge erred both in fact and in law in concluding that the respondent had not breached his fiduciary duty. The factual errors occurred in failing to refer to certain breaches of the OBCA, overlooking the duty to disclose by not considering the subsequent sale of the shares for a substantial profit, and by not referring to the fact that the purchase by Woodland was not in the best interests of AG. Had the judge applied the law correctly, he ought to have made a positive finding of evidence that the respondent put AG’s interests first, rather than a negative finding that there was no evidence to the contrary. The remedy was to declare a breach and to order the respondent and Woodland pay to AG the amount of money Woodland gained and AG lost from the respondent’s self-dealing.

The application judge erred in ordering AG to purchase the appellants’ shares. In his reasons, the judge found that the relationships between the shareholders were irreparably broken. Although there was some evidence that the relationships had been damaged, there was no evidence of irreparable damage. Even if such a finding had been supported by the evidence, the remedy of a forced sale of the appellants’ shares to the corporation went beyond what was necessary to rectify the oppression. The judge’s order was manifestly unjust in that it punished the appellants by failing to consider their reasonable expectations and rewarded the respondent by allowing him to receive all of AG’s future revenue from the poultry operation. The shares of AG held by the respondent in trust for the appellants were to be transferred to another of the respondent companies, with the appellants substituted for the respondent as director.

With the appeal succeeding completely, the application judge’s order on costs could not stand. His fixing of costs was retained in the same amount, but awarded to the appellants.

Issues

[21] This appeal raises three issues:

  • Did the application judge err in concluding that Angelo had not breached his fiduciary duty in connection with the purchase by Woodland of the Riverview shares?
  • Did the application judge err in ordering AG to purchase the appellants’ shares as a remedy for failing to declaredividends?
  • Did the application judge err by awarding the respondents their costs?

[22] Before I address these issues, I will briefly address the standards against which the application judge’s reasons must be reviewed.

Standard of Review

[23] In Wilson v. Alharayeri, [2017] 1 S.C.R. 1037, [2017] S.C.J. No. 39, 2017 SCC 39, at para. 59, the Supreme Court of Canada set out the standard for appellate review of decisions made under the oppression provisions of the Canada Business Corporations Act, R.S.C. 1985, c. C-44:

Appellate courts should . . . adopt a deferential stance when reviewing judgments rendered on oppression applications. Three principles govern the applicable standard of review. First, absent palpable and overriding error, an appellate court must defer to the trial court’s findings of fact. Second, an appellate court may intervene and substitute its own decision for the trial court’s if the judgment is based on “errors of law . . . erroneous principles or irrelevant considerations”. Third, even if it was not so based, an appellate court may intervene if the trial judgment is manifestly unjust.

(Citations omitted)

[24] This standard is equally applicable to appellate review under the analogous provisions of the OBCAAPAC Ltd. v.Cronin, [2019] O.J. No. 14, 2019 ONSC 86 (Div. Ct.), at para. 21, citing Basegmez v. Akman (2018), 141 O.R. (3d) 549,[2018] O.J. No. 617, 2018 ONSC 812 (Div. Ct.), at para. 7.

[25] A palpable error in the fact-finding process is one that is plainly seen: Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, at para. 6. An overriding error is one that materially affects the outcome of the case: Benhaim v. St-Germain, [2016] 2 S.C.R. 352, [2016] S.C.J. No. 48, 2016 SCC 48, at para. 38.

[26] The deference to be given to an application judge’s decision on the issue of remedy referred to in Alharayeri means that an appellate court may only interfere with that decision where it has been established that the application judge erred in principle or arrived at a decision that is otherwise unjust: Naneff v. ConCrete Holdings Ltd. (1995), 23 O.R. (3d) 481, [1995] O.J. No. 1377 (C.A.), at para. 17.

[27] Similar deference is owed to an application judge’s decision on costs. A reviewing court should only set aside a costs award on appeal if the judge has made an error in principle or if the costs award is plainly wrong: Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, [2003] S.C.J. No. 72, at para. 27.

[28] With these standards in mind, I turn now to an analysis of the application judge’s decision.

Analysis

Issue 1: Did the application judge err in concluding that Angelo had not breached his fiduciary duty?

[29] It is not disputed that Angelo was under a fiduciary duty as a director of AG. The issue before the application judge was whether Angelo had breached that duty. In finding that he had not, the application judge relied on three aspects of the evidence: (1) the fact that both Angelo and Bessie, as the directors of ABG, had acquiesced in the purchase of the Riverview shares by Woodland; (2) the fact that Riverview was not paying dividends at the time of the purchase in 2009-2010; and (3) the absence of any evidence that Angelo had placed his own interests ahead of those of AG. In my respectful view, by relying on these things, the application judge committed both factual and legal errors.

A director’s fiduciary duties

[30] A corporate director has both a statutory and a common law duty to “act honestly and in good faith with a view to the best interests of the corporation”: OBCA, s. 134(1)(a); BCE Inc. v. 1976 Debenture holders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, at para. 37. A director’s fiduciary duty requires him to avoid situations in which his interests conflict with those of the corporation and not to abuse his position for personal gain: Unique Broadband Systems Inc. (Re) (2014), 121 O.R. (3d) 81, [2014] O.J. No. 3253, 2014 ONCA 538, at para. 46. This duty dictates that a corporate director must not appropriate for himself an opportunity properly belonging to the corporation: Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592, [1973] S.C.J. No. 97, at p. 607 S.C.R.

[31] These fiduciary obligations do not preclude a director absolutely from transacting with the corporation. However, wherethat occurs, the law requires that the director prove that the transaction was “a righteous one”: Crighton v. Roman, [1960]S.C.R. 858, [1960] S.C.J. No. 52, at p. 869 S.C.R. In order to do that, the director must prove that he made full disclosure ofhis interest in the transaction: OBCA, s. 132(1); Crighton, at p. 869 S.C.R. If it is material, the disclosure must include anindication of the amount of the profit the director expects to gain: Gray v. New Augarita Porcupine Mines Ltd., [1952] J.C.J.No. 4, [1952] 3 D.L.R. 1 (P.C.), at p. 14 D.L.R.

[32] The OBCA requires that a director’s disclosure be in writing or entered into the minutes of the directors meeting at whichthe proposed transaction is first considered and precludes the director from voting on the transaction: s. 132(1) and (5).

[33] However, full disclosure of the director’s interest in a transaction is not enough. In addition, the transaction must be inthe best interests of the corporation, even where a director has made proper disclosure of his interest in the transaction:UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., [2002] O.J. No. 2412, 2002 CarswellOnt 2096 (S.C.J.), at para. 117.

[34] Where a director fails to make full disclosure or otherwise contravenes the provisions of s. 132 of the OBCA, a shareholder may apply for an order setting aside the transaction and requiring the director to account to the corporation for any profit or gain realized by virtue of it: OBCA, s. 132(9).

Application of the law

[35] In my respectful view, the application judge erred both in fact and in law by concluding that Angelo had fulfilled hisfiduciary duties with respect to the purchase and sale by Woodland of the Riverview shares.

[36] With respect to the duty to disclose, the application judge was correct in finding that Angelo and Bessie at least acquiesced in the purchase by Woodland of Riverview shares in 2010 by virtue of the resolution that was passed in 2009. However, he failed to refer to the fact that Angelo voted on that resolution, in contravention of s. 132(5) of the OBCA. He also failed to refer to the fact that there was a second Riverview share purchase in 2014, which was not approved by any resolution whatsoever.

[37] Perhaps more importantly, the application judge appears not to have considered the evidence that Woodland later sold the Riverview shares to AG for a very substantial profit. There was no evidence that Angelo disclosed his plan to sell the Riverview shares to AG. Thus, Angelo failed to meet his onus with respect to the duty to disclose.

[38] The application judge also failed to refer to the fact that AG would not have had to pay what it did to purchase the Riverview shares had it been the one to purchase the Riverview shares originally, which it was entitled to do as a Riverview shareholder. In focusing, instead, on the fact that Riverview was not paying dividends at the time its shares were purchased by Woodland, the application judge failed to consider evidence that showed that Riverview was retaining earnings. This is the reason Woodland was later able to justify the price at which it sold the shares to AG. Had the Riverview shares been purchased by ABG in 2010 and 2014, it would have been the beneficiary of these retained earnings, rather than Woodland. The purchases by Woodland, therefore, were not in the best interests of AG.

[39] In my respectful view, the failure to consider this uncontroverted evidence constituted palpable and overriding errors in the fact-finding process.

[40] In addition to these factual errors, the application judge appears to have committed a legal error in reaching hisconclusion that Angelo had not breached his fiduciary duties. As discussed above, where a director transacts with the corporation, as Angelo did when Woodland sold the Riverview shares to AG, the onus is on the director to prove that thetransaction was a proper one. The director must prove that he put the interests of the corporation above his own. Theapplication judge’s use of the words “no evidence that the director placed his interests ahead of AG” suggests that heplaced the onus on the appellants to prove that Angelo put the interests of Woodland ahead of those of AG, rather thanrequiring that Angelo prove the transaction was in AG’s best interests. Had the application judge applied the lawcorrectly, he ought to have made a positive finding, i.e., that there was evidence that Angelo put AG’s interests first, ratherthan a negative finding, i.e., that there was no evidence to the contrary. The application judge’s reversal of the burden ofproof constituted a legal error.

[41] As a result of these factual and legal errors, the application judge’s decision on the issue of whether Angelo breached his fiduciary duty to AG cannot stand. The remaining question is what to do now.

Remedy

[42] In my view, this is not an issue that needs to be returned to the application judge or another judge for determination. No conclusion is available on the evidence other than that Angelo breached his fiduciary duty by appropriating an opportunity for Woodland in purchasing the Riverview shares and by later selling those shares to AG at a substantial profit.

[43] Nor is it necessary to remit the matter to any other court in order to remedy the breach. There is no dispute as to theamount of money Woodland gained and AG lost as a result of Angelo’s self- dealing. Therefore, I would grant the requestmade by the appellants in their notice of appeal and order that Angelo and Woodland pay the sum of $1,146,418 to AG.

[44] The appellants have not claimed prejudgment interest on this amount under s. 128(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43.

Issue 2: Did the application judge err in ordering AG to purchase the appellants’ shares as a remedy for failing to declare dividends?

[45] The application judge found that the appellants had been oppressed because AG had never declared a dividend fromthe time the corporation came into existence in 1993 until after the application was commenced in 2017. As a remedy, heordered that AG purchase the appellants’ shares at fair market value.

[46] In my respectful view, the application judge’s remedy was based on a factual finding that had no basis in theevidence, was wrong in principle, and resulted in manifest unfairness.

Section 248 of the OBCA

[47] Section 248 of the OBCA provides the court with very broad discretion to deal with conduct that is oppressive, unfairlyprejudicial to, or unfairly disregards the interests of shareholders of the corporation. Where a court finds that such conducthas occurred, s. 248(3) provides that the court may make any interim or final order it thinks fit, including

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by- laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the money paid by the security holder for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating thecorporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested personfinancial statements in the form required by section 154 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 250;

(l) an order winding up the corporation under section 207;

(m) an order directing an investigation under Part XIII be made; and

(n) an order requiring the trial of any issue.

[48] However, the broad discretion provided to an application judge under the OBCA is constrained by its purpose. The reasonable expectations of the aggrieved parties are central to the issue of oppression. Those expectations serve both to determine whether the impugned conduct has resulted in oppression, and to delimit the remedy: BCE Inc.supra, at paras. 56 and 68; Naneff, at para. The remedy fashioned under s. 248(3) may only be used to rectify the oppression. As theSupreme Court stated in Alharayeri, at para. 27, the order “should go no further than necessary to correct the injustice orunfairness between the parties”. To go beyond that is an error in principle: Naneff, at para. 32.

Application of the law

[49] In their factum, the respondents argue there was no evidence filed on the application by the appellants to support theposition they adopt in this appeal that they had a reasonable expectation that they would be paid dividends on their shares. During oral argument, however, counsel for the respondents conceded that it was reasonable for the appellants to expect that some dividends would be paid on their shares, but not when and how much. In my view, this argument has no merit.

[50] It was implicit in the application judge’s finding of oppression that the appellants had a reasonable expectation thatthey would be paid dividends more frequently than once every 14 years and, in an amount greater than the $100,000 paidafter the application was commenced. This was a factual finding made by the application judge. The respondents have notsought to overturn it, nor can I see any reason why this court would. It was supported by the evidence of Bessie and the other evidence in the case. There is no requirement that evidence regarding the appellants’ expectations must come from the appellants themselves. As the Supreme Court held in BCE Inc., at para. 70, evidence of an expectation “may take many forms depending on the facts of the case”. As the court held, at para. 75:

“Reasonable expectations may emerge from the personal relationships between the claimant and other corporate actors. Relationships between shareholders based on ties of family or friendship may be governed by different standards than relationships between arm’s length shareholders in a widely held corporation.”

[51] On the other hand, there is good reason to disturb another factual finding made by the application judge. In his reasons for ordering that the appellants sell their shares to AG, the application judge found that the relationships between the shareholders were irreparably broken. With respect, the evidence before the application judge was insufficient to permit thisconclusion.

[52] To be sure, there was some evidence before the application judge that the relationship between Angelo and the rest ofhis family had been damaged. This included evidence that Bessie and Angelo had divorced, that the children hadcommenced an oppression application against Angelo, and that Bessie appeared to have sided with the children. However,there was no evidence in the affidavits of the witnesses, nor have we been taken to any evidence from the cross-examinationof them, that would support the application judge’s finding that the relationship between Angelo and his children hadbeen damaged irreparably. In fact, there was evidence to the contrary. At para. 30 of his affidavit of August 31, 2017, Angelodeposed that, rather than having the appellants’ shares in AG held in trust, the appellants should hold their own shares nowthat they are all over the age of majority. This is evidence from which the application judge could have inferred thatAngelo was of the view that the corporation could continue to operate with the appellants as shareholders, not the opposite.

[53] Moreover, even if it the application judge’s finding of irreparable damage could be supported on the evidence, the remedy of a forced sale of the appellants’ shares to the corporation went beyond what was necessary to rectify the oppression. This was not a situation like that in Wittlin v. Bergman (1995), 25 O.R. (3d) 761, [1995] O.J. No. 3095 (C.A.), relied upon by the application judge in making his order. First, unlike this case, the parties in Wittlin conceded the fact that they could not get along (para. 3). Second, the corporation at issue in Wittlin was one that required active management of its operations (para. 10). AG is, for the most part, simply a holding company for the profits it receives from its shares in Riverview. There is no evidence that much, if any, active management is necessary. For these reasons, Wittlin is distinguishable.

[54] Just as importantly, the application judge’s order was manifestly unjust in two respects. First, it punished theappellants. They never asked for an order forcing or allowing the corporation to buy their shares, nor did Angelo or thecorporation make such a request. Instead, the appellants came to the court looking for a seat on the board and left without evena share in the corporation. The application judge’s order failed to consider the appellants’ reasonable expectations, whichnever included losing their equity in the company, even for a price.

[55] Second, the application judge’s order rewarded Angelo. Notwithstanding his finding that Angelo had oppressed theappellants by failing to distribute the profits AG received from Riverview, the application judge’s order had the effect ofallowing Angelo to receive all of AG’s future revenue from that source.

[56] For these reasons, the application judge’s order requiring the appellants to sell their shares to AG should be set aside.

Remedy

[57] In their factum, the appellants request an order directing that the shares of AG presently held by Angelo for them in trust be transferred to KEAN. I agree that Angelo should no longer hold those shares in trust. So, too, does Angelo, as I have pointed out above. However, if the shares are transferred to KEAN, the potential for oppression continues unless Angelo is removed as a director of KEAN because he will continue to have 100 per cent control over AG. For that reason, I would grant the further request made by the appellants and order that Angelo be removed as a director of KEAN and the appellants substituted in his place.

[58] In addition to asking that their shares in AG be transferred to KEAN, the appellants ask in their notice of appeal and intheir factum for an order that a proportionate share of the assets of AG be transferred to KEAN, as well. I would not grantthis request. A proportionate share of AG’s assets is effectively transferred by virtue of the transfer of the shares.Transferring a proportionate share of AG’s assets in addition to the shares would go beyond remedying the oppression, inmuch the same way that the application judge’s order forcing the appellants to sell their shares did.

Issue 3: Did the application judge err by awarding the respondents their costs?

[59] The application judge ordered that the appellants pay costs $37,060.21 to the respondents due to the latter’s substantial success” on the application. 

[60] The appellants submit that the application judge erred in principle in making this order and that his order was plainly wrong. I need not address these arguments. Given my conclusion on the other issues, the application judge’s order cannot stand. For the reasons I have expressed, Angelo ought not to have been successful on any issue before the application judge.

[61] Counsel for the appellants urged us to send the issue of the costs of the application back to the application judge for assessment if they were successful in the appeal. However, I prefer the approach suggested by counsel for the respondents. Given that there are no other issues to remit to the application judge, I believe it is more efficient and in the best interests of all concerned to fix the costs of the application in the same amount as they were fixed by the application judge, but to award them to the appellants based on their complete success in this court on the issues that were before him.

Conclusion

[62] For the foregoing reasons, I would allow the appeal and order as follows:

(1) Woodland shall pay to AG the sum of $1,146,418, representing the profit earned by Woodland on the sale of the Riverview shares and the dividends earned by Woodland on those shares before they were sold to AG.

(2) Angelo shall transfer to KEAN the shares he presently holds in the trust for the appellants and he shall be removed as a director of KEAN. The appellants shall be appointed in his place.

(3) Angelo shall pay the costs of the application below to the appellants in the amount of $37,060.21.

Costs

[63] During the hearing, the parties agreed that the successful parties should be awarded their costs of the appeal in the amount of $16,000, all inclusive. The appellants should have their costs, fixed in that amount, in addition to the costs of the application.

Appeal allowed.

*source: Ontario Reports

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