Budd v. Gentra Inc.
Raymond Budd, plaintiff, and
Gentra Inc., Michael A. Cornelissen, H.M. MacDougall, G.
Drummond Birks, Henry Collingwood, Eggerton W. King, Allen T.
Lambert, Kenneth Leung, Gilbert J. Newman, Pierre Taschereau,
Jean C. Wadds, R. James Balfour, Jean A. Beliveau, Kenneth R.
E. Neil McKelvey, Earl H. Orser, Jack L. Cockwell, James M.
Tory, Marshall M. Williams, Melvyn M. Hawkrigg, Richard W.
Pound, Roger Phillips, J. Trevor Eyton, Maurice Riel, Thomas
R. Bell, Brian A. Canfield, Adrienne Clarkson, Gordon R.
Cunningham, David L. Donne, Fraser M. Fell, Paul Gobeil, F.
Warren McFarlan, Margaret E. Southern, B. Lee Bentley,
Nicholas W.P. Burbidge, David W.S. Dunlop, Anthony Flynn,
William J. Inwood, Laurent M. Joly, Charles F. MacFarlane, Ian
A.C. McCallum, Ernst & Young, Trilon Holdings Limited, Trilon
Financial Corporation, Great Lakes Group Inc., Arteco Holdings
Inc., Brascan Limited and Brascan Holdings Inc., defendants
 O.J. No. 5341
53 O.T.C. 154
76 A.C.W.S. (3d) 543
Court File Nos. 95-CU-95348 and B 102/95
Ontario Court of Justice (General Division)
Heard: September 9 and 10, 1997.
Judgment: December 28, 1997.
Raymond G. Colautti and Robert G. Copland, for the plaintiff.
Charles F. Scott and Lillian Y. Pan, for the defendant, Gentra Inc.
Bernie McGarva and John Longo, for the other corporate.
1 FARLEY J.:-- The plaintiff advised that he was the representative of approximately 1,100 present and former shareholders of Gentra Inc. ("Gentra") formerly called Royal Trustco Limited ("Trustco") who are members of the Royal Trustco Litigation Committee of Public Shareholders ("Committee"). The plaintiff brought motions for:
(i) an order for interim payment of fees and disbursements pursuant to section 242(4) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA"); and
(ii) an order appointing the Honourable Robert S. Montgomery as Inspector to investigate pursuant to Part XIX of the CBCA certain issues related to:
1. premature redemption of debt by Trustco in 1992;
2. acquisition of shares by Trustco in 1992;
3. payment of dividends by Trustco in 1992 at a time when it is alleged that the true financial circumstances of Trustco were such that there was a pressing need to conserve capital;
4. termination of the Standby Facility under which Trustco was alleged to have had access at all times and material conditions to capital funding of up to a billion dollars;
5. a retraction of over a $ 120 million dollars of Series F Preferred Shares of Trustco in late 1992 (it being alleged that there was reason to believe that many of the owners of these shares were insiders of Trustco or its upstream parent corporations or affiliates)
On September 10, 1997 I was asked to hold off coming to a decision on these motions as the parties wished to see if they could resolve matters by negotiation. Just before Christmas I was advised I should deliver my decision.
2 The plaintiff raised considerable opposition to the transaction under which Royal Bank of Canada acquired significant assets of Trustco in 1993 in what must be described as a rescue operation by the bank. Nothing further was heard on the litigation front until the plaintiff brought an application in 1995 (since required to be transformed into an action) although reports were being given on a confidential basis to members of the Committee in 1994. The case has since moved along relatively slowly. It does not appear that the certification motion to have it certified as a class proceedings action will be made until sometime in 1998.
3 In my view, it would be inappropriate to award interim costs to the plaintiff on this motion. I pause to note that if the plaintiff were successful in his motion for an inspector to be appointed then the costs of the inspector would be borne by Gentra (formerly Trustco) and there would not appear to be any apparent reason for providing interim funding to the plaintiff pending the report of the inspector. However, in any event, I find the motion premature and unsupported on the material before me and I decide it on that basis - not on the "investigation basis". Only the sketchiest of details have been given as to the plaintiff's capacity. That goes for both his personal situation and the resources of the Committee. I am given to understand that a considerable amount of money (some $446,000) has been raised by a percentage levy against the members of the Committee (namely 2% of their estimated losses). No cogent explanation was given as to why additional funds could not be raised from a further levy. It appears that some members of the executive of the Committee felt that what had been raised was all that the members could be asked for; however this view is not universally held and it appears to be only supported by what one might describe as a gut instinct. Despite having raised a significant war chest. the litigation is still in its infancy without much material progress despite over four years of warring. There does not appear to have been any accountability for the spending of the war chest to date on a substantive basis (recognizing that nothing goes smoothly in most litigation, has the money been well and wisely spent?). There should not be a blank or any cheque given for future costs until there has been such an accounting and a battle plan laid out as to how the future funds will be spent. That is not to say that a plaintiff has to give away strategic secrets to the other side. Similarly the other side should not be encouraged to engage in a war of attrition to wear down the financial and spiritual resolve of a plaintiff's side. In large part, this information will be forthcoming in the motion for certification as a class proceeding. At that time the plaintiff, Raymond Budd, will be required to demonstrate that he is a suitable representative of the class. As well, the Court will be able to examine another aspect of class proceedings - namely, the support which a representative plaintifFs counsel and law firm will be able to provide and on what basis. Frequently a law firm will support a class action on a financial basis in the sense of not requiring payment in full of its legal fees and disbursements when the accounts are rendered; this may be cited as a reason to invoke the multiplier in determining the fees for such a firm if the litigation is successfully concluded. It is unclear now whether the plaintiff's law firm is willing or able to give such financial support to this litigation.
4 Perhaps most disquieting is the advice that the plaintiffs presently proposed class would not be all of the former and present shareholders of Trustco (now Gentra) who could claim to have been oppressed by alleged improper acts of the defendants - but rather the class would only be those who became members of the Committee (and paid their percentage levy). Thus X and Y, otherwise identical former or present shareholders of Trustco, could end up being differently treated by the plaintiff's proposed classification. X, a contributor member of the Committee, would be part of the class; Y, a non-member, would not. I pause to point out a minor irony that could be possible. If Y were still a shareholder, then if any award were made against Gentra in favour of the class consisting only of Committee members, then Y would suffer indirectly through his shareholding in Gentra as to any benefit X obtained through the class action. If it had been the desire to avoid any aspect of being viewed as a selling of litigation interest, while still raising funds from those who could afford such support, then perhaps there could have been explored the possibility of voluntary contributions being paid back out of the first proceeds (if any) of the litigation. Certainly if it is proposed that the class continue to be restricted to those who contribute, this would seem to support the view that Committee members should be asked to contribute to support the litigation financially, but I do not come to any conclusion on that aspect of certification.
5 On the record before me and at this stage, I am unable to reach the conclusion "that the applicant [in this case the plaintiff, Raymond Budd, as supported by the Committee and possibly his law firm in this proposed class proceeding] is genuinely in financial circumstances which but for an order under [s. 242(4) CBCA] would preclude the claim from being pursued" [emphasis added] (as per Blair J. in Alles v. Maurice (1992), 5 B.L.R. (2d) 146 (Ont. Gen. Div.) at p. 152). The Committee apparently has refused to provide any financial information about its members. However, if one took averages, it appears that to date each member has contributed $400 to the litigation and the additional amount now being sought is about $300. There was no material provided by the plaintiff which supported that such a level of contribution would be a burden let alone a heavy burden upon the members of the Committee generally - or upon any single member thereof. Given the amounts in issue (i.e. the asserted losses), a contribution of the magnitude contemplated would not appear to be unreasonable in the way that such a dollar level of contribution would be if the amount in issue were only to be, say, $100 or even $1,000.
6 Let us now turn to the question of whether an inspector should be appointed. S. 229 of the CBCA provides that where it appears that the business or affairs of a corporation have been exercised in a manner that is oppressive or unfairly prejudicial or unfairly disregards the interests of a securityholder, then the Court has the discretion to direct that there be an investigation (and that the investigation be carried out by a named inspector).
7 Eberle J., in Re Royal Trustco Ltd et al (No. 3) (1981), 14 B.L.R. 307 (Ont. H.C.J.) reviewed the general concerns of an investigation. At p. 311 he observed:
It will be evident that, as with much new legislation, a number of problems of interpretation arise in considering these provisions. However, it is clear that an investigation is only an investigation, and is not a proceeding for the determination of rights. Resort must be had to other sections of the Act for that. It seems to me that the investigation provided for by s. 222 [now s. 229] is an investigation which must focus upon facts and, bearing in mind the complex nature of corporate organization and corporate operations, especially to the discovery and ascertainment of facts. It seems to be that the investigation provided for by the section is not one which should concern itself primarily with disputed or uncertain questions of law. [emphasis added]
As will be seen by this later emphasis, there may be some circumstances when elements of law may be dealt with by an inspector. He went on to state at p. 312:
... The point is that there is no mystery as to what was disclosed or not disclosed by the company to its shareholders, and it does not appear to me that there are any facts to be ferreted out on this aspect of the matter. ...
Did the directors fail in their obligation of disclosure? To me, that is a question more properly' resolved in a lawsuit than in an investigation into matters of fact only.
8 He went on to say at p. 314:
... However I am unable to conclude that any substantial area of factual investigation is now required. There is already on the table ample material on which any shareholder or other aggrieved party may decide whether or not take legal proceedings. If there were not, that might be sufficient justification to order an investigation, i.e., to ascertain facts in a manner and to an extent that might be beyond the capabilities of an ordinary shareholder to do. There may well be other grounds of justification, for I do not mean to suggest that the one I have indicated is the only one. The turning point in the present case is that the issues raised in this case, which are legal ones, or mixed legal and factual ones, are better disposed of in litigation between parties, where rights can be determined, than in an investigation which cannot determine rights. [emphasis added]
9 The Federal Court of Appeal in Canadian Javelin Ltd. v. Sparling et al. (1978), 91 D.L.R. (3d) 64 (F.C.A.) at p. 70 talked of the shareholders not being able "themselves [to] ascertain the facts" and therefore there being the desirability of there being an investigation by an inspector with "the duty to ascertain them". This is the better general view rather than the introductory sentence of that paragraph which suggests that legal conclusions would be drawn:
It is important, in my view, not to overlook the fact that the investigations of both the inspector in Canada and the regulatory agencies in the United States and in the Province of Quebec were undertaken for the benefit of the shareholders of the appellants to ascertain whether or not its affairs had been managed in a way which was detrimental, to use a rather neutral term, to their interests.
However, it may be that as was alluded to by Eberle J. in Royal Trustco supra that perhaps in some circumstances the legal effects of the facts might be considered by an inspector in his report.
10 The defendants also cited Michalak, v. Biotech Electronics Ltd.; Puetter et al. (mises-en-cause) (1986), 35 B.L.R. 1 (Que.S.C.). This decision can be quite confusing if it is not realized that what was being requested by the applicants was an investigation pursuant to what is now s. 241 of the CBCA and not pursuant to s. 229, and further that they had separate litigation going on which was not directly oppression based. An applicant under s. 241 would have to show that there had been oppression (here including unfair prejudice or unfair disregard) and that this required a remedy to correct the situation. As I expressed at p. 197 of 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 123, affirmed (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.):
I think that where relief is justified to correct an oppressive type of situation, the surgery should be done with a scalpel, and not a battle axe. I would think that this principle would hold true even if the past conduct of the oppressor were found to be scandalous. The job for the court is to even up the balance, not tip it in favour of the hurt party. I note that in Explo, supra, Gravely L.J.S.C. stated at p. 20:
"In approaching a remedy the court, in my view, should interfere as little as possible and only to the extent necessary to redress the unfairness. The broad relief sought by the applicant is, in my opinion, unnecessary."
11 There would thus appear to be logical constraints as to when a s. 241(3)(m) "an order directing an investigation under Part XIX to be made" remedy would be given to correct what had been found to be oppressive conduct. It would seem that under most circumstances this would be a redundancy. Perhaps its corrective use would be employed where it had been shown on the basis of known facts that there was not only oppressive conduct which required to be corrected but as well there appeared reasonable grounds to conclude that there were further material facts which had been otherwise concealed and which were either show that the known oppression was greater in magnitude or that there were other types of oppression which may be brought forward: an iceberg analogy.
12 To my view, it is only when one realizes the distinction between s. 241(3)(m) investigation and s. 229 one that one can appreciate the distinction which Martin J. was making at p. 14 of Michalak:
On the face of the proceeding it appears to me that what the applicants are really attempting to do is to use the wide powers granted to the Court under the C.B.C.A. to assist them in preparing the civil proceedings. That, it is trite to say is not the purpose of an investigation under the C.B.C.A. Rather the purpose is to permit the Court in the light of the results of the investigation to make orders to protect the aggrieved shareholders.
13 I see no such restriction as to a s. 229 investigation, particularly in aid of a general oppression application with the objective of receiving an oppression remedy.
14 However, it seems to me that what Martin J. had to say at pp. 12-13 is applicable to both types of investigation (an he recognized the lower standard of proof as to the existence of oppression under a s. 229 investigation situation).
As far as an investigation contemplated by the C.B.C.A. is concerned it will be appropriate to commence with a consideration of the object of such an investigation. The jurisprudence has established that the object is to permit the discovery of the facts in situations where the applicants have established "prima facie" the existence of "oppression". In Re Royal Trustco Ltd (No. 3) (1981), 14 B.L.R. 307 (Ont. H.C.) Eberle J. in discussing the scope of the investigation contemplated by the statute put it as follows [p. 311]:
"However, it is clear that an investigation is only an investigation, and is not a proceeding for the determination of rights. Resort must be had to other sections of the Act for that. It seems to me that the investigation provided for by s. 222 is an investigation which must focus upon facts and. bearing in mind the complex nature of corporate organization and corporate operations, especially to the discovery and ascertainment of facts. It seems to me that the investigation provided for by the section is not one which should concern itself primarily with disputed or uncertain questions of law."
As far as the present case is concerned the facts are well known. It is to be presumed that what has been invoked in the application and in the amended declaration has not been set down irresponsibly or without any basis in fact. A review of the amended declaration permits me to arrive at no other conclusion but that the facts bearing upon the merits of the civil litigation have been out in the open for some considerable time.
In the course of his argument Me [sic] Wolofsky alluded to the question which arose in the Watergate affair of "who knew what when?" His point, he says, is that new facts are coming to light every day as discovery proceedings in the civil action go forward. In my view that argument is without foundation and does not justify the ordering of an investigation under the C.B.C.A. In the first place if indeed the facts have not come to light the application, having regard for the manner in which it is drafted, does not reflect this. Rather it asks for an investigation to confirm what is already known. Secondly nowhere is it alleged that the applicants are unable to obtain particulars of the past conduct of the respondents. As far as I am concerned the applicants have hitched their wagon to the civil action claiming compensation and damages and have available to them the full range of discovery proceedings contemplated by the Code of Civil Procedure in order to obtain further clarification of any of the elements which may affect the civil action. [emphasis added]
I note as well that the applicants there were well into the discovery process in the other action, although not completed.
15 In the present case. the plaintiff has not made out in his request that he is unable to obtain the facts. In a confidential newsletter to members of the litigation committee dated June 30, 1994 (i.e. three and a half years ago) it was said at pp. 5-6:
Thus, although we have a strong case against our opponents already. I can honestly say to you that our investigations to date have barely scratched the surface. This is why we are so excited about the prospect of a discovery on the Canadian and International operations. As a result of our investigations, we know exactly what to ask for in discovery. [emphasis added]
Even if one takes into account a reasonable degree of puffery in this assertion (and if there is puffery, in my view that would be inappropriate since one does not wish to oversell), it seems clear that the plaintiff is reasonably confident of being able to zero right in on the material points at discovery. Of course, conceivably, it is possible that a plaintiff may be stonewalled at discovery and thus not be able to get at the material facts. This is not to be tolerated. It would seem to me that one impediment to getting at the facts would be that Trustco in its present Gentra condition no longer has many of its previous directors, officer and employees. Mr. Scott for Gentra observed at the beginning of the submissions that the plaintiff is not being hindered in this litigation - but perhaps tellingly he went on to say that Gentra will not (now) oppose the examination of former directors, officers or employees. Thus at present there does not appear to be any barrier to obtaining appropriate information via the discovery process - nor has Mr. Colautti for the plaintiff indicated that he cannot do so. It would be a different situation if the plaintiff were able to show that he had been met with delaying tactics or obfuscation barriers or anything of a like nature. I trust that it will not be necessary to have to deal with this in the future. I would also note that Gentra/Trustco was and still is a public company and subject to timely disclosure requirements of the securities legislation and exchanges policies. Thus, one would expect that there would be a disclosure of material facts forthwith (i.e. now, even if not on a timely basis). When one considers the nature of a corporation (see Ballard supra at p. 168; Montreal Trust Co. of Canada v. Scotia McLeod Inc. (1995), 129 D.L.R. (4th) 711 (C.A.) and (1994), 15 B.L.R. (2d) 160 (Ont. Gen. Div.) and Roman Corp. Ltd. v. Peat Marwick Thorne (1992), 11 O.R. (3d) 248 (Gen. Div.)) perhaps it will be appreciated that inappropriate conduct may injury a corporation and the corporation's shareholders. Thus, it would be in the best interests of the corporation and its shareholders to determine whether or not inappropriate action were taken which resulted in the corporation directly (and its shareholders indirectly thereby) suffering an unnecessary loss. The present and past officers and directors of such corporation would do well to consider my views in Ballard at pp. 171-2.
16 The motion to have an investigation is dismissed without prejudice to it being brought back on if necessary at a later time.
17 Counsel requested that costs of these two motions be dealt with by way of written submissions. I know that counsel will huddle and advise me by January 15, 1998, if that is necessary.