Agnew v. Village Contractors Ltd.
Edward A. Agnew and Elio Danelon, applicants, and
Village Contractors Limited, Enzo Deluca, Alfredo Deluca,
Tiberio Mascarin and Colio Wines of Canada Limited,
 O.J. No. 3211
 O.T.C. 537
99 A.C.W.S. (3d) 423
Commercial List File No. 98-BK-2754
Ontario Superior Court of Justice
Heard: July 31, 2000.
Judgment: August 29, 2000.
Company law -- Shareholders -- Shareholders' rights -- Oppressive acts, remedies -- Inspection or investigation.
Application by Agnew and Danelon, former shareholders of the respondent Colio Wines of Canada, for the appointment of an inspector under section 162 of the Ontario Business Corporations Act to determine the proper valuation of their shares. In 1991, the majority shareholders of Colio voted to amalgamate the respondent Village Contractors with Colio. The applicants were minority shareholders. Colio was in serious financial difficulty. A bank loan was due and Colio could not pay it. Efforts to find a purchaser were unsuccessful. The three majority shareholders of Colio also owned Village, a construction company. They proposed that Colio and Village be amalgamated to allow Village to claim Colio's cumulative losses against any profits Village might have. This was done. The applicants did not consent to the amalgamation. They were paid for their shares at $.01 each. Originally, the shares had been valued at $2 each. Shareholders' loans that had been advanced by the applicants were protected. The respondents had failed to obtain a valuation of Colio before the amalgamation. The applicants stated that there appeared to be oppressive conduct.
HELD: Application dismissed. The applicants failed to establish an appearance of oppressive conduct such that an inspector should be appointed to carry out an evaluation. Colio had serious financial problems. Realistically, the best way to protect the shareholders' investments was through refinancing. That way, the loans the applicants had advanced were protected and they received a nominal amount for their equity. The applicants did not show that Colio's assets and business would have been worth close to its liabilities prior to amalgamation.
Statutes, Regulations and Rules Cited:
Ontario Business Corporations Act, R.S.O. 1990, c. B.16, ss. 161(1), 161(1)(b), 161(1)(i), 161(2), 162, 248.
Raymond G. Colautti, for the applicants.
P.A. Neena Gupta, for the respondents.
1 SWINTON J.:-- The applicants, former shareholders of Colio Wines of Canada Ltd., seek relief pursuant to s. 248 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16. Initially, the relief claimed by the applicants included the return of their initial investment of $162,500.00 in Colio Wines. However, their counsel did not pursue this claim in oral argument. Instead, he asked that I order the appointment of an inspector pursuant to s. 162 of the Act to determine the proper valuation of the applicants' shares.
2 This case arises out of a decision on April 29, 1991, when the majority shareholders of Colio voted to amalgamate Village Contractors Ltd. with Colio. The applicants, Edward Agnew and Elio Danelon, were minority shareholders at the time.
3 Colio is a winery based in Harrow, Ontario. Construction began on the winery in 1980, and Colio began producing wine in the fall of 1981. By July, 1982, Mr. Agnew had invested $50,000.00 in Colio, and held 25,000 shares. He also invested a further $12,500.00 which was recorded as a shareholder loan on the books of the company, although he claims that this was an investment to purchase additional shares. Mr. Danelon had invested $100,000.00 and held 50,000 shares. Together they held 9.8% of the 765,000 issued and outstanding shares of the company at the time of amalgamation.
4 Just prior to the amalgamation, there were three other major shareholders. The respondent Enzo DeLuca held 360,000 shares, while the respondent Tiberio Mascarin held 170,000 shares, and Adriano Gorizzan held 150,000 shares. Each had paid $2.00 per share. In addition, each of these three individuals had made shareholder loans in the amounts of $173,624.00; $81,984.00 and $72,342.00 respectively by March 31, 1987, and further loans subsequently. In the financial statements dated March 31, 1991, the total shareholders' loans are stated to be $941,000.00.
5 There is no dispute that Colio was in serious financial difficulty in early 1991. On February 18, 1991, the Toronto-Dominion Bank gave notice that it intended to call the company's loan unless the company was sold by February 28, 1991, or the loan was paid down immediately to one million dollars by February 28, 1991, with a plan put in place to pay the balance of the loan by March 31, 1991. At the time of the amalgamation of Village and Colio in April, 1991, $1.7 million was owing to the bank. In addition to the bank debt, there were shareholders' loans of $941,000.00, plus other debt to related companies. Colio was also in a deficit position at the time, with cumulative losses of $1,815,288.00 as of March 31, 1991. The shareholders' deficiency was $472,080.00 as of the end of April.
6 The company made a cash call on the shareholders, but the applicants were unwilling to put further funds into the company. Mr. Agnew's affidavit in these proceedings indicates that he was unhappy with the way in which the company had been managed over the last decade. However, the applicants did not rely on these allegations of mismanagement to found their claim for relief before me, using them only to set a context.
7 According to the evidence, efforts were made to find a purchaser, without success. For example, during cross-examination, Mr. DeLuca made mention of an oral offer to purchase from Magnotta Wineries for one million to 1.5 million dollars (without assumption of Colio's debt), plus an indication of possible interest by AndrÈs Wines for the licences of Colio's twelve retail outlets, at a price of $25,000.00 to $50,000.00 for each licence. The applicants also made efforts to find a purchaser without success.
8 Therefore, the majority shareholders proposed that Colio be amalgamated with Village Contractors Ltd., a company owned by the respondents Alfredo DeLuca, Enzo DeLuca and Tiberio Mascarin. Village had leant Colio $200,000.00 in the past. The amalgamation would permit Village to utilize Colio's cumulative losses against any profits which Village might have from its construction business, thus giving Village a potential tax write-off over several years. According to the evidence of Enzo DeLuca, which was not contradicted, such losses would not be useable by an unrelated corporation.
9 A meeting of the Board of Directors of Colio was held on April 8, 1991 to discuss the financial difficulties of Colio and the proposed amalgamation. The applicants were present and given documentation, including the interim financial statements for the ten month period ending January 31, 1991. Approval was given to the calling of a Special Meeting of Shareholders, which was held on April 29, 1991. As well, approval was given for the transfer of Enzo DeLuca's and Mascarin's shares to Village, which were purchased for one cent a share.
10 At the April 29 meeting, the decision was made to amalgamate Colio with Village. Mr. Agnew voted against the resolution, and Mr. Danelon either voted against or abstained. By the amalgamation agreement, the applicants and Gorizzan were given one Class B, non-voting share in Village for each of their shares in Colio, redeemable at a price of one cent per share. Village's shares in Colio were cancelled.
11 Subsequent to the amalgamation, Village paid $1,700,000.00 to repay the indebtedness to the bank. In October, 1991, the applicants' shares were redeemed for $750.00 by Village. Gorizzan's shares were also redeemed.
12 The applicants seek an order for the appointment of an inspector pursuant to s. 162 of the OBCA. That provision is found under Part XIII of the Act, entitled "Investigation". Section 161(1) allows a security holder to apply for the appointment of an inspector, while s. 161(2) provides, in part:
Where, upon an application under subsection (1), it appears to the court that,
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards, the interests of a security holder;
the court may order an investigation to be made of the corporation and any of its affiliates.
Specifically, the applicants seek an order requiring an inspector to make an interim or final report to the court, pursuant to s. 162(1)(i) of the Act.
[The Court did not assign paragraph number 13.]
14 Section 161(1)(b) uses the language found in the oppression remedy in s. 248 of the Act. However, under s. 161(1)(b), an applicant need not prove that there has been oppression, unfair prejudice or unfair disregard of his or her interests in order to invoke this provision; rather, he or she must satisfy the court that it "appears" that there has been oppression. In Re Ferguson and Imax Systems Corp. (1984), 47 O.R. (2d) 225, the Divisional Court held that in applying this provision,
The court must examine the evidence and make a finding that it appears that there has been oppressive conduct. The court cannot direct that the investigation be made in order to assist the court in making such a finding. The finding must be made before the investigation can be directed. (at 233)
In Re Royal Trustco Ltd. (No. 3) (1981), 14 B.L.R. 307 (Ont. H.C.), Eberle J. stated that an investigation should be ordered only to determine facts, and it should not concern itself with disputed or uncertain questions of law (at 311). He adopted the reasons of Galligan J. in an earlier case, who held that a court can order an investigation if the material submitted leads it to conclude that there is "good reason to think that the conduct complained of has taken place" (at 317). E.I. Macdonald J. expressed caution about granting such relief in Brown v. Maxim Restoration Ltd. (1998), 42 B.L.R. (2d) 243 (Ont. Ct. (Gen. Div.)) at 247, noting that s. 161 "is not a device to assist parties to a shareholder's dispute to prepare for litigation".
15 Clearly, in applying s. 161(1)(b), it is necessary to have regard to the jurisprudence concerning the oppression remedy. In order to obtain relief under s. 248 of the Act, the applicant must show that the conduct of the respondents is oppressive, unfairly prejudicial or unfairly disregards their interests. In Brant Investments Ltd. v. Keeprite Inc. (1991), 3 O.R. (3d) 289 (C.A.), the Court of Appeal held that evidence of bad faith or want of probity is unnecessary in the application of the oppression remedy (at 305), although it will be unusual that a remedy will be ordered when there has not been some want of probity. Each case will turn on its facts, but the objective of s. 248 is to protect the reasonable expectations of the shareholders, especially in small, closely held corporations (820099 Ontario Ltd. v. Harold E. Ballard Ltd. (1991),  O.J. No. 266, 3 B.L.R. (2d) 113 at 191 (Ont. Ct. (Gen. Div.)), aff'd by the Div'l Ct. at 123,  O.J. No. 1082).
16 The applicants argue that there appears to have been oppressive conduct here, given the value of one cent per share attributed to their shares in Colio and the failure of the respondents to obtain a valuation of Colio before the amalgamation. They object to the fact that they have been required to cede the opportunity to participate in the future growth of the company to the respondents, described as the "DeLuca group".
17 The applicants relied on a report obtained from Pricewaterhouse Coopers LLP ("PWC") dated December 23, 1999, which, in their submission, raised significant questions about the implied valuation placed on Colio at the time of the amalgamation -- an implied valuation fixed at $7,650.00. That report is described as a review, and is not a formal valuation opinion or estimate. It concludes that both an adjusted asset approach and an earnings based approach should be reviewed to determine the fair value of Colio at the valuation date. Essentially, the applicants argue that there is good reason to believe that there has been oppressive conduct because of the content of the PWC report, which concludes:
Based on the limited foregoing analysis, we conclude that the Implied Valuation of $7,650 of Colio at the Valuation Date could be materially misstated. The factors discussed above, among others, may not have been properly taken into consideration in arriving at the Implied Valuation. We recommend that a formal valuation of Colio at the Valuation Date be obtained to determine the fair value under section 248 of the Business Corporations Act.
18 I have read the PWC report with care, as well as excerpts from the cross-examination of Helen Mallovy Hicks, a vice-president with PWC, who was one of three authors of the report. In my view, the report does not support the conclusion that there is good reason to believe that there has been oppressive conduct by the respondents within s. 161(1)(b). Throughout the report, there are suggestions that the implied valuation might have been improper. However, in reaching what must be described as "tentative" conclusions, the report fails to give adequate consideration to certain important facts.
19 First, the report made much of the fact that Village obtained a forgivable loan under the Winery Adjustment Programme of the Ontario Development Corporation after the amalgamation, and it is suggested that the possibility of this loan would be of value in determining the valuation of Colio's assets in April, 1991. Indeed, the report assumes that Colio was eligible for the loan before the amalgamation (p. 12), and that the loan could have been used to alleviate the pressure from the bank (p. 13). In fact, the authors of the report appear to be mistaken about Colio's eligibility. As well, the report fails to address certain important aspects of the loan programme.
20 The evidence shows that such loans were available only for solvent companies and could not be used to pay down existing financial liabilities. According to Enzo DeLuca, whose evidence is not contradicted, the loan would not have been obtainable had Village not first paid off the $1.7 million bank loan -- a fact that is not mentioned by PWC. As well, the programme required some degree of matching funds from the winery, as well as disbursement of funds by the winery to meet certain project commitments, which might be subsequently compensated by forgiveness of the loan. In any event, the loan would be forgivable over time -- in this case, between 1992 and 1996. Mr. DeLuca filed an affidavit stating that Colio received $900,000.00 in three stages and an additional $280,000.00 in two stages as reimbursement, and the loan operated as a reimbursement of 75% of certain types of expenditures. Therefore, the report's treatment of the loan -- especially the suggestion that the money might have been available in the year of amalgamation -- is flawed.
21 Further concerns with the PWC report arise with the treatment of Colio's tax losses. The amount available to carry forward against future profits was $3,142,520.00. The report makes the assumption that these losses would have market value. However, it acknowledges that "generally tax loss carry-forward balances have value to a potential purchaser who carries on business with a reasonable expectation of profit sufficient to utilize those losses prior to expiry". The report fails to examine what that value would have been to an arm's length purchaser. Given the poor financial position of Colio at the time of the amalgamation, its history of losses and its accumulated deficit of about $1.8 million for the year ended March 31, 1991, it is unrealistic to suggest that there would have been significant value here. The report makes certain assumptions about the likely future health of the company, based on its subsequent performance. However, that information would not have been available in April, 1991, when the company's situation and the market for Canadian wines were much less positive. Moreover, the report fails to consider the importance of the refinancing by Village and its efforts to that subsequent performance.
22 The report also contains a discussion of the hypothetical value of assets were the business sold, without dealing with the evidence that there was no buyer available around the time the bank threatened to call the loan. As well, the evidence on value from Mr. DeLuca indicates that the recovery, if assets were sold, would have been far below the existing debt level.
23 At best, the PWC report shows that there are various ways that one might have approached a valuation of Colio in April, 1991. Throughout the report, there are suggestions about how various assets of Colio might be valued -- for example, the inventory, the land and buildings, the LCBO listings and shelf space. Nevertheless, neither the report, nor the other evidence before me, are sufficient to lead me to believe that this is a case in which an inspector should be appointed to carry out an evaluation.
24 Colio had serious financial problems in the spring of 1991, and realistically it faced three choices: allow the bank to call the loan and liquidate the business; sell the winery as a going concern; or refinance. There is no evidence that there was a buyer readily available, and the PWC report has no information that suggests there was a market for wineries in 1991. The transactions referred to in the report occurred in 1995 and 1999. Allowing the bank to liquidate the business would benefit none of the investors. It was very unlikely, according to Mr. DeLuca, that there would be full repayment of all the company's loans in the case of a liquidation, and so shareholders would have recovered nothing.
25 Realistically, the best way to protect the shareholders' investments was through refinancing. The arrangement with Village resulted in the protection for the shareholders' loans, including that of Mr. Agnew, as well as a nominal amount for the applicants' equity. The fact that Village obtained the benefit of a winery that has continued to be a viable business does not tell against the respondents. There were further injections of capital by both Village and DeLuca and Mascarin personally after the amalgamation. Moreover, there is no appearance of unfairness here, in that the evidence shows that Enzo DeLuca and Mascarin also lost the significant amount of money which they had invested through the purchase of shares.
26 In effect, the applicants complain because Village proceeded by amalgamation rather than by further injection of capital into Colio alone. They argued that this would have protected their equity investment in Colio, albeit on a diluted basis. However, there is evidence that Village chose to proceed as it did, in part, to obtain the benefit of the tax losses to set off against its earnings in its construction business -- a benefit that would not have been available to it without the amalgamation. The fact that Village chose to proceed in this way, when considered in the total context, does not constitute unfair prejudice or unfair disregard of the applicants' interests.
27 In effect, the applicants seek an order for the appointment of an inspector in order to determine whether they were given a fair deal in 1991. However, they have failed to provide cogent evidence that Colio's assets and business would have been worth close to its liabilities, including its indebtedness to the bank and shareholders, prior to amalgamation. Therefore, they have not satisfied me that this is an appropriate case in which to order that an inspector be appointed to provide a valuation, as the evidence does not give me reason to believe that there has been oppression or unfair prejudice or unfair disregard of their interests.
28 Given the insufficiency of the evidence, their application is dismissed. If the parties wish to speak to costs, they may make written submissions or an appointment with my secretary.