Little v. TGI-VMS Visual Based Performance Systems Inc.
Randy Little, Mark Burk, and Bruce Monnier, applicants, and
TGI-VMS Visual Based Performance Systems Inc., TGI-VMS USA
Inc., Mobil Cal-Inc., TGI. L.L.C., Datagraph Systems North
America L.L.C., Paul Fontaine, Kim Meyer, Larry Mealy and
Michael Ljubisic, respondents
 O.J. No. 4980
103 A.C.W.S. (3d) 316
Court File No. 99-GD-46185
Ontario Superior Court of Justice
Heard: November 1 and 3, 2000.
Judgment: December 5, 2000.
Practice -- Judgments and orders -- Enforcement of orders -- Conditions precedent.
Proceedings to clarify a court order and to determine whether the respondents were in violation of that order. The applicants Little, Burk and Monnier were former officers, directors, employees and minority shareholders in the respondent TGI-VMS Visual Based Performance Systems and its named subsidiary corporations. As a result of the alleged misconduct of Fontaine, a shareholder holding a majority of the shares, the applicants launched an application seeking a declaration of oppression and other relief, including damages for wrongful termination. The applicants alleged that unfair and oppressive conduct was carried out with a plan or scheme involving their termination in order that the minority shareholders' interest could be bought under a shareholder's agreement. The application was resolved by agreement directing an evaluation of the shares through the appointment of a valuator-arbitrator. Exempted from the resulting order was consent for the applicants to proceed with their claim for damages for wrongful dismissal. A valuation was completed by Taylor. The minority shares to be bought were fixed by him at 37.5 per cent of the total shares issued. What failed to appear in the order was whether the action for wrongful dismissal, a contingent liability and the alleged acts of oppression were to be applied to fair market value of the minority shares. Taylor did not consider them.
HELD: The order was not specific. The conclusion of the valuator to consider contingent liabilities within his determination of applying good accounting practice was not of itself patently unreasonable. It should be open to the Court on the action for wrongful dismissal if properly amended, or in a separate action, to determine what constitutes the final value, before or after. This would be so unless the Court determined after evidence that the findings of the valuator were within his jurisdiction as provided by the order. It was unknown whether the shares would be reduced by an unknown contingent liability and for how much. There had not yet been any determination of wrongful conduct or consideration of the applicants' termination with or without cause. It left TGI-VMS with the inability to pay because of the size of the claims by the applicants and because there had been no resolution on these items. Because the value remained uncertain, the Court could not conclude that TGI-VMS was in violation of the payment within 60 days of the valuator's report, the final value not yet determined.
Statutes, Regulations and Rules Cited:
Business Corporations Act, R.S.O. 1990, c. B-16, s. 248.
Raymond Colautti and Raphael Partners, for the applicants.
Claudio Martini and Maria Marusic, for the defendants.
1 CUSINATO J.:-- The moving parties herein were former officers, directors, employees and minority shareholders in the Respondent Corporation TGI-VMS Visual Based Performance Systems Inc., (TGI-VMS), and its named subsidiary corporations. As a result of the alleged misconduct of Paul Fontaine, a shareholder holding a majority of the shares, the plaintiffs launched an application under s. 248, of the Ontario Business Corporations' Act, R.S.O., 1990, c. B-16 as amended. They sought a declaration of oppression together with various other relief, more specifically damages for wrongful termination.
2 The moving parties alleged that unfair and oppressive conduct was carried out with a plan or scheme involving their termination in order that the minority shareholders interests could be purchased under a shareholder's agreement.
3 The application to settle the oppression action was resolved by agreement of the parties directing an evaluation of the shares through the appointment of a valuator/arbitrator. The parties consent was formulated into an order signed by Patterson J. on July 26th, 1999. Exempted from this order in settlement of the proceedings of oppression was the applicant's right to proceed with their claim for damages for wrongful termination. This action that was deleted from consideration within Paragraph 15 of the order was with the understanding that it could proceed as a separate claim.
4 Following this consent order, the valuation of the shares was completed by a report produced by Low, Rosen, Taylor, Soriano (Low Taylor) business valuators. This firm was represented as qualified to assess the value of the shares. Their appointment as damage quantifiers is shown as June 6, 2000. Mr. Low a senior partner in this firm was appointed as the valuator/arbitrator and he shall hereafter be described as the valuator. Of significance to this order is that it provides that his valuation is to be final and binding upon the parties. The minority shares to be purchased was fixed by the valuator at 37.5% of the total shares issued. Within the terms of the order of Patterson J., it may be inferred that the value of these shares were to be assessed having regard to all the records of the Corporation applying good accounting practices in keeping with the provisions of the Business Corporations Act. What fails to appear in this order is whether the contemplated action for wrongful termination, a contingent liability and the alleged acts of oppression is to be applied to fair value of the minority shares. The issue of oppression or wrongful conduct was not a consideration for the valuator/arbitrator in determining value.
5 This leads us to the issues that now arise from this order. As to the findings of the valuator and non-compliance with the order, they have been set apart by the moving party into four main issues.
6 These issues are defined in the following terms:
(I) Has the respondent violated the order of Patterson J., that requires payment to the minority shareholders' within 60 days of the valuator's report?
More importantly are the values of the shares correctly fixed before or after contingency?
(II) Has the respondent failed to comply with the order of Patterson J., Paragraph 10, that the shares of TGI-VMS (Visual Based Performance Inc.,) at the earliest opportunity and no later than December 31, 1999, are to be qualified as small business corporation shares, eligible for the personal $500,000 enhanced capital gains exemption in Canada?
(III) Has the respondent failed to satisfy Paragraph 12 of the order of Patterson J., and if found to be so, should the respondent be ordered to pay to the applicants their pro-rata share of any share bonuses paid or attributed respecting the 1998 fiscal year forthwith?
(IV) Has the respondent failed to comply with the order of Brockenshire J., as set out in Paragraph 13 of the order of Patterson J.?
That is, that the respondent deliver monthly monitor reports of the corporation to include total expenditures on behalf of any shareholder charged to his shareholder's account with said reporting to continue until further order?
7 In response to this motion, the respondent in addition to filing responding materials has delivered a separate counter motion. In that motion the respondent seeks not only the dismissal of the moving parties' motion, but further to this sets out a separate claim for relief on the issue of cost that arise from the report provided by the valuator. This specific issue is based on the valuator's conclusions, upon which the counter motion seeks solicitor/client costs. This proposed claim for solicitor/client costs and disbursements arise from the expenses that result from an expert's review together with the payments incurred. Those fees are claimed it is submitted because of an offer of payment by the respondent to the moving parties at the outset before the expert's assessment, that is better than the final valuation of the minority shares.
8 I do not intend to deal now with those issues raised in the counter motion, since as acknowledged by the parties they are premature to this court's determination of the initial issues raised by the moving party.
9 In response to the issues raised, the respondent submits that essential to this court's consideration of valuation as determined by the valuator, the court should have reference to Paragraphs 4, 5, & 6 of the order of Patterson J. Those paragraphs are reproduced for our consideration as to the directions given to the valuator.
ORDER OF PATTERSON J; - July 26, 1999
4. THIS COURT ORDERS that the
valuator/arbitrator shall forthwith upon completion of its preliminary investigation, issue to each party its report outlining all facts, documentation and assumptions it intends to rely upon in order to arrive at a valuation of the said shares. The valuator/arbitrator shall not at this point express an opinion; preliminary or other, with respect to the valuation of said shares.
5. THIS COURT ORDERS that the
parties hereto shall hereafter upon receipt of information outlined in Paragraph 4 be entitled to present further evidence, with the right of cross-examination in respect of any such further evidence, and shall have the right to present their own independent expert evidence and to make further submissions to the valuator/arbitrator. The procedure for said hearing is to be agreed by the parties or as ordered by this court.
6. THIS COURT ORDERS that the
valuator/arbitrator shall, after considering such further submissions and evidence, issue its final report as to value of the shareholding interests to be purchased, valued as at April 15, 1999, and such valuation is final and binding upon the parties hereto.
10 As provided by this order and the directions therein to the valuator, following the preliminary investigation, a report was to be submitted to the parties of the facts and documents upon which he would rely to place a value on the shares.
11 Following his report the parties were permitted after a review of the said documents to present to the valuator at a hearing acting as a single arbitrator such additional information or witnesses including expert opinions before he was required to fix his final value of the shares. Mr. Martini submits that the issue of contingencies was addressed at the hearing before the valuator, and therefore his value after consideration of the contingencies represents the final value.
12 As provided in the order of Patterson J., its speaks only to the valuator determining the value of the shares as of a specific date. It does not speak of minority share values nor does the order use the term fair market value or speak of contingencies. It also does not provide the arbitrator with jurisdiction to remove from his general considerations of value the contemplated action and contingencies that may apply if he finds that the actions of the respondents constituted wrongful conduct. The alleged oppressive conduct was not the subject of the valuator or arbitrator's assessment. His determination of value was before and after applying the contingency as would apply in good accounting practice. To this extent it may be said that the application of whether a contingency should or should not apply to reduce the value of the shares held by the minority, under these circumstances was a legal consideration, not within the jurisdiction of the valuator or was it addressed.
13 Mr. Colautti for the moving party suggests that the order speaks only of addressing the value of the shares, not those of a minority shareholder that has been wrongfully oppressed as to his/her interest in the company and who have commenced action for wrongful termination. In this instance oppressive conduct was not a consideration of the valuator, and therefore value or fair value is different from fair market value. The prior should not and does not include consideration of any action for the alleged wrongful conduct by the officers. While it is accepted a legal contingency shall reduce the value in the market place, the moving party submits it should not be applied under the circumstances presented, where no specific directions are given to the valuator to assess wrongful conduct, a legal consideration.
14 That the order of Patterson J. speaks only of valuing the shares for the purpose of the shareholding interest to be purchased. That the valuator who fixes the total value of the shares at 2.275 million dollars and those of the minority shareholders at $853,125 which constitutes 37.5% of all shares issued, Mr. Colautti suggests has completed and complied with the terms of the order as to value.
15 That while the valuator may provide in accordance with good accounting practice a reference to the corporations contingent liability that arises from the right of the moving parties to proceed with their actions for wrongful dismissal, it does not apply here and this contingency should be excepted from the valuator's determination of value.
16 That the wrongful termination action was contemplated at the time of Patterson J.'s order, and in fact this separate relief was exempted from the application of the moving party in pursuit of its remedies. That such contingency existed and was known at the time of the order. In fact although delivery of the Statement of Claim was prior to the valuator's report of June 6, 2000, such proposed action was expected and should not have been a consideration in the value of the minority shares of the parties wronged.
17 When Mr. Low the valuator submitted his report with his conclusions as to the value of the minority shares, he did so with the following comment:
For the purpose of our opinion and the order, we qualify the conclusions set out herein that $843,125 value should be reduced by 37.5%, the after tax eventual liability resulting from the claim.
18 It is this last comment by the valuator and his conclusion, which the moving party takes exception to and states it is outside his jurisdiction.
MR. MARTINI'S SUBMISSIONS
19 Mr. Martini for the respondent suggests that the report is final and binding as set out in the order. That the moving party had the opportunity to make submissions concerning contingent liability and it is not for this court to interfere with the valuator's final conclusions on valuation. That a court on review may only do so if it is established the valuator.
(1) Exceeded his jurisdiction.
(2) There was some identified impropriety on the part of the valuator.
(3) There was an error in law on the face of the award identifying his determination as patently unreasonable.
Mr. Martini submits that contrary to the moving party's position, none of these exceptions occurred.
20 To support his position, the respondent submits that evidence was called and submissions made at the arbitration as to the necessity for consideration of contingent liability in determining value and thus share value. That such consideration was in accordance with good accounting practice and constitutes the final value of those shares.
THE COURTS REVIEW
21 In my consideration of the respondent's position it is noted that while the respondent takes this position in the first instance, that final value has been achieved, he acknowledges that because of the valuator's consideration of contingency, payment as per Para. 9 of the order of Patterson J. is frustrated. That this is so because no final valuation has been achieved due to the action started and the uncertainty of the result. With this statement it seems to me it leaves the door open for the court to determine the issue of contingency. If it is established there was wrongful conduct that is demonstrated on the part of the respondents, should this not be a legal determination for the court of whether the value of the shares are with or without consideration of such contingency?
22 Mr. Colautti for the moving party appears to adopt this very position, that while the valuator has referred to contingent liability in his report, it is for the court to determine, if his findings of fair value are to be reduced by the contingency of the action commenced by the minority shareholders within the circumstances presented. Since fair value is a legal determination as to the purchase price of the minority shares, by the corporation against whom the wrongful conduct is alleged, such determination cannot be concluded upon by the valuator without specific direction. Counsel for the applicant submits that to fix the value of the minority shares with consideration of a contingent liability, the very contingency upon which the oppression is based is to reward the wrongdoer with the devaluation of the minority shares for the specific alleged wrong upon which the oppression action and wrongful termination is based. That the valuator's jurisdiction did not extend to determine whether there was oppressive conduct on the part of the majority shareholders. That such jurisdiction of whether the acts of the respondent constituted a wrongful act is for the court's determination. That this is particularly true where the alleged wrongful termination of the applicants was exempted from the proposed settlement of the oppression action against the corporation.
23 That from an examination of the valuator's reports he establishes both a fair value and fair market value for the shares. That it is for the court to determine which applies. That the valuator was not in a position to determine the legal application of which applies where the proposed purchasers are the alleged wrongdoers.
24 That considerations of oppression or wrongful conduct that could disentitle the remaining shareholders from a consideration of the contingent liability as to value in the purchase of those shares was not within his jurisdiction or was such a legal determination before him.
25 The consent order of Patterson J., signed by the parties is not specific. While it exempts from the original application brought, the applicant's action for wrongful termination, it does not provide that acceptable accounting practices with consideration for contingencies of the very persons against whom the oppressed conduct is alleged, is to apply. It would appear from a review of the order that this consideration was overlooked, save for its application by the valuator.
26 With this review, I do not find that the conclusion of the valuator to consider contingent liabilities within his determination of applying good accounting practice is of itself patently unreasonable. In my view, this is not the issue. The question rather is the intent of the order and whether value for the shares is to be settled before or after applying a contingent liability. This raises the question, does the determination of this issue by the court constitute interference of the valuator's determination of value. To put it another way, is the application of a contingent liability where the shares are valued before and after consideration of contingency constituted as part of the valuator's final and binding determination, or is such a consideration of deduction if inappropriate a consideration which is open to the court. It seems unreasonable to conclude that a court after consideration of the order and the evidence of wrongful conduct as alleged is not empowered to determine the appropriateness of the deduction of the contingent liability from fair market value if wrongful conduct is established. This in my view should at the very least be open for the court's consideration. This should be particularly true where to determine wrongful conduct is not given to the valuator. The alleged unfair practice of the defendants was not the subject of consideration by the valuator, or was there evidence before him in which he could make these conclusions of oppressive conduct or unfair practice. These considerations to my knowledge were not addressed to determine if the contingency of action against the wrongdoers also the purchasers may not apply. The valuator I conclude was more concerned with Ms. Howe's evidence whether a deduction for contingency of action accorded with good accounting practice when determining the value of the corporation.
27 Before I turn to the disposition of the issues raised, it appears that with hindsight, the determination as to the value of the shares may have been better left until the trial of the issues concerning wrongful conduct and ultimately wrongful termination. The prior consideration could very well apply to the legal considerations in the value of the shares, while the latter may be confined only to the appropriate notice period as to each employee where cause for such termination is not established.
28 Within the legal proceedings as they are presently constituted, the issues now raised on this motion as to whether a contingency does or does not apply to the value of the shares of the minority, should it not be determined by a separate action? As an alternative, it may be incorporated by amendment to the existing pleadings for wrongful termination. This could avoid a multiplicity of proceedings since this action may deal not only with wrongful conduct but wrongful termination.
29 Without amendment to the existing pleadings or a separate action the issue of value may well be outside of the consideration if not the jurisdiction of the court.
30 I now answer the issues raised in the order presented. It must be acknowledged that the valuator's assessment of fair value before or fair market value after consideration of the contingency is without determination of conduct.
31 This raises the question of what is the final value of the shares that is binding upon the parties? Has that determination been made or can that determination be made only after trial? As to this question we may ask, what was the obvious intent of the parties in consenting to Paragraph 15 of the order as to fair value, was it to be with or without consideration of the contemplated action?
32 This is specifically important to Issue One. If after trial the court determines that the operating minds of the company are found to have acted unfairly and oppressively toward the minority shareholders, what is their remedy if any? To suggest the valuator has made this determination of value by applying a contingency without specific direction or evidence to consider conduct may from a review of the order be beyond its intent or scope. This would detract or minimize the importance of Paragraph 15 of the order and may result in allowing the defendants to benefit from their own wrongful conduct, where there may have been no jurisdiction on the valuator to do so.
33 For the reasons given, I do not conclude that a court's determination of this issue is in any way an interference of the valuator's determinations.
34 My assessment of the valuator's report is that he in his conclusion and in accordance with sound accounting practice as outlined in his findings has established firstly the value of the shares and thereafter the fair market value in an open market transaction. It is yet to be established which applies.
35 As to his application of general accounting practices, I find no error. Where all the shares are to be purchased on the open market, their value should be reflected by this contingency but that is not the situation before us. We cannot conclude that if a court makes a finding that the shares are to be purchased by the alleged wrongdoers, and the allegations of misconduct are established, that the wrongdoers are to get the benefit of this reduction. This seems to me to be a determination for the court after evidence unless previously settled by the parties and cannot be a pre-determination by the valuator without consent or clearly incorporated within the order.
36 For these reasons, I conclude it should be open to the court whether on the action for wrongful termination if properly amended, or in a separate action, to determine what constitutes the final value, the before or after. This would be so unless the court determines after evidence that the findings of the valuator were within his jurisdiction as provided by the order.
37 On the question of whether we have a final value as contemplated by the order, this question appears to have already been answered by the respondent in their factum. To quote Paragraph 19 of their position,
It is the position of the Respondents that as the Valuation arrived at must be reduced by the contingent liability, no final Valuation has been achieved for the purposes of paragraph 9 of the Order of Mr. Justice Patterson. If no final Valuation has been achieved, no payments are owing under the Order. It is not possible to determine the value of the shares until the contingent liability is determined.
38 This position seems to have been adopted since it is unknown whether the shares shall or shall not be reduced by an unknown contingent liability and for how much. There has been no determination as of yet of wrongful conduct or consideration of the applicant's termination with or without cause. It leaves the respondent with the inability to pay, not only because of the size of the claims by the applicant, but also because there has been no resolution on these issues. It may be said, that final value may only be determined after it is settled whether the contingency applies.
39 For all of these reasons while I accept that the order of Patterson J., may have contemplated immediate payment after valuation, because the value remains uncertain, I am unable to conclude that the respondent is in violation of payment within 60 days of the valuator's report, the final value not yet determined.
40 Turning to Issue II, the respondent acknowledges that it is bound to qualify the shares of TGI-VMS for the personal $500,000 enhanced capital gains exemption in Canada. The financial officer in writing acknowledges this obligation. As reported, the steps are dependent on a fixed purchase and sale date. Once this is known, the respondent confirms that compliance with the order may be carried out. At such time TGI-VMS will take the necessary steps to qualify the shares for eligibility for the personal $500,000 enhanced capital gains exemption in Canada. Once again, although the order of Patterson J., contemplated that such steps could be achieved prior to December 31, 1999, we may infer that the parties also conceived a purchase and sale of the minority shares prior to this date.
41 While there is an obvious breach of this time limit, it has been explained through the financial officer in writing, the reasons for the respondent's inability to conform. From the submissions heard provided compliance takes place prior to purchase and sale and the moving parties are not jeopardized, I do not conclude that a declaration for compliance at this time is appropriate or necessary.
42 The payment of bonus referred to in Paragraph 12 of the order of Patterson J. has been raised as Issue Three. It provides if there are any shared bonuses paid or attributed for the fiscal year 1998, the respondents are to pay to the applicants their pro-rata share. I direct compliance with this paragraph of the order and that it should be completed immediately. In arriving at this conclusion, I do not agree that the issue of costs in the counter motion must be dealt with prior to the payment of the bonus. They are separate issues and we are not here to provide security to the respondents as a pre-determination. This is not a mareva situation where the costs must be secured if the respondent is successful. Such a pre-determination to secure costs is inappropriate, the claimants all reside within the jurisdiction or have roots here of a financial nature and there is no suggestion they are judgment proof.
43 Turning to the final issue, I direct the respondents to continue to deliver monthly monitor reports with specifics of the extent of the total shareholders' liability, to the Corporation from time to time. For this purpose, the reports do not require a breakdown of personal charges by each shareholder. The intent of the original order is to monitor the shareholders' liabilities until the completion of the purchase and sale of the minority shares to determine there is no wasting of assets. The monitoring and the report that follows is also to identify any abuse in the Corporation, of inappropriate expenditures not in keeping with former policy. With the exception to the above direction, the monitoring and the reports provided are to be in keeping with the specifics outlined in the order of Brockenshire J.
44 On the question of costs, I am prepared to hear counsel's submissions, but it may be that counsel are able to resolve this issue between themselves. Because success has been somewhat divided, may I suggest that costs be fixed between $3,500 to $4,000 for the two half days before the court. Since I am of the view that the issue of contingency and the jurisdiction of the valuator, the major issue must be resolved whether in an amended wrongful termination action or a separate claim, that those fixed costs be payable to the party in the cause, who achieves success on the most controversial issue, the value of the minority shares with or without contingency. I shall leave it to counsel nevertheless if they wish to make submissions on costs, they are to arrange an appropriate date.