Citation: Giffin v. Soontiens, 2011 NSSC 404
Date: 20111031
Docket: Hfx No. 292594
Registry: Halifax
Between:
Gordon Giffin Plaintiff
and
Nicole Soontiens, Ilona MacAlpine, XL Electric
Limited, a body corporate, Huntec Limited, a body
corporate, and CNCA Holdings Limited,
a body corporate Defendants
DECISION
Judge: The Honourable Justice Gerald R. P. Moir
Date of Hearing: January 11, 12, 13, 18, 19, and 20, 2010, January 17, 18, 19, 20, 24, 25, 26, 27, and 31, February 1, 2, 3, 4, 8, 9, and 16, 2011
Last Written Submission: September 14, 2011
Counsel: John A. Keith, Andrew D. Taillon, and Jack J. Townsend, articled clerk, for plaintiff
George W. MacDonald, Q.C., Kiersten Amos, and Michael Blades, articled clerk, for defendants
Scott Sterns with watching brief for Tibor Berta and Western Electrics (2004) Ltd.
Table of Contents
Introduction para. 1
Fact Finding
The Berta Family and Business para. 11
Giffin, MacAlpine, and Soontiens in Western Electrics para. 22
Agreement for a Second-Generation Business para. 52
Financing the New Venture para. 81
Loan to Company or Gift to Daughters? para. 108
Incorporation and Articles para. 139
Shareholder Agreement and Share Terms para. 148
Events Leading to Shareholder Agreement and Share Terms para. 168
1999 to 2004 para. 204
Transfer of Class C Shares para. 237
2005 para. 260
2006 and Early 2007 para. 285
XL Purchase of Leftover Tools and Inventory para. 306
Premises para. 319
Issues para. 330
Importance and Interpretation of the Shareholder Agreement para. 334
Promissory Estoppel para. 365
Misrepresentation para. 367
Shareholder Oppression para. 373
Fiduciary Duty para. 422
Remedy para. 432
Moir, J.:
Introduction
[1] Gordon Giffin, Ilona MacAlpine, and Nicole Soontiens worked for the same electrical business. They decided to leave and to start their own electrical contracting company.
[2] Mr. Giffin believed that the company was to be owned and operated by the three as equal principals. Ms. MacAlpine and Ms. Soontiens seemed to agree with that in the formative discussions.
[3] The three left their employment at different times over a period of months, but under a single plan. Equally, they took the risk of leaving an established business for a speculative venture.
[4] Each took on an equally important role in a newly incorporated company. Each worked hard. They undertook equal liabilities to the bank and the bonding company. They equally accepted modest incomes so as to develop equity in the company.
[5] In one respect only, their contributions were not equal. Ms. Soontiens and Ms. MacAlpine invested $95,000 in start-up costs to Mr. Giffin's mere $5,000. In the beginning, he understood that he could borrow and invest an equal amount, but he was erroneously told that the bonding company would not recognize as equity an investment of funds that he had borrowed.
[6] The investments were set up as directors' loans and the company paid interest on the excess, $85,000, and eventually it began to substantially pay off the principal. Mr. Giffin understood that paying off the $85,000 portion of directors' loans would be a priority and his expectation of equality was eroded to that extent.
[7] The shares of the new company were not distributed among the three principals, and no shareholder agreement was prepared, until well after the principals had left their employment, made their investments, devoted much labour to the company, and undertook contingent liabilities to the bank and the bonding company. The shares were not distributed equally, and the shareholder agreement established many inequalities between Mr. Giffin and his co-adventurers.
[8] The situation improved for Mr. Giffin some years later when about one third of the most valuable shares were transferred by Ms. MacAlpine and Ms. Soontiens to Mr. Giffin. This put him, more or less, on an equal footing for distribution of equity on liquidation. He had equality in management as a director, but a majority would suffice for dividends, and the board of directors had much discretion in that regard.
[9] The company was successful. It reached the point where the principals could take out real profits, over and above normal compensation. However, the payments were grossly unequal. Mr. Giffin lost faith in the other principals, began looking for other work, and eventually left the company for a lower paying job.
[10] Mr. Giffin alleges various causes against the defendants. As will be seen, only one of them is established. Various actions taken by the company, including a declaration of grossly unequal dividends, amount to shareholder oppression. Mr. Giffin is entitled to remedies to redress the oppression.
The Berta Family and Business
[11] Tibor Berta, the father of the defendants, Ilona MacAlpine and Nicole Soontiens, and the uncle of the plaintiff, Gordon Giffin, was born in Hungary in 1937. He was among the many who came to Halifax about the time of the Hungarian Revolution.
[12] Mr. Berta had obtained a diploma from a mechanical and electrical institute in the old country. He continued his studies here, became a journeyman electrician, acquired his interprovincial ticket in 1962, and worked for many years with a local contracting company.
[13] Mr. Berta met Diane Berta when he was studying in Halifax. She was a secretary at the school. Later, she went to work for G. I. Smith when he was the finance minister. When Smith became premier, Clarkson Gordon hired her. It was just opening a Halifax office.
[14] The Bertas married in 1968. Ilona Berta was born in 1971, Nicole Berta two years later. Mrs. Berta sometime worked as her husband's secretary at the firm of electrical contractors but she insisted on being home after the children were born, always when they were very young and after school when they became school-aged.
[15] In 1985, Mr. Berta acquired an established local business, Western Electrics Limited. It was a unionized electrical contractor. By then, Mr. Berta had all the knowledge and skills for estimating, bidding, seeing to performance, and generally running a commercial electrical contracting business.
[16] Mrs. Berta would have preferred to be at home. But, Mr. Berta said of Western Electrics, "This place needs to be organized." She worked there until they retired. Mrs. Berta did "whatever needed to be done" including payroll, filing, tracking change orders, tracking contract values, and looking after the books. I have the impression that the business profited from close attention to accounting and other important controls.
[17] Western bid for, and obtained, medium to large contracts with commercial, industrial, and institutional clients. For this, it required bonding. And for that, it required good financial controls, sufficient equity, and auditor prepared financial statements. Financial statements from the mid-nineties show strong financial performance.
[18] I take it that Western Electrics was well run by Mr. Berta and that it showed good financial performance under his ownership. The strong financial showing of the mid-1990s is probably indicative of performance before that.
[19] Mr. Berta spoke of efforts to "revitalize" Western Electrics going into the 1990s. I doubt that it required a financial turn-around. Rather, he was preparing it for the day he could take out his investment and retire. His daughters and his nephew figured in that plan. Their introduction into the business is part of the backdrop to the formation of their own companies, the subjects of the shareholder oppression claims.
[20] As I said, Western Electrics was unionized. Its was a closed shop. Mr. Berta became a representative of management in industry-wide negotiations. His relationship with the union in his own shop became strained. For his part, Mr. Berta believed that the union held him back because unionized labour cost more than the cost of labour in non-unionized competitors and because it placed obstacles in his way for contracts outside Halifax, obstacles that did not exist for his non-unionized competitors. Western's relationship with the union also became backdrop to the formation of the next-generation business.
[21] We will discuss the introduction of Mr. Giffin, Ms. MacAlpine, and Ms. Soontiens into the Western Electrics business. Then, we should discuss their plans for the next-generation business, which was not to be unionized.
Giffin, MacAlpine, and Soontiens in Western Electrics
[22] Mr. Giffin maintains he had a very close relationship with the Berta family. The four immediate members of the family gave evidence which tended to downplay the strength of the relationship.
[23] I find that the immediate members of the Berta family were very closely knit. That continued as the two daughters grew up, were educated, went into business, and had families of their own. It continues to this day, and it now includes sons-in-law and grandchildren. I find that Mr. Giffin looked to the Berta family as a substitute for his own, somewhat fractured, immediate family. He was an especially close nephew and cousin, who was much under the influence of his uncle from an early age.
[24] While accepting the evidence of the members of the Berta family that Gordon Giffin was not like a son and brother, I find that it was obvious he was closely attached to the family, especially when he followed his uncle into a career as an electrician, and then as an electrician, estimator, and project manager in his uncle's business. This finding is relevant to the assessment of conflicting evidence about plans for the next-generation business and for findings about expectations.
[25] Gordon Giffin was born in Halifax in 1966. His father is Diane Berta's brother. Gordon Giffin is five years older than his cousin Ilona MacAlpine and seven years older than Nicole Soontiens.
[26] When Mr. Giffin was finishing high school, he decided that the career for him was as an electrician and an estimator. He went to vocational school and was accepted as an apprentice with a non-unionized outfit. He got his interprovincial journeymen certificate in 1990. He obtained more designations that advanced his qualifications as a construction electrician and an estimator.
[27] Mr. Giffin and members of the Berta family were willing to mislead the Western Electrics union for their own perceived advantage. That helps explain the lengths parties went to, perhaps unnecessarily, to avoid unionization of the next-generation business. The propensity to mislead shows itself in the story of Giffin joining Western.
[28] Mr. Giffin says that, after some time with his non-unionized employer, he decided he wanted to work in the unionized sector. I think he wanted to work for Western Electrics.
[29] Mr. Berta advised his nephew to create a situation in which it would appear that he got fired by his non-union employer for attempting to unionize it. Mr. Giffin perpetrated a hoax and, eventually, the IBEW directed the Halifax local to take him in.
[30] Mr. Giffin gained union membership in 1988, and he was hired into the closed shop at Western Electrics the next year. He was still an apprentice then. He became a journeyman in 1990. He was met with some animosity from the unionized employees at Western Electrics, who referred to him as "Tibor's nephew" or "the nephew".
[31] Despite the animosity over his relationship with the owner, Mr. Giffin succeeded in gaining the respect of his co-workers. He also began to move toward management. At an early stage, Mr. Berta invited his nephew to work, from time to time, in the office and taught him how to do take-offs.
[32] A take-off is the result of the process by which an estimator, or someone working under an estimator, extracts a bill of materials from bid documents, mainly the drawings and specifications. The bill is then costed. This work is combined with a labour estimate, which is often the more challenging component. When the estimator has the diligence and skill to produce an accurate estimate, the contractor is in a position to make a competitive but profitable bid by adding amounts for administration and profit.
[33] It came to pass that Mr. Giffin or another journeyman would prepare the take-offs. These would go to a purchasing agent, who would do the cost extensions. Then, a summary would be prepared for Mr. Berta or the lead estimator next after him. Mr. Berta, or the lead estimator, would review the materials costs and "labour the job", i.e. prepare the labour estimate. From there, Ms. Diane Berta would "finalize the bid" in consultation with her husband about margins for administration and profit.
[34] The gentleman who acted for many years as Mr. Berta's lead estimator was also the top supervisor of site projects. He was next after Mr. Berta in that capacity also, but Mr. Berta was seldom seen on site during Mr. Giffin's years with the company. This gentleman was well respected by the workers.
[35] In the mid-1990s, the lead estimator and supervisor of projects decided to retire. Mr. Giffin took over his work. Mr. Berta's role remained as owner, senior estimator, and ultimate authority for business decisions.
[36] Mr. Giffin felt he had a lot on his plate. He was still learning the art of estimating and the business of construction management. Mr. Berta remained his mentor, but Mr. Giffin worked closely with Mr. Berta on bidding, represented Western at construction management meetings, and provided site management.
[37] Nicole Berta, now Nicole Soontiens, was born in 1973. Growing up, her father taught her respect for money. She learned to save, rather than borrow, for what she wanted. Her mother taught her financial recording.
[38] Ms. Soontiens worked at Western in the summertimes and on weekends when she was a student in high school and college. She is a graduate of Saint Mary's University holding a Bachelor of Commerce, and she has post graduate education in construction contracting.
[39] In 1994, the purchasing agent decided to leave Western Electrics. Ms. Soontiens took that position. It is evident that she became skilled at recognizing the materials and tools required for electrical contracting, where to get them, the cost, and their use and disposition. She also developed a good knowledge of the electrical contracting business from the perspective of the office.
[40] Ms. Soontiens began to learn the arts of estimating, negotiating with suppliers, and finalizing bids. She learned much of this from her father and her mother, but I think she also learned about the business from her cousin although present circumstances make it difficult for her to acknowledge it.
[41] Ilona MacAlpine was born in 1971. She finished high school in 1988 and graduated from St. Mary's with a Bachelor of Commerce in 1992.
[42] Ms. MacAlpine attributes her early knowledge of business to her mother. She shows her mother's skills in organization and financial controls.
[43] During high school and college, Ms. MacAlpine worked in retail sales and food services part-time. She went with Canada Trust after college. When she was laid off from there, her father offered her a job as her mother's understudy. That was in 1996, seven years after her cousin had joined the firm and one year after her sister had done so.
[44] So, in the mid-nineties Western Electrics had an office of six or seven employees of whom five were family. Mr. Berta was the boss. Mrs. Berta was in charge of administration. Their daughter, Ms. MacAlpine, was Mrs. Berta's understudy. Their daughter, Ms. Soontiens, was the purchasing agent and was quickly learning the business as a whole. Their nephew, Mr. Giffin, was the estimator and the project manager.
[45] The testimony of Mr. Giffin and Ms. MacAlpine makes it clear that the three second-generation employees got along well, worked closely together, and were eager to learn and advance. As Mr. Giffin put it, they "evolved".
[46] The family dimensions of the Western Electrics business grew more complex, as families tend to do.
[47] Kevin Soontiens is a professional engineer, in the electrical discipline. He graduated in 1996 from the University of New Brunswick. At that time, he heard that Western Electrics was looking for an estimator and he applied for the job. They hired him.
[48] Mr. Soontiens knew nothing of the electrical contracting business. He learned from Mr. Giffin and Mr. Berta. He had the skills necessary for estimation by the time he left Western in 2002. That was also the year in which he obtained his designation.
[49] Soon after joining Western Electrics, Nicole Berta started dating Kevin Soontiens. They were married in 2001. Mr. Soontiens would become involved with the business in its second-generation incarnation.
[50] Gordon Giffin did volunteer work with the RCMP for many years. Because of that, he met Michael MacAlpine, a member of the force. Because of that, Officer MacAlpine met Mr. Giffin's cousin, Ilona Berta. They were married in 2004.
[51] The two sisters and their cousin were closely tied to one another, and to the electrical contracting business, when the sisters started thinking about striking out on their own. They started talking about that among themselves in 1997, or thereabouts. This was before Ms. MacAlpine and Ms. Soontiens were married, and after they had moved out from their parents' home.
Agreement for a Second-Generation Business
[52] The Berta sisters thought it was time for a change. Their father would retire soon, and he offered to turn the business over to them.
[53] They saw the union to be a problem, as already explained. More importantly, the two sisters wanted to be their own business women. Everyone would see Western Electrics as their father's business, but they wanted to start something new for themselves. So, they declined their father's offer.
[54] The two sisters discussed operating a travel agency. Then, a restaurant. They sought advice from Mr. Berta. He said that he had done well in electrical contracting, and they had backgrounds in the field although they were not electricians themselves. So, why go somewhere new?
[55] Both parents were very supportive. The sisters felt free to go in a different direction. They started to consider opening their own non-union electrical contracting business.
[56] From the evidence of Tibor Berta, Diane Berta, Ilona MacAlpine, Nicole Soontiens, and Gordon Giffin, I infer that there were three significant problems that needed to be solved for the sisters to operate a successful new electrical contractor company:
· Stable, profitable work would come from customers who were sophisticated and whose requirements were large. That is, commercial, industrial, and institutional customers known to be good to work for. Tenders for work of that kind had to be bonded. To start with medium level contracts would require equity in the order of $100,000. So, the first problem was to find $100,000 that would show as equity on the opening balance sheet to be given to a bonding company.
· The new business had to immediately employ well qualified journeymen to satisfy the sophisticated customers it would seek. These were not easily available. The competitive disadvantage of non-unionized shops was in a constant shortage of first rate journeymen. In Mr. Berta's words "there were not enough qualified journeymen electricians who [were] non-union".
· There would be a serious challenge by the IBEW to the new business' independent status. Because of the connection between Western Electrics, Ms. MacAlpine, Ms. Soontiens, and Mr. Giffin, and because they were family of Tibor Berta, the union would be keen to have the new business certified as a successor employer.
In my assessment, solving each of these three problems was seen to be essential to the success of the proposed venture. None was more important than another.
[57] It was the second of these essential problems that led to discussions with Gordon Giffin. He was not informed that the sisters had been given the opportunity to take over Western Electrics. The discussion with him centered primarily on the perceived difficulties with the union. The sisters and the cousin shared the same frustration with, and the same predisposition against, unionization.
[58] Mr. Giffin's frustration with the IBEW had recently been inflamed. The union would allow lower wage rates when a unionized contractor bid against non-unionized competitors. On a recent important competition, the union had waited until the last minute to advise Western Electrics of the rates it would permit, and the rates were more than it was allowing to other unionized employers. Western Electrics lost the competition.
[59] The testimony of Ilona MacAlpine and Nicole Soontiens was often at odds with that of Gordon Giffin on the important subject of the discussions that led to their formation of the new business. This testimony is important for finding expectations, and assessing the reasonableness of them.
[60] I do not accept everything Mr. Giffin told me. In assessing his credibility, I have taken into account his self-interest, as well as somewhat contradictory testimony he provided to the Nova Scotia Labour Relations Board. Nothing more will be said of the later because the transcripts went undisclosed so as to preserve their surprise value on cross-examination. The Civil Procedure Rules make an exception to disclosure obligations that allows for this, but the Rules severely limit the usefulness of the undisclosed evidence. It can only be used to challenge credibility, and it cannot be used beyond that to support findings of fact: Rule 94.09(2)(c).
[61] On the subject of what was said to Mr. Giffin when the concept of a new business was being formulated, I prefer the testimony of Mr. Giffin to that of Ms. MacAlpine and Ms. Soontiens when a contradiction appears. As will be seen, some of what Ms. Soontiens asserts is entirely improbable. Mr. Giffin would never have joined the venture if she had said what she claims she said.
[62] Also, time has allowed the two sisters to forget the importance of Mr. Giffin's primary contribution to the venture. Today, the new business is established and, no doubt, it can attract competent journeymen. The opposite was true when the formative discussions were held. Without a skilled estimator and, equally or more importantly, an experienced project manager with the ability to attract other journeymen, the new venture was impossible.
[63] Here is one concrete example of this forgetfulness. Ms. Soontiens testified that Mr. Giffin joined the new venture as an estimator; her sister recently described him as a "tag along". A business plan prepared by Ms. Soontiens in 1998 described Mr. Giffin as the "Experienced Electrician/Estimator/Project Co-ordinator". It says that the "key personnel" are Mr. Giffin, Ms. Soontiens, and Ms. MacAlpine. He was more than just an estimator. And, he was not a tag along.
[64] This forgetfulness allows for distorted memories of discussions that took place more than a decade ago.
[65] Ms. MacAlpine and Ms. Soontiens represent the discussions as occurring after they had decided to form the new business and as presenting to Mr. Giffin the basis on which he could join them if he wanted. Mr. Giffin's perspective suggests that the three of them formulated the plan for the new venture mutually out of frustration with the latest setback delivered by the union.
[66] I find that Mr. Giffin was not told of the discussions between the sisters, and those with their parents. He was not made aware that Western Electrics had been offered to them, or that they had already decided to try to form their own electrical contracting business, or that Western would be wound down eventually. I find that the impression given to him was one of mutual development of a new idea.
[67] I also find that, at the time Mr. Giffin was drawn into the discussions, the sisters had made no final decision about starting their new business. In addition to having to arrange bonding, they needed to attract someone who was a qualified electrician and who could head up estimating, do project management, and attract other skilled journeymen. (The bonding company also saw the need for a plan to attract competent staff.)
[68] Ms. Soontiens testified that Mr. Giffin was to receive a small percentage of the shares. She and her sister would allow him to buy more "under the right conditions". She said that whoever put in money would have shares. The more money, the more shares.
[69] The essential role played by Mr. Giffin belies the terms now asserted by Ms. Soontiens. She said that the only shareholders were to be her sister, Mr. Giffin, and herself. Mr. Giffin was not to be equal "because I wanted to control the company". She said, "It was going to be my company." She said she made that clear.
[70] Had these things been said in 1998, Mr. Giffin would have declined to participate and the new venture would have gone nowhere. It strains credulity to suggest that he gave up his position at Western Electrics to work hard for a speculative venture owned by his cousins on the promise of some unspecified, small share. His participation was then said to be "key". The suggestion made in testimony a decade later is contradictory and preposterous.
[71] Ms. MacAlpine's testimony was different than her sister's on this point. Let us start with the advice she heard her father give before she and her sister approached their cousin. Tibor Berta had "some concerns". He said more than once that they "may have problems finding good people".
[72] Ms. MacAlpine says that she and her sister approached their cousin, and he agreed to join them. It was to be "our company", but Mr. Giffin "could have a minority position".
[73] If Ms. MacAlpine and Ms. Soontiens are seen as a single voting block, which their testimony and subsequent behaviour support, then Mr. Giffin's testimony about the terms is consistent with Ms. MacAlpine's. He was to have a minority position.
[74] According to Mr. Giffin, the three formulated the idea for a next-generation business, then sought advice from Mr. Berta. Mr. Berta said he would look into companies available for purchase.
[75] The group met at the Berta house around June of 1998. The subject was kept secret. Buying an existing company was ruled out. It would be better to start something new, and build their own reputation.
[76] Mr. Berta advised that they would need about $90,000 to start the business. They would try to attract secure clients who paid their bills on time. Specific prospects were identified.
[77] Mr. Berta asked rhetorically, "How are you going to fund this?" They also discussed the need for good qualified electricians, the competitive disadvantage of non-union contractors on that score, and the difficulty of attracting journeymen necessary to medium and large contracts.
[78] So, the discussion at this formative stage was about the three essential problems already referred to.
[79] Things progressed on financing and staffing. Throughout, Mr. Giffin understood that there would be three equal owners. Thus, Mr. Giffin thought he would have to raise, and he intended to raise, one third of the equity they would need for bonding.
[80] Before turning to the subjects of financing and staff, let me summarize my findings on the formative discussions:
· There had been a discussion, unknown to Mr. Giffin, about the Berta sisters forming their own business. That culminated in a decision to try to form their own electrical contracting business.
· Three essential problems were identified: financing, staffing, and unionization.
· Gordon Giffin was key to solving the staffing problem.
· Mr. Giffin was approached by Ms. Soontiens and Ms. MacAlpine, and the discussion proceeded in such a way that he understood ownership would be split three ways equally.
Financing the New Venture
[81] The Guarantee Company of North America, or a predecessor, provided bonding to Western Electrics for decades. The Halifax branch manger is Mr. Dan Fletcher. He held that position for over two decades. He testified.
[82] Mr. Fletcher discussed the proposed new venture with Mr. Berta, and later with Ms. MacAlpine and Ms. Soontiens. It think it likely that Tibor Berta made the introduction before the summer of 1998. Mr. Fletcher was of the view that the new business would require $100,000 in equity to support the kinds of bids it would initially make.
[83] When he was on the stand, Mr. Fletcher explained that bonding is a function of equity in, and judgment about, a contractor. Standard multiples of equity will be considered in deciding how large a contract to bond and how much exposure the bonding company would tolerate in aggregate for a contractor, but the work of bonding, like that of commercial lending, involves art in assessing the contractor on broader terms.
[84] Mr. Fletcher also explained that which would be obvious to anyone experienced in commercial credit. The source of the equity in the business is irrelevant to the credit of the business as such. Whether the equity was retained earnings or shareholder investment did not matter. If it came from shareholder investment, it did not matter whether the shareholder invested cash the shareholder held or borrowed. (Of course, beyond the assessment of the business as such there is the valuation of guarantees. Debts owed by the guarantor are relevant to that valuation.)
[85] Finally, Mr. Fletcher explained that a newly founded contractor would need to retain earnings or otherwise build equity, so it could bid on larger and larger contracts and, thereby, grow.
[86] Mr. Giffin says he saw his bankers in June of 1998 and, again, later in the summer. Then he met with his two cousins and his uncle. He reported that he had arranged a line of credit for $35,000, his one third of the needed equity.
[87] Mr. Giffin says that he was told by his uncle and cousins that the Guarantee Company of North America required that the infusion of equity come from "unencumbered" sources "free and clear". It was not enough that the company had no conventional debt against the money, the shareholder could not borrow it either. Ms. Soontiens testified that she said as much to Mr. Giffin at some point.
[88] Mr. Giffin says that Mr. Berta then offered a loan to the three shareholders for $85,000. The three would put up $5,000 each. (How a loan from Mr. Berta is any better than one from a bank is not explained.)
[89] Mr. Giffin had borrowed money from Mr. Berta in the past. As a lender, Mr. Berta always expected repayment with interest.
[90] Mr. Berta also wanted security of a kind. Except for the union, he could take redeemable shares. Because of the union, the $85,000 loan would be guaranteed by shares held by the daughters. On repayment, they would be surrendered or split equally. (Why the sisters, and not the cousin, is not explained.)
[91] According to Mr. Giffin, at that same meeting in the summer of 1998, the parties made a plan for starting up the new business. They would have to be selective about their first bids. The three prospective shareholders would leave Western Electrics in an order. Ms. Soontiens would leave before the first bid. Next, Mr. Giffin would leave when a bid was accepted and the work had to be done. Ms. MacAlpine would stay with her father temporarily.
[92] Tibor Berta said that Mr. Giffin did not understand financial statements, but his daughters did. I find that that was so and that Mr. Giffin lacked sophistication for the financial side of business. I find that Ms. MacAlpine and Ms. Soontiens, with their commerce degrees and their minds for and interest in business, had a sophisticated understanding of commercial organizations and finance.
[93] The difficulty is to determine whether the parties made a commitment to one another, and what was the substance of the commitment. I accept Mr. Giffin's evidence that a meeting occurred, but I have, for the reasons already pointed out, difficulty understanding the content.
[94] Testimony is consistent that at some point in 1998 the parties agreed on the plan described by Mr. Giffin for starting the business, including the order in which they would leave Western Electrics. They all say that the intended business would require $100,000 in equity. They disagree on where that was to come from. Let us look at the testimony of Mr. Berta, Ms. MacAlpine, and Ms. Soontiens.
[95] Mr. Berta said that Mr. Giffin first approached him in 1997 about starting his own business. This was after Mr. Berta started to consider retirement. He thought Mr. Giffin would need $70,000. He understood that Mr. Giffin could not raise that much money.
[96] As discussed, Mr. Berta says he saw the new venture to be his daughters' business. They told him that Mr. Giffin would like to work with them and that he wanted to participate in ownership.
[97] Mr. Berta denies there was any discussion about his making a loan. He claims Nicole Soontiens said that the daughters needed $95,000 and he decided to make a gift to them in that amount. As for Mr. Giffin, Mr. Berta claims to have made it clear to him more than once that the $95,000 "is for the girls".
[98] According to Ilona MacAlpine, she and her sister told their father that Mr. Fletcher was looking for $100,000 in equity and Mr. Giffin was going to come up with $5,000. Mr. Giffin had gone looking for financing and that was the paltry amount he came up with. So, Mr. Berta wrote a cheque for $95,000 to Ms. Soontiens and said to her that half of it was for Ms. MacAlpine. It was a gift.
[99] In cross-examination, Ms. MacAlpine admitted that there was an understanding in the beginning that Mr. Giffin had the opportunity to buy one third of class B and C shares. She was clear that this understanding was in effect "from the beginning". The exact price was not stipulated, and the option was not carved in stone.
[100] One of the difficulties with Ms. MacAlpine's testimony about an option to purchase one third of class B and class C shares is that, at the time of the discussions, there were no classes of shares contemplated. That possibility arose first in suggestions Ms. Soontiens made to Guarantee Company of North America. At that time, Ms. Soontiens wrote of special shares for the sisters as "preferred shares". Much later, Ms. Soontiens settled on shares divided into class A, class B, and class C.
[101] Ms. Soontiens testified that, knowing her father was willing to give Western Electrics to her and her sister, she asked if he had the kind of money Guarantee Company of North America required. He said he did, and he told her to see him when it was needed. This was not done in a meeting with Mr. Giffin present, Ms. Soontiens was alone with her father or with both parents.
[102] Ms. Soontiens knew then that Mr. Giffin had $5,000 to put in. So, she took her father to offer a gift of $95,000.
[103] Mr. Berta's terms were only that one half would be for his other daughter, the money was to fund equity on an opening balance sheet of a new electrical contracting company, and this was all he would give for the business. Ms. Soontiens said her father said, "Don't screw it up."
[104] Ms. Soontiens testified that it was "always agreed" by her and her sister that their cousin could purchase up to one third of the class C shares. She agreed with her sister's statement that Mr. Giffin had the opportunity to purchase one third of the class B and one third of the class C shares. They had an understanding "from the beginning". I take Ms. Soontiens to have referred to the period of discussions before anyone left Western Electrics and before incorporation of the new company. We encounter the same problem as with her sister's testimony.
[105] Ms. Soontiens also said that there was no formal option or agreement. "In the right circumstances, down the road, he could buy." "It was possible if we wanted to do that."
[106] I am satisfied that there were meetings in the summer of 1998 as described by Mr. Giffin. Months later, Mr. Berta drew a cheque for $95,000, which was paid to the new company and recorded as a loan owing by it to Ms. Soontiens. If, between the meetings and the cheque, arrangements between Mr. Berta and his daughter changed, Mr. Giffin was not made aware.
[107] I find that, from the beginning, Ms. Soontiens and Ms. MacAlpine led Mr. Giffin to believe that he could acquire one third of the new company, subject to some terms about repayment of start-up investments that may have remained vague. I make that finding based upon my assessment of the testimony about the early discussions and the evidence about later events, including the conveyance of almost one third of class C shares to Mr. Giffin for nothing.
Loan to Company or Gift to Daughters?
[108] Mr. Giffin's allegation of a loan to be repaid to Mr. Berta, and Mr. Giffin's alleged expectation that shares securing the loan would be cancelled or distributed three ways on repayment, and the denial of both made it relevant to ask: What did the new company pay to Mr. Berta, Ms. Soontiens, or Ms. MacAlpine on account of the start-up investment? What money was paid by Ms. Soontiens or Ms. MacAlpine to their father between 1999 and 2007? What was the money paid for, if not repayment of the alleged loan?
[109] These questions made relevant every financial transaction between the new company and Ms. Soontiens or Ms. MacAlpine and every financial transaction between the daughters and their father. It turns out that these were numerous. The defendants were slack about disclosure. This caused unnecessary delay and unnecessary expense. Because of that, suspicions became heightened. Even today, I cannot be satisfied that full disclosure was made.
[110] Ms. Soontiens' responses during cross-examination made it clear that she adopted a passive role toward her responsibility to disclose relevant documents: Mr. Giffin's lawyers got what they asked for; she gave her own lawyer "whatever he asked for".
[111] So, Ms. Soontiens did not look for documents recording substantial payments by XL to her husband for what had been her father's leftover tools and inventory, payments Mr. Giffin was not told about. Her explanation: the transactions were innocent, they were not for funnelling money to Mr. Berta from the new company. The transactions were relevant, whether they tended to prove or disprove a material fact.
[112] Records of some of the tool and inventory transactions went undisclosed until trial. This caused a lengthy and costly adjournment and much more digging on the plaintiff's part than should have been necessary.
[113] There was an account held jointly by the two sisters at the Toronto Dominion Bank. Some $10,000 passed into and out of this account, much of it in cash, during the early period of the alleged loan. The plaintiff obtained the account statements only by compelling bankers to testify at trial. Ms. Soontiens did not recall looking for these relevant statements. They were certainly in her control.
[114] Ms. MacAlpine showed the same attitude toward her disclosure as did her sister.
[115] For example, on discovery Ms. MacAlpine was asked to advise of any bank accounts she used to pay money to her parents. Through her counsel, she advised the plaintiff that only a Scotiabank account that had already been disclosed was used for that purpose. During the first part of the trial, and under the pressure of subpoenas having been served on her bankers, Ms. MacAlpine conceded that two undisclosed Toronto Dominion accounts were used for relevant transactions. Her explanation? She was never asked to provide details about Toronto Dominion accounts, just Scotiabank accounts.
[116] For another example, Ms. MacAlpine took on the task of disclosing payments made by the new company to Mr. Soontiens for the leftover tools and inventory he got from Western Electrics. Even as the trial was underway, it became apparent that the overall amount was greater than the total of disclosed cheques. The discrepancy was in the tens of thousands. Ms. MacAlpine went back to her assistant who identified further transactions simply by searching "Soontiens" in the record of vendors on the accounts payable journal. This led to production of the primary documents, more cheques to Mr. Soontiens. Running the search and finding the cheques were not onerous tasks, and they should have been done long before trial and without prompting.
[117] The defendants' attitude toward disclosure led to a long adjournment, an order for production, and late productions even when the trial was about to resume. Against that background of non-disclosure, we are left to assess numerous transactions to see whether the record proves payments of interest and principle on a phantom loan.
[118] Mr. Berta commonly made loans to his daughters. Sometimes Mrs. Berta participated. These were sometimes recorded through promissory notes if the loans were large and, small or large, records of repayments were often kept.
[119] Repayment was by bank transfer, cheque, set-off, or cash. The family often dealt in cash, sometimes in the thousands of dollars.
[120] After the new company was formed, when banking with an initially modest line of credit was obtained and bonding for some target jobs was being arranged, Mr. Berta gave Ms. Soontiens the cheque for $95,000. Mr. Giffin put in his $5,000 and the $100,000 was recorded as directors' loans.
[121] (A year later, in October of 1999 after Ms. MacAlpine joined the business, cheques were drawn out to the two sisters and the money was redeposited to show $47,500 as a loan from Ms. Soontiens and a like amount from Ms. MacAlpine. I find nothing unusual in that transaction.)
[122] Mr. Giffin says that the $100,000 was made up of $5,000 each from the three equal shareholders and $85,000 due to Mr. Berta. Ms. Soontiens and Ms. MacAlpine say that their investment was $95,000. Interest was paid by the company to the sisters, and a round number results from calculations based on $85,000 assumed principle rather than $95,000.
[123] The plaintiff proved two possible sources for payments to Mr. Berta to be credited against the $85,000. One is unusual debits from the accounts of Ms. Soontiens or Ms. MacAlpine, such as large cash withdrawals. The other is payments made by the new company to Mr. Soontiens that were accounted as payments for the leftover inventory and tools of Western Electrics, which the plaintiff submits were nearly worthless.
[124] In the years 2003 to 2005, the sisters withdrew about $90,000 in large amounts:
July 3, 2003 Soontiens purchases bank draft $9,300
Oct. 14, 2003 Cash withdrawn by Soontiens $3,000
Oct. 31, 2003 Soontiens purchases bank draft $35,870
April 27, 2004 MacAlpine cash withdrawal $7,500
Jan. 5, 2005 Soontiens cash withdrawal $7,700
July 28, 2005 MacAlpine cash withdrawal $5,000
Aug. 25, 2005 MacAlpine cash withdrawal $6,500
Aug. 26, 2005 Soontiens cash withdrawal $4,000
Sept. 22, 2005 Soontiens cash withdrawal $1,000
Sept. 23, 2005 Soontiens cash withdrawal $4,000
Oct. 6, 2005 Soontiens cash withdrawal $2,500
Oct. 14, 2005 Soontiens cash withdrawal $2,700.
[125] Payments for the leftover inventory and tools totalled about $100,000:
Jan. 17, 2003 $11,926
June 30, 2003 $21,664
Oct. 29, 2003 $4,800
June 24, 2004 $12,656
Dec. 22, 2004 $24,340
Sept. 30, 2005 $25,000.
[126] The plaintiff submits that this $190,000 should be attributed to repayment of the principal of, and payment of interest on, two debts. In May of 2002, Mr. Berta advanced $36,000 to the Soontienses to help with the purchase or construction of a home. In November of 2003, he advanced the $95,000 to start up the new business.
[127] The Soontienses signed a note for $56,000 payable to Mr. Berta. According to Mr. Berta, the note was for $36,000 advanced, half by him and half by his wife, in 2002 to assist with the new home and $20,000 owed by Kevin Soontiens to him from sales of some of the leftover Western Electrics inventory and tools.
[128] I cannot say, on the evidence before me, how much of the cash went to Mr. Berta as possible repayment of a loan. There are arguments for doing so, but the evidence does not prove any to a likelihood. Nor can I say how much of the payments for the leftover inventory and tools may have gone to Mr. Berta. The evidence does not support findings that a loan, rather than a gift, was made by Mr. Berta or that a loan was repaid, even partially.
[129] Mr. Berta's evidence on repayment of the note is illustrative of the kinds of problems one encounters in attempting to unravel the financial dealings within the Berta family.
[130] On discovery, Mr. Berta said that the note was repaid and the evidence would be in his Scotiabank or Toronto Dominion accounts.
[131] Not long before the trial resumed, and well after Mr. Berta had been ordered to produce relevant documents, his lawyer advised that $1,000 had been forgiven by Mr. Berta to improve the pool area in the Soontienses' newly constructed home, the Soontienses offered him $40,000 but Mr. Berta forgave it, and the balance was paid off by set-offs.
[132] However, Mr. Berta claims he forgot the fact that half of the $36,000 for the earlier home loan had come from his wife. She did not agree to the forgiveness and, although the note is payable to Tibor Berta alone, $18,100 plus interest of $900 had to be repaid to Mrs. Berta. This is supposed to explain $19,000 of a cash withdrawal by Ms. Soontiens in December of 2007 in the amount of $22,000.
[133] It is odd for one to withdraw tens of thousands in cash to pay a debt, unless one wishes to make it difficult to see the purpose. That $19,000 transaction was in 2007. I have detailed the large cash withdrawals in the earlier years.
[134] There is evidence of Mr. Berta dealing in large amounts of cash to lend money to, and be paid by, relatives. Further, there is a close financial connection between him and his relatives. He directly trades for them in their investment accounts, and has access to their passwords for that purpose.
[135] Finally, a lot of money passes around the Berta family. They assist one another in large ways and small. Usually they expect to be repaid, but Mr. Berta has also made some sizable gifts to his daughters.
[136] Further, I accept Mr. Giffin's evidence about discussions of a loan for $85,000. I am satisfied that there was, in the beginning, a promise of a loan by Tibor Berta. However, I am also satisfied that, at some point, that changed from a loan to a gift, a gift that was used to make a loan to XL.
[137] I find that, after the earliest formative discussions, and after taking Tibor Berta's advice against buying a non-union contractor, and after the discussions with Mr. Fletcher, and after Mr. Giffin came to believe that he could not borrow money to create required equity for the new company, the two sisters and their cousin agreed to an arrangement under which they would put in $5,000 each and leave Western Electrics.
[138] It has not been proven that money from the new business was used to repay Mr. Berta. I do find that Mr. Giffin understood at the material times that there was a loan of $85,000 from Mr. Berta and that there was to be some connection between repayment of the loan and redemption of shares. In my assessment, his understanding about repayment and redemption is the more important point, and its importance is not diminished by the fact that the loan to the company was payable to Ms. Soontiens and Ms. MacAlpine, rather than to their father.
Incorporation and Articles
[139] Mrs. Diane Berta came up with the name XL Electric Limited. Ms. Nicole Soontiens dealt with Mr. Gregory Baker, Q.C. The company was incorporated on October 2, 1998 under the Nova Scotia Companies Act. That statute allows for memorandum of association type incorporations. (Judicial authorities from other jurisdictions about corporate powers, and the powers of shareholders and directors, have to be read cautiously in light of the differences among types of legislated incorporation by registration.)
[140] A standard form of memorandum was adopted. It contains provisions for control of shares by the directors and for types of shares. Article 6 provides:
The Directors shall control the shares and, subject to the provisions hereinafter set out, may allot or otherwise dispose of them to such persons at such times, on such terms and conditions and either at a premium or at par as they think fit.
[141] When XL was incorporated, Mr. Giffin and Ms. MacAlpine were still working for Western Electrics. So, initially Ms. Soontiens was the sole shareholder, officer, and director.
[142] XL eventually created three classes of common shares named A, B, and C. None were designated as preference shares. However, there is evidence that Ms. Soontiens associated the class A shares with preference shares.
[143] Article 13 prescribes a form for common shares and a form for preference shares. For the later, the "rights, restrictions, conditions, and limitations" are to be printed on the reverse.
[144] Section 50 of the Companies Act also tells us something of the nature of preference shares. They are subject to redemption or purchase by the company: s. 50(1). A company who issues preference shares must include in its balance sheet a statement of the date when the preference shares may be redeemed or purchased by the company: s. 50(2).
[145] Mr. Giffin left Western and joined XL early in 1999, and Ms. MacAlpine did so in the summer. During this time, Ms. Soontiens dealt with professionals to develop the share structure and shareholder rights including a shareholder agreement and share terms.
[146] It will be necessary to delve into Ms. Soontiens' dealings with the professionals and the discussions with, and limited participation by, Mr. Giffin. This evidence, as well as the parol evidence about the formative discussions, will be relevant to the issues of oppression and remedy and to resolve an ambiguity in the share terms.
[147] However, it is best to start with the contract and the share terms without reference to the parol evidence. That way, we can see clearly where the parol evidence is important and where it is not.
Shareholder Agreement and Share Terms
[148] On October 4, 1999 Ms. Soontiens, Ms. MacAlpine, Mr. Giffin, and XL Electric Limited executed a shareholder agreement before XL's lawyer, Mr. David Thompson, to whom Mr. Baker had introduced Ms. Soontiens. On that day, the three became the directors of the company, Ms. Soontiens became president, and Ms. MacAlpine became secretary and treasurer. Mr. Giffin was not made an officer.
[149] The shareholder agreement provided for three classes of shares. Before relinquishing her position as sole director, Ms. Soontiens adopted special resolutions to create new shares and to state the "Terms and Conditions of Class A Special Voting Common, Class B Common and Class C Common Shares". In my view, the share terms are integral to the shareholder agreement and they are crucial to the issues I have to determine about shareholder rights, oppression, and remedy.
[150] Article 2.01(a) of the shareholder agreement provides for share ownership in amounts that appear to support the defendants' theory of a minuscule interest for Mr. Giffin and appear to belie Mr. Giffin's claim that ownership was to be equal, in the sense of thirds. The shares were to be distributed:
(i) Nicole - 51 Class A Special Voting Common Shares
10 Class B Common Shares
34 Class C Common Shares
(ii) Ilona - 51 Class A Special Voting Common Shares
10 Class B Common Shares
34 Class C Common Shares
(iii) Gordon - 10 Class B Common Shares.
[151] Assuming there is no substantive difference among the classes about income rights (the rights to dividends) or ownership rights (the allocation of equity on liquidation), the distribution supports the defendants' theory of ownership based only on money invested: 95% for the $95,000 invested by the sisters from their father, and 5% for Mr. Giffin's $5,000. However, the rights attached to shares are different between the classes.
[152] The share terms provide for voting, income, and ownership. The two hundred shares are alike for voting. The same is not so for dividends or, when one takes a penetrating look at the terms, for allocation of equity.
[153] Dividends are to be calculated differently according to class:
class term example
A "each shareholder's cash invested return on $85,000 paid
in the Company (excluding amounts to Ms. Soontiens and
invested by all shareholders Ms. MacAlpine
regardless of class)"
B "each shareholder's first $5,000 equal dividends for equal
invested in the Company or any financial investment and
other amounts which are invested dividends for labour
equally" or "dividends ¼ in lieu of wages"
C "the net profits of the Company" the balance, to the extent that cash flow allows.
The Board has a broad discretion to determine the amount to declare for a dividend and discretion to prefer one class over another.
[154] The terms about allocation of equity require some interpretation to resolve a textual conflict. It is better to state those terms in full:
1(c) The holders of the Class A Special Voting Common Shares are entitled to receive the remaining property of the Company, in priority to the holders of other classes of shares, upon the liquidation, dissolution, bankruptcy, or winding-up of the Company or other distribution of its assets among its shareholders for the purpose of winding-up its affairs.
2(c) Subject to the prior rights of the holders of the Class A Special Voting Common Shares, the holders of the Class B Common Shares are entitled to receive the remaining property of the Company upon the liquidation, dissolution, bankruptcy, or winding-up of the Company or other distribution of its assets among its shareholders for the purpose of winding-up its affairs.
3(c) Subject to the prior rights of the holders of the Class A Special Voting Common Shares, the holders of the Class C Common Shares are entitled to receive the remaining property of the Company upon the liquidation, dissolution, bankruptcy, or winding-up of the Company or other distribution of its assets among its shareholders for the purpose of winding-up its affairs.
[155] Taken literally, term 1(c) provides for all the equity to be allocated to class A holders. That would make 2(c) and 3(c) meaningless.
[156] Similarly, if one implies a limit on what is payable on liquidation for class A shares, 2(c) and 3(c) conflict. One provides that all the equity is to be distributed for class B, and the other provides that all the equity goes according to class C holdings.
[157] Of course, these terms are to be read in context. The terms about dividends may be an important source for context. One could expect rights to income from shares to be consistent with rights to the equity.
[158] The terms about dividends provide a reasonable scheme. Subject to the Board's discretion, B is the source for an equal return on the small initial investments of $5,000 each or for labour, A provides for a different return on investment in excess the $5,000, and C provides for distribution of profits after payment for work (B) and returns on investment (B and A).
[159] An interpretation of the share terms as providing different bases for dividends and similarly different bases for division of equity on liquidation would lead to the conclusion that class A shares, class B shares, and class C shares have different values. Although the shareholder agreement does not define the nature of the different classes, it does provide for valuation of shares in certain situations, such as resignation. Do those provisions assist us in understanding terms 1(c), 2(c), and 3(c)? Do they weigh for or against different values?
[160] Article 4 regulates sale of shares among shareholders and to third parties. The price for an internal sale under 4.01(b), or for a sale initiated by an external offer under 4.01(c), is determined by the offeror. So, these provisions shed no light on the question of different values for different classes of shares.
[161] Article 4.04 provides for the buyout of a minority shareholder, defined as one who holds 10% or less of the voting shares regardless of class. Mr. Giffin was in that position until 2004, and he is mentioned by name in article 4.04(b). Value is determined by the price offered, a negotiated price, or valuation by an arbitrator. This sheds no light on the issue of how the different classes are to be valued.
[162] Article 5 provides options to remaining shareholders on death, insolvency, retirement, or resignation. Article 5.05(a) requires the shareholders to determine the value of shares in the company by reference to "the fair market value of all of the Shares as if all of these Shares were being sold". This is to be achieved by agreement or arbitration.
[163] I do not read article 5 as telling us how to value the different classes. In particular, the reference to a notional sale of all shares does not assist us. The value of class B shares, for example, could be higher if the whole of the shares were being sold, instead of just some of the class B shares. In that case, the arbitrator would have to determine the fair market value of all shares assuming a sale of all of them, but there could remain a question about different value for different classes.
[164] Article 6 is a shotgun clause. Again, price is determined subjectively, sometimes by tactic, bravado, or timidity. It does not assist us to resolve the issue of differing values.
[165] Where are we so far? We have a problem with terms 1(c), 2(c), and 3(c) of the share terms. On liquidation, the holders of class A shares "are entitled to receive the remaining property of the Company" in priority to the holders of other classes. Subject to that, the holders of class B shares "are entitled to receive the remaining property", and subject to the rights of class A shareholders only, the holders of class C shares also "are entitled to receive the remaining property". The terms for dividends may shed some light on the terms for distribution of equity. Otherwise, the shareholder agreement does not assist us.
[166] None of this would matter much, except Ms. Soontiens and Ms. MacAlpine transferred virtually one third of the class C shares to their cousin in early 2004. For voting purposes, that gave him 16%, but in the circumstances of this company, there is no difference between 5%, 16%, or 33% for voting. For valuation, what did it give him?
[167] Let us return to the narrative and come back later to the questions of dividend rights, division of equity on liquidation, and their consequences for share value.
Events Leading to Shareholder Agreement and Share Terms
[168] Ms. Soontiens left Western Electrics in September, 1998. It was her job to set up the new company. Her first tasks were to get bonding and banking in order.
[169] As I said, Ms. Soontiens prepared a business plan and presented it to Mr. Fletcher of Guarantee Company of North America. It identified the shareholders and described the shares they were to receive. She and her sister were to hold "Preferred/Common" and Mr. Giffin was to hold "Common".
[170] Ms. Soontiens testified that she understood preference shares were similar to common shares "with extra rights". She did not explain what the "extra rights" might be. In view of Mr. Giffin's testimony about the formative understanding, the provision in the articles for preference shares, and the reference in the articles to the Companies Act, I think it likely that Ms. Soontiens had redemption in mind when she prepared a business plan that called for preference shares to herself and her sister, and not to Mr. Giffin.
[171] Ms. Soontiens got XL incorporated with the assistance of Mr. Baker. Mr. Baker recommended Mr. Michael Hornby to be XL's accountant. Ms. Soontiens met with him.
[172] Mr. Soontiens made a note of Mr. Hornby's advice. It included setting the $100,000 up as loans rather than using it to purchase shares. That way, no taxes would be payable "[w]hen the money was taken out of the company".
[173] Mr. Hornby advised about a tax discount available to new companies for the first three years of operations and of the advantages, and disadvantages, of the shareholders taking dividends instead of wages.
[174] Mr. Hornby wrote to Mr. Baker on December 14, 1998 after having had "a meeting with Nicole Berta regarding the proposed share structure for the company". The letter described the three classes of shares we see in the shareholder agreement and called for the distribution we have seen:
Class A shares are to comprise 51% of the total and they are to be distributed equally to Ms. Soontiens and Ms. MacAlpine, Class C comprise 34% and are to be divided equally between the sisters, and Class B comprise 15% split three ways.
[175] This "proposed share structure" was settled between Ms. Soontiens and Mr. Hornby. Neither discussed it with Mr. Giffin. Not at the time. Not later. He was to find out about it only when Ms. Soontiens delivered a copy of a draft shareholder agreement many months later when she sought execution.
[176] Mr. Hornby's letter said nothing about division of equity on sale or other liquidation. However, he did give Mr. Baker instructions on the dividends:
The Class B shares are to pay dividends based on each of the shareholder's first $5,000 invested in the company or any other amount that may be invested equally by the three shareholders. In addition, this class is to account for dividends being paid in lieu of wages to each of the shareholders.
The Class A shares are to pay dividends based on each of the shareholder's remaining cash invested in the company (to be paid at a premium).
The Class C shares are to be taken into account along with the other two classes of shares when a dividend is being paid out of net profits for the year.
[177] When he testified, Mr. Hornby was of the view that class A, at 51%, was designed to ensure Ms. Soontiens and Ms. MacAlpine maintained control, class B was to enable dividends in lieu of salary, and class C would not produce dividends unless they were paid on all three. Given the distribution, this suggests that Mr. Giffin was to be little more than an employee. He would get something for his small investment and, otherwise, his shares only enabled payment of his wages by dividend.
[178] Mr. Baker referred XL to his colleague, Mr. David Thompson, for regularizaton of the share structure and preparation of a shareholder agreement. Mr. Thompson took instructions exclusively from Ms. Soontiens. He did not meet Mr. Giffin until the day the agreement was signed. However, his correspondence shows that he thought Ms. Soontiens was reporting to Mr. Giffin, as well as to her sister.
[179] Early in January of 1999, Mr. Thompson drafted documents for the shares, he drafted a shareholder agreement, and he and Ms. Soontiens met over the drafts. In the meantime, Ms. Soontiens had set up the books, she had arranged banking and bonding, and she had successfully bid on two jobs with the assistance of a consultant. And, Mr. Giffin had just left Western Electrics and had just taken up his role at XL. Ms. MacAlpine would join them in the summer.
[180] Ms. Soontiens had two lengthy meetings with Mr. Thompson in January to discuss the draft documents. There is an early draft shareholder agreement in evidence. It was prepared by Mr. Thompson, and it includes notes by Ms. Soontiens. The notes, a comparison of the draft with the finalized agreement, and notes made by Mr. Thompson show some of the subjects discussed by Ms. Soontiens with Mr. Thompson and some of the instructions she gave.
[181] The notes and changes lead me to find that Ms. Soontiens gave close attention to the drafts. She was more attentive than she admitted on cross-examination.
[182] Ms. Soontiens and Mr. Thompson discussed the possibility of making the class A shares preference rather than common. I am mindful that "preference shares" can be a vague phrase. However, the evidence satisfies me that the vehicle of preference shares, as understood in Nova Scotia law, was considered as a means of protecting the unequal part of the initial investment ($85,000). That is, the shares would have been redeemable on repayment.
[183] We do not know what was said by Ms. Soontiens and Mr. Thompson about preference shares. However, the subject appears to have been dropped at this point.
[184] The first draft of the shareholder agreement proposed that many decisions by the company would require unanimous shareholder approval. Ms. Soontiens had those provisions changed so that Mr. Giffin's approval would not be needed. Restrictions on share transfers without unanimous consent were changed to require only majority consent.
[185] After the two lengthy meetings, and Ms. Soontiens' various instructions, Mr. Thompson revised the drafts. He and Ms. Soontiens had a third meeting, which produced a further draft.
[186] Mr. Thompson forwarded finalized drafts of the agreement and share terms to Ms. Soontiens on February 17, 1999. He wrote about the different treatment of Mr. Giffin and urged independent legal advice. Also, he offered to explain things to all three rather than rely on Ms. Soontiens to pass along his advice as lawyer for the company. "If you feel it would be helpful, I would be happy to have a meeting of all four of us to go through the documentation and explain it."
[187] Yet another revision was made to the shareholder agreement in August, 1999 after Ms. MacAlpine moved to XL. Again, Mr. Thompson recommended independent legal advice.
[188] No meeting was held until October 4, 1999 when the agreement and share documentation were presented for execution.
[189] Half a year went by after the company lawyer first recommended independent legal advice and offered to meet with all the parties. Ms. Soontiens never suggested Mr. Giffin meet with the company lawyer, never passed along the recommendation for independent legal advice, never showed Mr. Giffin drafts or correspondence from the company lawyer, and never told Mr. Giffin what she had instructed the lawyer to put in the agreement.
[190] Hence, my finding that Ms. Soontiens and Ms. MacAlpine did not want Mr. Giffin to understand that they had abandoned the theme of equality.
[191] As I said, Mr. Giffin left his job with Western Electrics and joined XL at the end of 1998. XL had secured a large contract that required Mr. Giffin's expertise and a work force that he would be primarily responsible for recruiting and directing. The contract was good for several months of work.
[192] At that time, Ms. Soontiens held all the shares but she was responsible for dealing with the professionals and getting the share holdings regularized on behalf of XL. Mr. Giffin testified that, and I accept that, he would have been very concerned about, would have insisted on a discussion about, and would have objected to the preparation of a shareholder agreement in which his rights were substantially different from the other shareholders. He said that he thought they were to be equals.
[193] My findings about Mr. Giffin's expectations for equality are based on the evidence as a whole. However, the following are prominent: the formative discussions, evidence that compensation was roughly equal between 1999 and 2006, evidence that Mr. Giffin contributed equal or greater labour in making the business a success, equal exposure of the three shareholders on guarantees of obligations to the bonding company and the bank, equalization of the class C shares in 2004, and my general preference for Mr. Giffin's testimony on subjects related to this question.
[194] I find that Mr. Giffin expected equality of income from, and ownership in, XL. I find that that expectation was apparent to Ms. Soontiens and Ms. MacAlpine when Mr. Giffin took the risk of joining XL, and when he worked so hard to make it a success even as Ms. Soontiens worked with the professionals on an agreement that was contrary to his expectations.
[195] I accept the evidence of Mr. Giffin that he was not given the finalized draft until the morning of the day it was signed, October 4, 1999, after he had been working for XL for over half a year and had signed the guarantees. Ms. Soontiens gave it to him. She said, "We have to go to the lawyer's office to sign this. You should read it."
[196] Mr. Giffin had little understanding of shareholder agreements, the operation of the kinds of provisions one finds in them, or share terms.
[197] Mr. Giffin read over the agreement so he could truthfully say at the meeting that he had read it. He understood little of what he read. He and Ms. Soontiens drove to Mr. Thompson's office. Ms. MacAlpine met them there.
[198] There is some discrepancy between the testimony of Mr. Thompson and that of Mr. Giffin about what happened at the meeting. We know that it lasted for less than an hour. What stands out in Mr. Giffin's mind is a passing around of numerous documents for signature.
[199] Mr. Giffin claims he said, "You know, these do not reflect the true agreement between us." He claims nothing was said, but Mr. Thompson nodded. I reject that evidence. Mr. Thompson would recall such a thing, if it happened. And, he would have stopped the process until he was sure the agreement offered for signature was the true agreement of those signing it.
[200] What I do take from this evidence is that, when he signed the agreement, Mr Giffin understood that the shares were not being divided equally, subject to redemption of the class A shares.
[201] I find that Mr. Giffin was asked, at the meeting, whether he had obtained independent legal advice. I find that Mr. Thompson went over important provisions in the agreement. I also find that Mr. Giffin understood little of what was being said. It is likely that Mr. Thompson assumed that, in the months before the meeting, Ms. Soontiens had passed along his advice, the drafts, and his letters about the need for independent legal advice in light of the preferential treatment of Ms. Soontiens. That is to say, it is likely that Mr. Thompson thought Mr. Giffin had some background information on the issues, when in fact he had none.
[202] I find, however, that Mr. Giffin understood that the agreement treated him unequally. And, he signed it.
[203] At the same time, the parties signed unanimous shareholder resolutions authorizing the class A, B, and C shares and establishing the share terms.
1999 to 2004
[204] XL's year end is September 30. Annual profits, compensation to shareholders, and retained earnings went as follows:
year profits compensation equity
1999 $152,637 $100,900 $152,637
2000 143,886 156,359 170,713
2001 261,905 252,006 302,479
2002 33,628 157,154 336,107
2003 35,959 194,661 372,066
2004 103,404 290,542 475,470.
(The shareholders' investment shows as debt on the balance sheet. So, lenders might add it to retained earnings in assessing equity.)
[205] One sees that XL was successful in maintaining profits, paying comfortable but generally modest compensation to the three principals, and accumulating significant equity. This success is attributable to investments in the business by the three principals well beyond the $100,000 lent in the beginning.
[206] Let us start by discussing the investment of skill and labour, then the financial investments, then the opportunity created by taking modest compensation. That will lay the groundwork for understanding how the shareholder agreement was administered before there was enough money to cause quarrels. And, that begins to explain why the shareholder agreement was performed as it was.
[207] I must say that I reject the plaintiff's assertion that XL was Tibor Berta's business. I find that he advised on some bids and that he weighed in on discussions of business issues, such as at annual meetings. Particularly, I find that he influenced declarations of dividends. However, I find that the financial decisions were made by Ms. Soontiens in consultation with Ms. MacAlpine and that, generally, the business was run by the three principals, not Mr. Berta. On issues that mattered to Mr. Giffin, they governed by consensus.
[208] In his attempt to prove that Mr. Berta lent $85,000 to XL, rather than gave $95,000 to his daughters for them to make their own investment, Mr. Giffin testified to the effect that Mr. Berta ran the XL business. Mr. Giffin claimed that Mr. Berta was always involved in major tenders and that he dominated annual meetings.
[209] In my assessment, Mr. Giffin overstated Mr. Berta's role in XL. After he left, Mr. Giffin threatened to go to the union with information supporting the proposition that XL was a successor employer to Western Electrics. I think his position on Mr. Berta's role attempts to justify that tactic and to bolster his theory of the $85,000 loan.
[210] In my assessment, members of the immediate Berta family understated Mr. Berta's role and their desire to conceal it. A concrete example of both is found in minutes of the 2006 annual meeting prepared by Ms. MacAlpine which, in my assessment, includes much said by Mr. Berta but with his involvement concealed. His name was left off the attendee list. Much of the minutes is in the passive voice so speakers cannot be identified.
[211] Ms. Ivy Lilly, who was an accounting clerk with XL, testified to the frequency of telephone calls from Mr. Berta, especially around tender closings. I accept her evidence and assess it as contradicting that of Ms. MacAlpine and Ms. Soontiens on this subject.
[212] When bonding was being set up at Guarantee Company of North America, Mr. Fletcher recorded a "verbal understanding" with Mr. Berta that Mr. Berta would resolve any problems that developed with the new company.
[213] The plaintiff objected to Mr. Berta being recalled to give evidence against such an understanding. I was referred to True Blue Cattle Co. v. Toronto‑Dominion Bank, [2004] A.J. 265 (Q.B.), in which permission to recall a witness was refused because "proper grounds" had not been shown [para. 9] and the recall "amounts to splitting his case" [para. 10].
[214] The recall was to give evidence about something in a document counsel had not seen (although the defendants must have been aware of it during the Labour Relations Board hearing). It is sufficient that the testimony was on a new subject and that damage to the order of Mr. Berta's earlier testimony is protected against by the right to cross-examine on the new subject. Also, I see no splitting of the defendants' case caused by the recall.
[215] Although Mr. Fletcher can no longer recall the understanding, I am satisfied by the record, and its annual repetition, that there was such an understanding. I reject evidence given by Mr. Berta to the contrary.
[216] The verbal understanding is inconsistent with the evidence tending to diminish Mr. Berta's role.
[217] I am satisfied that Mr. Berta was more involved in XL than he and his daughters said he was. I am also satisfied that Mr. Berta did not dominate the business decisions, as Mr. Giffin said.
[218] The truth lies somewhere in between the two versions and, for me, it is unimportant to exactly determine Mr. Berta's role. I took this evidence into account when determining the question of repayments on the supposed $85,000 loan. Otherwise, it is enough to see that XL got some input from Mr. Berta on tenders and he had a voice on the issues that were to be determined by the directors or shareholders.
[219] XL operated between 1999 and 2004 with Ms. Soontiens being the ultimate authority and the one to whom all office positions reported. Ms. MacAlpine was in charge of accounting. Mr. Giffin was the estimator, the project manager, the recruiter of workers, and the primary authority in the field.
[220] I find that business decisions were made by consensus in the office, except financial decisions. Those were mostly made by Ms. Soontiens with input from the accountants, Ms. MacAlpine, and, I find, Mr. Berta. I am not suggesting that Mr. Giffin was left out of financial decision making. He had nothing to contribute to, and little interest in, resolving many financial issues.
[221] I find that Ms. Soontiens skilfully ran the business from the perspective of the office and that she was the ultimate authority on such decisions as making a tender. I find that Ms. MacAlpine was responsible for the sound financial controls that XL enjoys. These contributions were, in my assessment, essential to the success of XL in its early years.
[222] I find that Mr. Giffin devoted long and productive hours to XL. As discussed, his contribution was essential to establishing XL because competent journeymen had to be attracted to a new, ununionized, and unproven company. I also find that the quantity and quality of his labour contributed much to the success of XL.
[223] As expected, XL had trouble initially with attracting experienced electricians. It overcame that life or death problem. I find that Mr. Giffin was primarily responsible for that success.
[224] By nature, Mr. Giffin works long hours. The quality of his work is reflected in the expansion of XL's business over the period that now concerns us. The increasing size of contracts landed by XL cannot be attributed just to its increasing bond limits. Common sense demands findings of good performance on contracts and growing reputation. Such would have been impossible without skilful bidding, good supervision, and the quality and timeliness of the work.
[225] Mr. Giffin had ultimate responsibility for performance of awarded contracts.
[226] So, I find that each of the three principals contributed labour that was essential to the establishment of XL's business.
[227] Apart from the $100,000 in loans, the three principals also made equal financial contributions to the establishment of XL. They undertook contingent liabilities for bank debt, a line of credit that rose from $50,000 to $100,000 and a small term loan. More importantly, they guaranteed the bonding company, which stood as a contingent liability exceeding a million dollars at the end of 2004.
[228] They contributed as well by accepting a policy of restrained compensation. This allowed equity to increase without further shareholder loans or other investments. Indeed, XL was on the verge of retiring much of the $100,000 in shareholder loans at the end of the period we are discussing.
[229] The increasing retained earnings resulted from a strategy of improving the balance sheet to become bondable on larger and larger jobs. The Guarantee Company of North America kept increasing XL's bond limits. The new business had a limit of $500,000 per job with $750,000 in aggregate and, after the 2004 performance, the limits were at one million dollars, and $1.6 million.
[230] This strategy was not of Mr. Giffin's making. The sisters established a target of $500,000 in equity to graduate XL into the larger contracts. They formulated the financial measures, including restrained compensation, that allowed XL to hit that target in 2005. However, Mr. Giffin made a financial contribution by accepting the policy of restrained compensation even while he lavished long and productive hours on XL.
[231] Against that background, it is easy to see why the three principals were content with generally equal compensation during this period. When one allows for adjustments for Ms. Soontiens' early work before Mr. Giffin left Western Electrics and for periods in which Ms. Soontiens or Ms. MacAlpine did not work at XL, the compensation is pretty much equal.
[232] A dividend was declared only once on class A shares. That dividend was a vehicle to compensate Ms. Soontiens for her earlier work. (Ms. MacAlpine waived her payment due on the declaration.)
[233] Otherwise, compensation was paid by salary, bonuses, or equal dividends on class B shares. The choice of a vehicle for compensation was driven by tax considerations in 1999, 2000, and 2002. In 2003, the principals were paid salary only. In 2003 and 2004, they were paid salaries and bonuses. The amounts were based on XL's performance, the need to increase retained earnings, and the desire to keep expenses high enough that XL qualified for a small business tax rate.
[234] The decisions on dividends were made by Ms. Soontiens and Ms. MacAlpine. Again, I do not find that Mr. Giffin was unfairly excluded. I find that he was content to leave financial decisions to the others so long as he was treated equally.
[235] During this period, interest was also paid by XL to Ms. Soontiens and Ms. MacAlpine. I am satisfied that interest was paid at a rate greater than that referred to in notes to financial statements and that the interest was calculated on a principal amount of $85,000.
[236] I find that in the period from 1999 to and including 2004, the shareholder agreement was administered in a way that treated Ms. Soontiens, Ms. MacAlpine, and Mr. Giffin as equals. Whatever misgiving Mr. Giffin should have taken from the text of the shareholder agreement, he was treated for five years as though he were an equal.
Transfer of Class C Shares
[237] As the first five years of XL's performance, and its gradual growth to a half million in retained earnings, neared its successful conclusion, Ms. Soontiens and Ms. MacAlpine gave about one third of the class C shares to Mr. Giffin. Why? Oddly, the answer to that question is not apparent from what was said among the three principals or from what was recorded in the documents implementing the transfers of shares. The answer reveals much about intentions and expectations, once it is seen.
[238] In January of 2004, Ms. Soontiens and Ms. MacAlpine signed share purchase agreements with Mr. Giffin by which they each agreed to sell him eleven of the sixty-eight class C shares. This resulted in holdings of 33.8% for Soontiens, 33.8% for MacAlpine, and 32.4% for Giffin. The purchase price was one dollar for each transfer of eleven shares. In other words, the "sale" was a gift.
[239] Mr. Hornby was consulted in 2003 about the possibility of "issuing additional shares" to Mr. Giffin. He expressed the views that, if the sale was not arm's-length and not at fair market value, there could be tax implications for the sellers and, if the sale was also below fair market value, there could be tax problems for the recipient.
[240] It appears he was next consulted on this subject after the fact. In April of 2004, he wrote to Ms. Soontiens. She had advised Mr. Hornby that she and Ms. MacAlpine sold a portion of their shares to Gordon Giffin. She had inquired about tax consequences for herself.
[241] Mr. Hornby said that, as the sisters were not "related individuals" to their cousin, as the phrase is defined in the Income Tax Act, there was no automatic requirement for reporting the sale at fair market value. However, Revenue could determine that they were not dealing at arm's-length, and that may trigger a requirement to report the sale at fair market value with tax consequences.
[242] Mr. Hornby also said that the only way to be certain was to request an advance ruling. He advised Ms. Soontiens to report the sale on her 2004 return "reflecting both your costs and the proceeds received, which will result in neither a capital gain nor a capital loss".
[243] The XL annual meetings were held at restaurants of Mr. Berta's choosing. He participated. According to Mr. Giffin, Mr. Berta said at the end of the meeting for 2003 that he wanted his daughters to give Mr. Giffin eleven class C shares each.
[244] Mr. Giffin says he does not recall anything being said about why Ms. Soontiens and Ms. MacAlpine should make the gifts. He thought this was a move toward equality. When the agreements were signed he took little notice. Equalization was expected by him. The transfer was, therefore "not a big event".
[245] Both Ms. Soontiens and Ms. MacAlpine testified that Mr. Giffin always had an option to buy further shares in the business. As discussed, that assertion is mysterious because Ms. Soontiens claims to have told the accountant and the lawyer about it, it is not mentioned by the professionals, and nothing of it appears in the shareholder agreement. Also, Ms. MacAlpine and Ms. Soontiens associate the option with class C shares from a time before anyone thought of class C shares.
[246] Ms. Soontiens was asked in direct examination how the gift developed. She referred to Mr. Giffin's option to buy more shares. She claimed to have asked him when he was going to buy more. He never followed through. Ms. Soontiens said that she thought he lacked funds, but she did not explain what the price would be or how it was to be calculated.
[247] Around the 2003 year-end, Mr. Giffin is supposed to have asked how he would "do that". Ms. Soontiens said she discussed the subject with whomever was the company accountant at the time. His explanation described "quite a process" that included freezing the company and acquiring a valuation. (That is not consistent with Mr. Hornby's testimony or his letter of April, 2004.)
[248] According to Ms. Soontiens, she thought her cousin had made a contribution to the establishment of the XL business. The professionals suggested that she and her sister could make gifts of the twenty-two shares to recognize "someone who had helped grow our company".
[249] In cross-examination, Ms. Soontiens said there were two reasons for the transfers. One: Giffin had the possibility to acquire more shares in the future. Two: the company accountant recommended it.
[250] Ms. MacAlpine expressed surprise that Mr. Giffin did not seem appreciative of the gifts.
[251] She too was asked on direct how the gifts developed. Mr. Giffin had not approached her or her sister about buying more shares. So, the issue reached a point where the accountant was asked how she and her sister would go about getting more shares to their cousin.
[252] A complicated process was described by the accountant. It involved a freeze and a valuation. So, she and her sister decided to make gifts instead.
[253] I reject the explanations given by Ms. Soontiens and Ms. MacAlpine for the transfer of almost one third of the class C shares to Mr. Giffin.
[254] There never was an option to purchase shares. That is why the option price is unknown. That is why the option did not find its way into the shareholder agreement. And, that is why we do not have to find clairvoyance.
[255] Ms. Soontiens did not ask for advice on whether to transfer shares to Mr. Giffin. She asked about how shares could be transferred to him, and she asked, after the fact, for further advice on the tax consequences of the transfers she and her sister had chosen to make despite the accountant's advice that making a gift of the shares to Mr. Giffin could have tax consequences.
[256] The reasons given for the transfers are unsatisfying. The answer to "Why did you transfer class C shares to Mr. Giffin?" appears to be "Because selling them to him was too complicated." The important question "Why did you feel obligated to transfer at all?" remains unanswered. We could make that question more elaborate: "Why did you feel obligated to make a gift of one third of the shares to the point of exposing yourselves to potential tax liabilities?"
[257] The answer is that XL could not do without Gordon Giffin yet.
[258] XL was emerging successful. Gordon Giffin had been, and would continue for a while to be, essential to that success. The defendants knew he expected equality. The company was on the verge of declaring real profits. The imbalance of the shareholdings, and Mr. Giffin's vulnerability to a squeeze-out, would come into stark light unless some measure could be adopted to soften the appearance, to blunt the blow of unequal distributions of the real profits.
[259] I find that that is the answer to the question of why the gifts. I make that finding out of the void which is the explanations offered for the defendants and without attributing the transfers to a dictate by Tibor Berta. I make that finding based on my findings about the formative discussions, my findings about the success of XL in the years 1999 to 2004, and evidence of another extraordinary transaction instigated by Ms. Soontiens and Ms. MacAlpine.
2005
[260] Financially, 2005 was a better year yet for XL. The company was landing large contracts. At one point, the bonding company called for an infusion of equity to support the level of contracting, but soon earnings outstripped the need. In fact, the time had already come for Ms. Soontiens and Ms. MacAlpine to reduce their financial investment.
[261] In fiscal 2005, the net earnings were $451,401 and retained earnings rose to $926,870 before dividends.
[262] For the first time, except when class A was used to compensate Ms. Soontiens for her early work, the directors declared dividends on the class A shares. Ms. Soontiens and Ms. MacAlpine were each paid $28,050 on those shares.
[263] Otherwise, dividends were roughly equal among the three principals. They were paid $18,700 each on the class B shares and $18,975, $18,975, and $18,150 on class C. There were slight differences in salary with each principal being paid about $100,000.
[264] The combined compensation was $136,324 for Mr. Giffin, $162,758 for Ms. MacAlpine, and $167,562 for Ms. Soontiens. The inequality did not sit well with Mr. Giffin.
[265] Ms. Soontiens testified about Mr. Giffin's volunteer work for the industry generally. And, she spoke of an apparent change in his interests. He was becoming more and more involved at the national level. However, no one suggests that his work for XL slacked off. All of which is just to say that Mr. Giffin would have been entitled, in 2005 as in past years, to see himself as having made at least an equal contribution to the company's success.
[266] The 2005 financial statements were finalized in November of 2005. And, the annual meeting was held on the evening of November 28, 2005 at a restaurant of Tibor Berta's choosing.
[267] The meeting was unpleasant for Mr. Giffin. Mr. Berta started criticizing Mr. Giffin's personal spending choices, such as to pay for expenses related to his wife's studies at university. Mr. Giffin told his uncle that the subject was none of his business.
[268] Mr. Giffin testified that Mr. Berta said that he had decided that XL should pay the girls $28,000 each on the class A shares. Mr. Giffin says that he challenged this, and Mr. Berta replied "Because I say so." Mr. Giffin testified that Mr. Berta dictated that the $5,000 investments should be retired by XL, and he announced that he had given his XL loan to the girls as an early inheritance.
[269] Shortly after the meeting, Ms. MacAlpine sent an e-mail confirming the dividends for each class.
[270] Mr. Giffin testified that, after the meeting, he concluded that the class A dividends were against the formative understanding. He testified that he went to Ms. Soontiens' office the next day and complained. Mr. Giffin says that he said this was not to happen again. He protested his not having been consulted.
[271] Mr. Giffin claims that, in Ms. Soontiens' office that day, he told Ms. Soontiens and Ms. MacAlpine that he wanted the Tibor Berta loan paid off. They made no comment. As far as he knew, paying off the loan would end class A dividends. He testified that he requested his cousins to produce figures from Mr. Berta.
[272] Mr. Giffin testified that the e-mail about dividends responded to his demand about the loan. There are problems with his story. Ms. MacAlpine was on maternity leave, and staying with her parents during construction of a new home, when the meeting is supposed to have taken place. Secondly, the e-mail says nothing about a loan. Thirdly, whatever objections Mr. Giffin voiced did not stop him signing a directors' resolution on January 30, 2006 implementing the 2005 dividends decided on at the November meeting.
[273] Ms. Soontiens testified that she was the one who announced the dividends. She does not recall any reaction by Mr. Giffin. She specifically denies any meeting like the one that Mr. Giffin described in her office the next day.
[274] According to Ms. Soontiens, the 2005 dividends on class A shares were declared because of the company's financial success. Mr. Giffin worked hard, he was a part of what made the company successful, and he deserved what was paid to him. But, "We, as primary owners, deserved more." When the company grew enough, she and her sister were "able to allow ourselves" what they deserved.
[275] Ms. MacAlpine testified that the 2005 annual meeting was a pleasant affair. On the $28,000 dividends: it had been a good year, and she and her sister planned on getting a return on their investment. Mr. Giffin showed no reaction.
[276] Once again, an extraordinary transaction shows that Ms. Soontiens and Ms. MacAlpine were more aware of Mr. Giffin's discontent, and were more concerned about his reactions, than they allowed in testimony.
[277] The professionals were consulted about documenting the 2005 dividends. According to Ms. Soontiens, the company accountant became concerned with the wording of the class A share terms. He recommended to the company lawyer that certain words be removed.
[278] Mr. Thompson, XL's lawyer, does not recall getting instructions on this. The record shows that he sent a draft shareholders' resolution and a draft special resolution to Ms. Soontiens on January 9, 2006. By these drafts, the three shareholders would have removed a sentence from term 1(b). That term reads:
The holders of the Class A Special Voting Common Shares shall be entitled to receive such dividends, if any, as the Directors of the Company may from time to time determine and declare. The Directors shall declare dividends in favour of the holders of the Class A Special Voting Common Shares based on each shareholder's cash invested in the Company (excluding amounts invested equally by all shareholders regardless of class), paid at a premium to be set by the Directors. The Directors may determine and declare such dividends in favour of any such class to the exclusion of the others, or a greater dividend may be declared in favour of any class;
The drafts would have removed the middle sentence. So, dividends would cease to be tied to excess cash investments. That is to say, nothing would be left to support Mr. Giffin's belief that the class A shares were tied to $85,000 of the $95,000 invested by the others.
[279] If his theory of equality were Mr. Giffin's invention, if he had been undisturbed by the unequal 2005 dividends, and if he did not believe that the class A shares were tied to an $85,000 loan, the amendment of share term 1(b) should have presented no problem for Mr. Giffin at the time. Mr. Thompson drafted the shareholders' resolution for signature by each of the shareholders, and he drafted the certificate on the special resolution to certify adoption by "all of the Shareholders of the Company". Although he was asked to, and did, sign the contemporaneous resolution for the 2005 dividends, Mr. Giffin was never shown the draft resolutions for the amendment of share term 1(b).
[280] Mr. Thompson recalls a discussion with "someone" about revising his drafts so they would be signed only by the holders of the class A shares. He prepared a resolution of class A shareholders, something I find no support for in the Companies Act, the articles of association, the shareholder agreement, or the share certificates. He prepared a special resolution that certified adoption by "all of the Class A Special Voting Common Shareholders of the Company", and a shareholders' resolution to be signed only by Ms. Soontiens and Ms. MacAlpine. They signed them.
[281] Ms. Soontiens' stated reason for excluding Mr. Giffin, and for never telling him about the amendment, is that the amendment does not pertain to him. I reject that explanation.
[282] The "someone" with whom Mr. Thompson discussed the revisions to exclude Mr. Giffin was undoubtably Ms. Soontiens. He advised her that what she was doing, purporting to amend a share term without a meeting or unanimity, was "unusual". This is a rather kind word for a transaction that, without the consent, or even the knowledge, of the excluded shareholder, would broaden the terms for a class of shares that takes priority over other classes held in part by the excluded shareholder.
[283] Ms. Soontiens and Ms. MacAlpine had motives for purporting to amend the share terms in this "unusual" way and for concealing the purported amendment from Mr. Giffin, one of the parties who had created the deleted term in the first place. Considering all of the evidence, I find:
· Mr. Giffin believed, and the others knew he believed, that dividends were to be equal after retirement of the excess investment.
· Mr. Giffin believed that the $28,000 in class A dividends was contrary to the agreed equality.
· The others knew that he was offended by the declaration.
· In discussions with the company accountant, Ms. Soontiens saw that there was language in share term 1(b) to support the view that class A dividends were tied to the excess investment. Ms. Soontiens and Ms. MacAlpine wanted to avoid the repercussions of such a term.
· They concealed their wishes by not asking for Mr. Giffin's signature, by not calling a shareholders' meeting to settle any disagreement, and by not telling Mr. Giffin about the dubious resolutions.
[284] I prefer the evidence of Mr. Giffin about the 2005 annual meeting. I find that Mr. Berta announced the class A dividends. He may have made it seem as though he was making the decision, but I am satisfied that the decision was made by Ms. Soontiens in consultation with her sister and, probably, her father.
2006 and Early 2007
[285] The financial health of XL grew even stronger in fiscal 2006. It realized healthy net earnings of $206,430. Retained earnings after the 2005 dividends rose to nearly a million dollars.
[286] There were no dividends, including no contentious dividends on the class A shares. However, inequality prevailed again. For the first time in eight years Mr. Giffin did not receive equal, or equalized, salary and bonuses. He was paid $92,000, more than twelve thousand less than Ms. Soontiens and Ms. MacAlpine. According to minutes of the 2006 annual meeting, the compensation for Mr. Giffin included adjustments for maternity leave taken by Ms. Soontiens and Ms. MacAlpine. So, the inequality was greater than first appears.
[287] Ms. Soontiens testified that the unequal amounts were determined by her sister, herself, the company accountant, and possibly Tibor Berta.
[288] Early in 2006, Mr. Giffin, along with his cousins, signed the documentation implementing the decision about 2005 dividends. He says he did so after protesting, and stipulating that such a thing was not to happen again. He was unaware of the contemporaneous purported amendment to the share terms. He says he would not have signed the resolution for the 2005 dividends if he knew about the purported amendment. I accept his evidence in that regard.
[289] So, for Gordon Giffin, 2006 started off on a sour note. As already said, I find that Ms. Soontiens and Ms. MacAlpine knew about Mr. Giffin's discontent over their unequal treatment of him for the 2005 fiscal year.
[290] Mr. Giffin testified that he felt in 2006 that he had been "taken" by his cousins and uncle. He discussed this with his wife and determined to wait and see. If things did not right themselves, he would leave XL. Indeed, he started looking for other work.
[291] Incidentally, I was invited to draw an adverse inference from the fact that Mr. Giffin did not call his wife as a witness. I think that judges should be careful about having to resort to such an aid when trials are getting so long and so costly. In any event, in this instance the inference is not "warranted in all of the surrounding circumstances": Davison v. N.S.G.E.U., 2005 NSCA 51 at para. 73. It would involve guess work about what useful information the witness recalls and the reasons for keeping her out of a long and costly trial.
[292] Mr. Giffin says he explored going with an excavation company. Then, in July of 2006, he applied to join the RCMP. He had a long standing interest in joining the force, and in one piece of correspondence, he referred to it as "my one dream".
[293] The application leads to a process of testing, physical tests, an interview, more tests, and assessments. In Mr. Giffin's case, that took nine months. In the meantime came the XL 2006 annual meeting.
[294] Ilona MacAlpine produced minutes. As I said, they are peculiar. No record of annual meetings was made before. An incomplete attendee list, and heavy use of the passive voice, shows a desire to hide Mr. Berta's presence and participation, if not dominance.
[295] One sentence in the minutes stands out for me: "(Gordie was reminded that only Nicole and Ilona held Type A shares.)" Mr. Giffin says that such a statement was never made.
[296] The reminder is supposed to have come at the end of Ms. Soontiens' reiteration of "how she and Ilona broke down cash dispersion/retention for XL". One fifth was to be retained. One tenth, after shareholder bonuses, was to go to staff. The remaining $35,000 in shareholder loans was to be repaid. There would be three bonuses totalling $300,000 paid through a "dividend based on share structure". And, "Remainder of cash ¼ to be paid to all shareholders based on individual shares held."
[297] So the supposed reminder was to reiterate that when real profits were divided, Mr. Giffin would get much less than the other two. As with the January 2006 amendment, the parenthetical statement inserted into the peculiar record shows that Ms. Soontiens and Ms. MacAlpine were facing a dilemma.
[298] XL had accumulated sufficient retained earnings. It was in a position to distribute real profits. The dilemma: they wanted to take most of the profits for themselves, but they knew that this would further offend Mr. Giffin, who believed that, after retirement of the shareholders' loans, profits would be divided equally.
[299] I find that the parenthetical statement in the minutes was not made at the meeting. The false record would be useful later to support Ms. Soontiens' and Ms. MacAlpine's position that profits were to be divided unequally in their favour. Ms. MacAlpine created the record for the same reason she and her sister purported to make the January 2006 amendment. They wanted to keep the real profits mostly for themselves, but they had misgivings about their right to do so and about Mr. Giffin's reactions.
[300] In February of 2007, Mr. Giffin had been through almost all the steps to become a member of the RCMP. Acceptance of his application was almost certain when on Monday, February 26, 2007 he went into Ms. Soontiens' office and resigned effective the end of March. His application was accepted by the RCMP in April.
[301] There are reasons for suspecting that a desire to be a Mountie was the primary motive for Mr. Giffin's departure from XL and unequal treatment was unimportant. Perhaps, it was even a reason invented to improve settlement on the value of his shares. The reasons for suspicion include:
· Mr. Giffin referred, in correspondence with an industry colleague, to joining the force as "my one dream".
· Mr. Giffin never opened a direct dialogue with the others about his supposed discontent.
· He refused to resign as a director and engaged in tactics related to his guarantees and the union.
· He did not tell the other principals about his application with the RCMP until acceptance was certain.
· He chose to announce his resignation when Ms. MacAlpine was due to have her second child.
· He made what Ms. Soontiens and Ms. MacAlpine believe were unreasonable demands for settlement.
[302] I accept Mr. Giffin's evidence that "my one dream" was a cover for embarrassment about his failed business relationship.
[303] My findings show that I consider Ms. Soontiens and Ms. MacAlpine to have known of Mr. Giffin's discontent and of the reason for it. So, the criticism about dialogue could cut both ways. Also, the breakdown of a personal relationship with close family members tends to preclude reasonable dialogue. I accept Mr. Giffin's testimony that he felt "taken" when his cousins and uncle determined not to treat him as an equal.
[304] The tactics have been taken into account in assessing credibility. I think Mr. Giffin was free to keep his application to the RCMP private. I do not think he meant any harm to Ms. MacAlpine or her baby. I do not find his positions on settlement to be helpful for assessing true motives.
[305] Mr. Giffin had a long interest in the RCMP. This led to alternative employment with fulfilling work and a lower income. However, I find that this was only an alternative. I find that unequal treatment led to the resignation.
XL Purchase of Leftover Tools and Inventory
[306] Tibor Berta retired from Western Electrics at the end of 2002. Kevin Soontiens stayed with the company while it wound down.
[307] An electrical contractor purchases inventory, such as adapters, couplings, flex connectors, locknuts, clamps, cables, juncture boxes, cover plates, disconnect switches, temporary panels, bushings, isolators, and expansion joints, of specified kinds to perform awarded contracts. Always, some inventory is leftover. Some of the leftovers will be useful for performing new contracts. Some, not.
[308] So, after Western had been in business for decades, it had accumulated plenty of leftover inventory. Also, used tools.
[309] When Western wound down, Mr. Soontiens invested hundreds of hours in selling the leftover inventory and tools. Ms. Berta helped. They made up a list of potential purchasers and contacted them, first with a fax and then by returning telephone messages.
[310] Mr. Soontiens started a new job in June of 2002. The next year, a construction company took over premises where the balance of leftover inventory and tools were left behind. There was still "a lot of stuff to move", Mr. Soontiens testified.
[311] At discovery, Mr. Berta referred to "leftover pieces that could have been dumped in the junk yard." On the stand, well after the trial had begun and had been adjourned, and after the evidence of what XL paid for the leftover pieces had finally been disclosed, Mr. Berta offered this reflection: "One man's junk is another man's treasure."
[312] Mr. Berta's evidence, and the following, lead to a finding that the leftover inventory and tools had little value:
· They were the leftovers of a longstanding electrical contractor.
· They were the leftovers of the leftovers, what remained unsold after a lengthy marketing effort.
· Mr. Soontiens paid Mr. Berta $3,000 for them.
· Eight years later, a "pile" of them remains with XL, using Ms. Soontiens' word from her testimony.
[313] Mr. Soontiens sold the leftover pieces to XL through Ms. Soontiens for $100,386.
[314] Ms. Soontiens claims that the leftovers were useful and that she established fair prices based on her knowledge of cost, subtracting a fifteen percent discount. She and her sister allocated the amounts for tools to an asset account of XL. They allocated much of the cost of the leftover inventory to various jobs, often using round figures.
[315] Even if the inventory had been consumed in the jobs to which it was costed, which I do not accept, and even if the tools had a value approaching cost, which I do not accept, the Soontienses took for themselves the opportunity for XL to acquire the tools and inventory from Tibor Berta at almost no cost. I find that they either deprived XL of a deal, overcharged XL for the inventory and equipment, or did both.
[316] The defendants were derelict in their disclosure of documents related to the astounding purchases of the leftover inventory and tools. It was argued that I should not find the defendants were in serious breach of their disclosure obligations because disclosure is limited by relevancy, relevancy is determined from pleadings, and, until lately, the pleadings only said that the loan went unpaid and that the failure to repay was oppressive. The idea that the loan was secretly repaid, in part through the amounts paid for leftover inventory and tools, was only lately added to the pleadings.
[317] The statement of claim contained a general allegation that defendants "would continue using XL Electric to unfairly disregard [Mr. Giffin's] interests". Mr. Giffin was not aware that Ms. Soontiens had caused XL to pay $100,000 to her husband for something he bought for $3,000. It is hard for me to see how that fact, and the documentation related to it, would not require immediate disclosure in a shareholder oppression suit alleging unfair use of the company in disregard of the minority shareholder's interests.
[318] The only particular in the defence filed to the unamended statement of claim reads:
In particular, the Defendants deny that the Plaintiff has been the subject of any oppression or unfairness as a shareholder of XL Electric Limited or Huntec Limited and puts him to the strict proof thereof.
How can one make such a pleading and not see that it calls for an explanation of a transaction paying a staggering profit to the household of one of the defendant shareholders?
Premises
[319] In 2001 to 2007, XL operated out of a converted house on Waddell Avenue off Windmill Road in Dartmouth. Before Mr. Giffin resigned, the three principals made a decision to move to bigger premises and all three were looking at prospects.
[320] There are two issues to be determined about the premises in this case. What disposition should be ordered for the proceeds that remain from a sale of the Waddell Avenue premises? Does Mr. Giffin have a claim to the equity in the new premises? (The evidence about the premises goes to other issues as well, such as credibility and expectations for equality. I have been mindful of this evidence when making other findings.)
[321] Huntec Limited was a corporation owned by Mr. Berta. He transferred it to Ms. Soontiens for the new business to acquire the Waddell Avenue premises. Huntec purchased them in November 2000 and, at that time, the shares were reorganized so that each of the three principals held a hundred of the three hundred common shares.
[322] Thus, Huntec was evenly held, as with the class B shares in XL, eventually as with the class C shares, and unlike class A. Mr. Giffin says that the equality in Huntec reflects what should have been in XL aside from the repayment of loans and the class A shares securing repayment.
[323] Huntec supplied premises for XL. In return, XL paid all expenses related to the real estate and it met the mortgage payments. Therefore, XL earnings helped create equity in the real estate to which the three principals were equally entitled. On occasion, they showed one third of the equity in Waddell Avenue as an asset on personal net worth statements.
[324] As I said, the company outgrew the building and the principals decided to find something bigger. Someone determined that there needed to be a new holding company. Ms. MacAlpine's minutes of the 2006 annual meeting contain this: "The holding company will be structured the same as XL ¼ ".
[325] So, the equality of Huntec was to come to an end. From Ms. Soontiens' and Ms. MacAlpine's perspective, following the XL structure meant that the equity would be split 16%, 42%, 42%.
[326] After Mr. Giffin left XL, Ms. Soontiens and Ms. MacAlpine incorporated CNCA Holdings Limited. In May of 2007 it acquired premises on Topple Drive in Burnside, where XL operates to this day. (There are some peculiarities about dates on the deed, but I am satisfied that the conveyance took place beneficially in May, 2007.)
[327] The Huntec premises were sold in 2009. Net proceeds of $170,756 are held in trust. The parties have not agreed on winding up.
[328] Mr. Giffin is troubled by $98,599 claimed as "Due to related parties". His concerns include sums charged to Huntec for one fifth of the cost of defending this proceeding. Also, there is some suggestion that expenses to be covered by XL as rent may have been charged back to Huntec.
[329] Mr. Giffin also says that Ms. Soontiens and Ms. MacAlpine effectively transferred the operations of the equally owned Huntec to the exclusively owned CNCA. He seeks damages for lost business opportunity. In response, the defendants rely on article 5.05(c) of the shareholder agreement, which provides that the date for valuation of Mr. Giffin's shares in XL is the day he gave notice of his retirement.
Issues
[330] The substantial issues of liability are whether the plaintiff has established an entitlement to oppression remedies and whether certain defendants owed, and breached, fiduciary duties. I find in favour of the plaintiff on the first. I am not satisfied that a fiduciary duty was owed.
[331] The appropriate remedies for the oppression have to be determined.
[332] However, there are some more adjectival issues that affect the determinations of liability and remedy. They should be dealt with first.
[333] So, the determination will involve:
· Importance and Interpretation of the Shareholder Agreement
· Promissory Estoppel
· Misrepresentation
· Shareholder Oppression
· Fiduciary Duty
· Remedy.
Importance and Interpretation of the Shareholder Agreement
[334] During the trial, I ruled that a plaintiff shareholder in an oppression case is not precluded, either by the parol evidence rule or by an exclusive agreement clause, from proving a parol agreement that adds to, varies, or contradicts a written and unambiguous shareholder agreement signed by the plaintiff. The written agreement may be powerful evidence against the reasonableness of expectations based on the parol agreement, but it is not determinative.
[335] My reasoning has not changed, and it bears on the present issues. I will release a transcribed and edited version of the ruling, so as not to repeat myself.
[336] However, something changed since the ruling. At paragraph 6 of the ruling, I said "From the evidence so far, it appears that the shareholder agreement is unambiguous." I now see the share terms, which are integral to the shareholder agreement, to contain ambiguities that go to the heart of the case. This was discussed at length in the course of settling the facts: see "Shareholder Agreement and Share Terms".
[337] When I formulated the view that the terms may contain ambiguities, I asked for counsel's assistance. I am grateful to counsel for quick and thorough submissions on this issue.
[338] (The defendants complain that the plaintiff's submission exceeded the scope of my request. My assessment of the facts was pretty much complete when I asked for further submissions, and I was in need only of help with the interpretation of the share terms. I can see how that led plaintiff's counsel to refer to their understanding of the extrinsic evidence, but it was too late for submissions to influence my assessment of that evidence.)
[339] I reiterate that the share terms are integral to the shareholder agreement. The agreement provided for "Class A Special Voting Common Shares, Class B Common Shares, and Class C Common Shares" without defining, within itself, the income or ownership rights attached to each class. That was left to schedules attached to each of the share certificates. They were created at the same time as the shareholder agreement. The terms of the agreement are such that the share terms have to be regarded as accepted in the instant before the agreement was executed: recitals A(1), A(2), A(3), and B.
[340] I also reiterate the importance of the share terms about ownership, that is, distribution of equity on liquidation. The first share term for each class tells of voting rights. The next tells of dividend rights, and leaves much to the discretion of the directors. The third is about rights on liquidation, and it tells us about ownership of the equity, how much of the equity gets attributed to what shares.
[341] Finally, at the cost of even more repetition, I reiterate the ambiguities in the share terms about distribution of the equity. Holders of class A shares "are entitled to receive the remaining property of the company". No apparent limit. They get theirs "in priority". Holders of class B "are entitled to receive the remaining property of the company". And, holders of class C "are entitled to receive the remaining property of the company".
[342] This creates two ambiguities. Literally read, term 1(c) distributes all of the equity, but 2(c) and 3(c) call for further distributions. Secondly, both 2(c) and 3(c) call for distribution of all of the equity that remains after 1(c) is satisfied.
[343] It is submitted for the defendants that "the first priority enjoyed by Class A shares is without limit". Therefore, "the 'rights' embodied in Class B(c) and Class C(c) are meaningless." Therefore, "holders of Class B and C shares have no entitlement". Terms suggesting otherwise do not create an ambiguity because "Meaningless or odd words, however, do not equate to ambiguity." Counsel put it another way in reply submissions, "a right which may never materialize is not an ambiguity".
[344] The plaintiff's submission accepts that the distribution terms are ambiguous and refers to extrinsic evidence, and the unaltered terms for dividends, as showing that the class A entitlement to the equity is a priority claim limited to the balance of the excess shareholders' loans. In reply to the defendants' submission, the plaintiff refers me to authorities on the interpretation of contracts.
[345] Justice Warner provided us with a succinct, helpful summary of the main principles of contractual interpretation in Taylor v. Taylor, [2009] N.S.J. 592 at para. 17:
1. Contractual interpretation is all about giving the proper meaning to the words selected by the parties themselves to govern their relations, understood within the context in which the words are used.
2. A contract is to be construed as a whole, with meaning given to all of its provisions. This is the first aspect of context. Disputed language is interpreted in the context of the language of the agreement as a whole.
3. This precept deals with the factual matrix extrinsic to the written contract. It is the second aspect of context; the first being words in a contract are to be interpreted in the context as a whole. Disputed agreements are interpreted in the context of the surrounding circumstances that give rise to the contract.
4. Interpretation is an objective exercise. Contractual interpretation seeks to give effect to what the parties objectively manifested by the words they used, not by what they subjectively intended.
5. Commercial contracts are to be interpreted in a manner that promotes commercial efficacy.
6. Every effort should be made to find a meaning. Courts should be loath to hold contracts void for uncertainty.
7. Contracts are to be interpreted as of the date they are made. Unlike statutes and the Constitution where the interpretation changes over time, the meaning of a contract is fixed on the day it is made.
8. The parol evidence rule or the extrinsic evidence rule is a much misunderstood rule. It deals with the extent to which extrinsic evidence may be used to affect the interpretation of a contract. According to Mr. Hall, the rule runs contrary to the modern themes of contractual interpretation. Courts do allow extrinsic evidence in for some purposes. Words in a vacuum are almost meaningless, they must be interpreted in their context which is first the document itself and second the surrounding circumstances. Evidence of the subjective intention of either party is precluded, as it is the words used by the parties to implement their intentions, and not their subjective intentions, that govern. There is another limitation to the parol evidence rule; the rule excludes, or precludes, admission of evidence that contradicts the written contract. In other words, evidence of the background circumstances or factual matrix may be admitted if there is an ambiguity within the context of the document as a whole; but evidence that purports to contradict the express terms of the contract is inadmissible.
[346] The principles about textual context and giving meaning to the whole text are prominent on the present issue. Justice La Forest and then Justice McLachlin had this to say in their joint reasons at para. 9 of BG Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] S.C.J. 1:
It is a cardinal rule of the construction of contracts that the various parts of the context are to be interpreted in the context of the intentions of the parties as evident from the contract as a whole ¼ . Where there are apparent inconsistencies between different terms of a contract, the court should attempt to find an interpretation which can reasonably give meaning to each of the terms in question. Only if an interpretation giving reasonable consistency to the terms in question cannot be found will the Court rule one clause or the other ineffective¼ . In this process the terms will, if reasonably possible, be reconciled by construing one term as a qualification of the other term ¼ . [ references omitted]
See also Eli Lilly & Co. v. Novopharm Ltd., [1998] S.C.J. 59 at para. 52.
[347] I do not read terms 2(c) and 3(c) as merely creating "a right which may never materialize". They create rights that can never materialize if 1(c) is given its literal meaning. Give 1(c) its literal meaning, and 2(c) and 3(c) are meaningless. The court's obligation is to "attempt to find an interpretation which can reasonably give meaning to each of the terms". We must not dismiss a term as meaningless unless there is no "interpretation giving reasonable consistency to the terms". (Quotes are from the passage in BG Checo above.)
[348] The solution proposed by the defendants must be a last resort. Conflicting terms in this commercial contract can be reconciled through a commercially reasonable interpretation grounded in both the text and the external context.
[349] As discussed when I was settling the facts (particularly, para. 159 to para. 164) there is little in the terms of the shareholder agreement about sales or other dispositions of shares pointing the way toward an interpretation of share term 1(c) that gives it reasonable consistency with 2(c) and 3(c). However, the text of 1(c) itself supplies a basis for such.
[350] As is pointed out for the plaintiff, the provision requiring payment on class A shares "in priority to the holders of other classes of shares" is inconsistent with the proposition that nothing will ever be paid for the class B and class C interests. The reference to a priority implies that something else comes second. That is to say, 1(c) contemplates a limit at which class A shares are fully satisfied from the equity, with the possibility of more equity being left over for distribution on the other shares.
[351] The same conclusion follows from "Subject to the prior rights of the holders of Class A Special Voting Common Shares" in 2(c) and 3(c). Note that there is no priority between class B and class C in the text. Once the unwritten limit on distribution for class A shares is reached, class B and C shares appear to stand equal. This creates another ambiguity, but the "subject to" phrase leads to the same inference as the "in priority" phrase 1(c): there may be more to come.
[352] When settling the facts, I discussed the value of the following provision in 1(b) for finding the limit contemplated by "in priority to the holders of other classes of shares" in 1(c) and "[s]ubject to the prior rights of the holders of Class A Special Voting Common Shares" in 2(c) and 3(c):
The Directors shall declare dividends in favour of the holders of the Class A Special Voting Common Shares based on each shareholder's cash invested in the Company (excluding amounts invested by all shareholders regardless of class) ...
See para. 157 to para. 159.
[353] The purported removal of this term in 2005 was unauthorized and unfair. In any case, the term was part of the textual context when the shareholder agreement and the share terms were created in 1999.
[354] This textual context provides a commercially reasonable way to resolve the ambiguity: dividends on class A shares are to provide a return on excess capital invested by Ms. Soontiens and Ms. MacAlpine in XL, originally $85,000 and now $35,000, and the equity is likewise to be distributed first to retire excess capital. Any balance is available for dividends on class B and C shares, and so the equity is to be divided likewise.
[355] Whether it is used to provide external context (see, Taylor v. Taylor) or as extrinsic evidence to resolve an ambiguity, the parol evidence supports the same conclusion as does the textual context.
[356] I regard the testimony of, and written communications by, Mr. Hornby and Mr. Thompson to have been rather neutral on this point. Certainly, they must have thought that Mr. Giffin's interest was to be much smaller than Mr. Giffin thought. But, they do appear to have been less involved in questions of equity ownership than questions about voting control and dividend payments. Had they been more involved in the former, there would likely have been no ambiguity.
[357] Also, one needs to be careful in assessing the testimony by the professionals about what was intended. They listened only to Ms. Soontiens. They tell us what she decided, but not what the other contracting parties thought or did. In that sense, their testimony is dangerously close to the subjective intent of Ms. Soontiens. The court has to determine the objective intent (fictitiously, some argue) attributable to all the contracting parties.
[358] When settling the facts, I reviewed evidence and gave my findings about the formative understanding that motivated the three principals to leave Western Electrics and take their chances on an untried venture. See "Agreement for a Second-Generation Business". No need for repetition.
[359] Equality was central to the formative understanding and to the decisions that were made because of it. Whether as external context relevant to the interpretation of the contract or as parol evidence to resolve an ambiguity, the underlying understanding is a strong source for resolving the textual inconsistency between 1(c) and the other terms for distribution of equity, 2(c) and 3(c).
[360] The underlying understanding contradicts the view that no shares held by Mr. Giffin entitled him to any part of the equity, that the equity was owned 50% by Ms. Soontiens, 50% by Ms. MacAlpine, and 0% by Mr. Giffin.
[361] As the discussions progressed, there was only one modification to the theme of equality. For present purposes, it does not matter whether Mr. Giffin was ready and able to put up one third of the start-up loans, and it does not matter whether Mr. Berta gave the money to his daughters or lent it. What matters is that XL was to repay the loan.
[362] So it makes sense that class A shares, which were expressly tied to excess capital, should have a priority claim on the equity. Originally that was $85,000. Now it is $35,000.
[363] The textual context and the parol evidence also support a similar resolution of the conflict between 2(c) and 3(c). As with dividends under 2(b), distribution of equity on class B shares is to retire equal financial investments and to pay for labour not already compensated. Any balance is divided equally under 3(c) as the balance created by "the net profits of the Company".
[364] In conclusion, term 1(c) provides for distribution of the equity first to retire outstanding, unequal investment, such as the $35,000 due to Ms. Soontiens and Ms. MacAlpine. Term 2(c) provides for distribution of any balance to retire equal investments and to compensate for unpaid labour. Finally, term 3(c) provides for distribution of any remaining equity to the holders of class C shares.
Promissory Estoppel
[365] Mr. Giffin attempts to establish promissory estoppel on the basis of the equal treatment of the shareholders between 1999 and 2005. They were paid dividends, bonuses, and salaries equally. While it lulled Mr. Giffin into a sense that he would be treated equally despite the shareholder agreement, that conduct did not amount to a representation. It did not go to the crucial question, which led to manoeuvring and acrimony: How will real profits be distributed if XL becomes really successful?
[366] See also, the discussion about representations that are false in fact in the next section.
Misrepresentation
[367] There are several ways in which a misrepresentation leads to legal consequences. A contract induced by a misrepresentation may be avoided. A misrepresentation may lead to a promissory estoppel. A fraudulent or negligent misrepresentation may be actionable as a tort.
[368] A contract induced by a misrepresentation, even a written contract induced by an oral misrepresentation, may be avoided: Bauer v. Bank of Montreal, [1980] S.C.J. 46, Bank of Nova Scotia v. Zackheim, [1983] O.J. 3258 (O.C.A.), and Canadian Imperial Bank of Commerce (CIBC) v. Dorey, [1991] N.S.J. 434 (S.C.). Frequently, the representation is about the nature or effect of a draft contract that is offered for signature, a statement about present fact rather than future intent.
[369] The restriction of misrepresentation to present fact stems from an element of the tort, whether it be negligent misrepresentation or fraudulent misrepresentation, that also applies when a party asserts estoppel by misrepresentation. In each, the representation must be false in fact. Authorities on this subject were reviewed by Justice MacAdam in relation to negligent misrepresentation in Cape Breton Development Services Ltd. v. D. Roper Services Ltd., [2001] N.S.J. 524 (S.C.) and in relation to estoppel by misrepresentation in Ford v. Kennie, [2002] N.S.J. 162 (S.C.).
[370] The plaintiff submits that the shareholder agreement ought to be set aside "as a result of a misrepresentation on behalf of Soontiens and MacAlpine". "[I]t was clearly represented to Giffin that he, Soontiens, and MacAlpine would be treated as equals under any contract". I emphasize the word "any". It shows the defect in the argument. The representation was about an intention for something to be created in the future.
[371] Short of fraud, discussions that are thought to settle the principles for a contract to be worked out in detail are not about present fact. They are not inducements to sign a proffered contract. They are inducements to develop and finalize a contract. They cannot be expressions of present and unchanging intent because contractual intent is to become fixed in the contract that is under negotiation.
[372] The understanding for generally equal treatment was part of the formative discussions along the road to a contract that was being negotiated and was to be finalized later. As such, the understanding was neither a false statement nor the kind of representation that could, if false, lead to avoidance of the contract. The representation was about future intent, a subject to be refined when the contract was developed.
Shareholder Oppression
[373] Nova Scotia did not go with the Canada Business Corporation Act model for incorporation by registration, but the Legislature did add the Third Schedule, which incorporated the CBCA provisions about rights of dissent, derivative proceedings, and shareholder oppression.
[374] Subsection 5(1) of the Third Schedule allows a complainant to apply for an order. Subsection 5(2) provides that "the court may make an order to rectify the matters complained of", if:
¼ the court is satisfied that in respect of a company or any of its affiliates
(a) any act or omission of the company or any of its affiliates effects a result;
(b) the business or affairs of the company or any of its affiliates are or have been carried on or conducted in a manner; or
(c) the powers of the directors of the company or any of its affiliates are or have been exercised in a manner,
that it is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer ¼ .
[375] Subsection 5(3) contains a discretion for the court to "make any interim or final order it thinks fit". Without limiting the breadth of this discretion, subsection (3) goes on to mention some specific kinds of order. Relevant to this case are:
(d) an order directing an issue or exchange of securities; ...
(f) an order directing a company ... or any other person, to purchase securities of a security holder; ...
(h) an order varying or setting aside a transaction or contract to which the company is a party and compensating the company or any other party to the transaction or contract;
(i) an order requiring a company, within a time specified by the court, to produce to the court or an interested person financial statements in the form required under the Act or an accounting in such other form as the court may determine;
(j) an order compensating an aggrieved person; ... .
[376] We now have the guidance of the Supreme Court of Canada on the application of shareholder oppression provisions such as these. The decision is BCE Inc. v. Debtureholders, [2008] S.C.J. 37.
[377] The debentureholders' security was in Bell Canada. It was a wholly owned subsidiary of BCE. The parent sought approval of a plan of arrangement by which its shares would be purchased by a consortium under a leveraged buyout. Most of the purchase price was to be supported by BCE. Bell was to guarantee part of BCE's resulting liability.
[378] The debentureholders complained that the exposure of Bell Canada for the BCE liability would degrade the short term trading value of the debentures and the debentures could lose their investment grade status.
[379] The debentureholders applied for an oppression remedy. The shareholders approved the plan, as did the Quebec Superior Court. The court also dismissed the oppression claim. The Quebec Court of Appeal set aside the approval, and refrained from dealing with the oppression claim.
[380] The Supreme Court of Canada restored the approval of the plan of arrangement. Consequently, it had to consider a cross-appeal of the dismissal of the oppression claim.
[381] Section 241 of the CBCA was at issue. Section 5 of the Third Schedule was taken from s. 241. The Court identified two approaches to s. 241 (para. 54 and 55) and said at para. 56:
In our view, the best approach to the interpretation of s. 241(2) is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to "oppression", "unfair prejudice" or "unfair disregard" as set out in s. 241(2) of the CBCA.
[382] The Court gave an overview of the first part of the determination of an oppression case, reasonable expectations, at para. 60 to 66.
[383] At the outset, a distinction was made between the ordinary remedies that protect rights and enforce obligations and the "special remedy" provided by s. 241. This distinction helps us understand the first part of the analysis of an oppression case. The Court said at para. 61:
Lord Wilberforce spoke of the equitable remedy in terms of the "rights, expectations and obligations" of individuals. "Rights" and "obligations" connote interests enforceable at law without recourse to special remedies, for example, through a contractual suit or a derivative action under s. 239 of the CBCA. It is left for the oppression remedy to deal with the "expectations" of affected stakeholders. The reasonable expectations of these stakeholders is the cornerstone of the oppression remedy.
[384] At para. 62, the Court emphasized the requirement that expectations have to be reasonable. 62. It pointed out that actual expectations are not conclusive.
[T]he question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.
(Conflicting claims and expectations were particularly prominent in BCE.)
[385] In para. 63, the Court referred to a judgment of Justice Lederman in the Ontario Superior Court of Justice when saying:
Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context ¼ .
The Court concluded: "These expectations are what the remedy of oppression seeks to uphold."
[386] The Court discussed proof of reasonable expectations at para. 70 to 88.
[387] "[O]ppression ¼ generally turns on particular expectations arising in particular situations." And so, "Evidence of an expectation may take many forms depending on the facts of the case." (para. 70)
[388] Although the question is "fact specific", the Court "ventured" some generalizations at para. 71:
· "Actual unlawfulness is not required ¼ ".
· "The remedy is focussed on concepts of fairness and equity rather than on legal rights ¼ [T]he court looks beyond legality at what is fair given all of the interests at play ¼ ".
· "[N]ot all conduct that is harmful to a stakeholder will give rise to a remedy for oppression as against the corporation."
[389] Some factors "emerge from case law that are useful in determining whether a reasonable expectation exists." (para. 72). The court referred to seven such factors:
¼ general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders.
The Court provided some commentary on each of these at para. 73 to 88, and I will come back to some of the commentaries when discussing reasonable expectations in this case.
[390] The overview of the second part of the determination of an oppression case is found at para. 67. "Even if reasonable, not every unmet expectation gives rise to a claim under s. 241." The conduct complained about must oppress, unfairly prejudice, or unfairly disregard relevant interests. So, the statute provides.
[391] Continuing at para. 67, the three phrases are explained this way:
"Oppression" carries the sense of conduct that is coercive and abusive, and suggests bad faith. "Unfair prejudice" may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, "unfair disregard" of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders' reasonable expectations ¼ The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders.
[392] The Court discussed conduct that may amount to oppression, unfair prejudice, or unfair disregard of relevant interests at para. 89 to 94. However, it acknowledged that in many cases proof of these will be tied up with, and may merge into, the proof of reasonable expectations. In any case, the claimant must prove "wrongful conduct, causation and compensable injury." (para. 90).
[393] "Unfair prejudice" and "unfair disregard of relevant interests" expand on oppression as it had been developing at common law. They make it clear that "wrongs falling short of the harsh and abusive conduct connoted by 'oppression' may fall within s. 241." (para. 93).
[394] Paragraph 93 of BCE goes on to provide examples of conduct that may be unfairly prejudicial:
¼ squeezing out a minority shareholder, failing to disclose related party transactions, changing corporate structure to drastically alter debt ratios, adopting a "poison pill" to prevent a takeover bid, paying dividends without a formal declaration, preferring some shareholders with management fees and paying directors' fees higher than the industry norm ¼ .
[395] Finally, the court had this to say about unfair disregard of relevant interests, at para. 94:
"[U]nfair disregard" is viewed as the least serious of the three injuries, or wrongs, mentioned in s. 241. Examples include favouring a director by failing to properly prosecute claims, improperly reducing a shareholder's dividend, or failing to deliver property belonging to the claimant ¼ .
[396] "Does the evidence support the reasonable expectation asserted by the claimant?" (BCE, para. 68). The evidence establishes that Mr. Giffin had an expectation of equal treatment within XL. In some respects, the shareholder agreement he signed made that expectation unreasonable, but on the subjects of dividends and share of equity the expectation of equality remained reasonable.
[397] We shall start by briefly discussing the non-exclusive factors set out in BCE except the last one, representations and agreements, which we shall discuss more extensively.
[398] On the nature of the corporation: XL always was a small, closely held, family corporation, in which ownership and management were one. The plaintiff referred me to Ebrahimi v. Westbourne Galleries, [1972] 2 All E.R. 492 (H.L.) and Ferguson v. Imax Systems Corp., [1983] 43 O.R. (2d) 128 (C.A.) Often a corporation of that kind attracts expectations of equality and fair dealing on the inside.
[399] On the relationship between the parties, most issues were decided by consensus and each of the three members worked full time in discrete roles, each of which was essential to the success of the venture. Their corporate relationship, as well as their family relationship, is a kind of which equal treatment may be expected.
[400] On past practice, we see conflicting facts. Until 2005, compensation was equal. However, from the beginning shareholdings were not equal. The equal compensation to 2005 said nothing for the future because profits were kept in the company to improve the balance sheet until retained earnings were large enough to support bonding on large contracts. Then, real profits were produced, and there was something to quarrel over.
[401] The subject of preventative steps does not assist us here.
[402] It may be that Mr. Giffin ought to have confronted the others and sought a resolution. His failure to do so was urged by the defendants against his credibility. If his expectation of equality was reasonable, why did he not argue for it?
[403] As I said in reference to credibility, the criticism cuts both ways. Ms. Soontiens and Ms. MacAlpine saw a problem coming on the distribution of real profits. Hence, the conveyance of some shares. Hence, the purported removal of the provision about the purpose of class A dividends. They did not attempt to sort it out with Mr. Giffin.
[404] The best I can make of it is that Ms. Soontiens and Ms. MacAlpine were prepared to do some things to blunt Mr. Giffin's expected reaction to declarations of dividends on real profits, but they were determined that they would get much more than him. Mr. Giffin saw what was happening, concluded he had been taken, and the relationship broke down.
[405] I do not think that speculation about preventative steps will much assist cases in which individuals argue about reasonable expectations in a small, closely held company after a breakdown of a personal relationship. The examples in BCE on preventative steps involved oppression claims by secured creditors, not co-adventures, let alone family members.
[406] The Supreme Court said at para. 79 of BCE, "Shareholder agreements may be viewed as reflecting the reasonable expectations of the parties ¼ ".
[407] Before turning to the XL shareholder agreement, there are a number of findings that support the reasonableness of Mr. Giffin's asserted, and subjectively held, expectation of equality. Aside from the agreement, the most important of these are:
· The underlying or formative understanding conveyed to Mr. Giffin by the other two shareholders.
· Aside from the initial $85,000 investment, relatively equal risks taken in leaving employment for an unproven venture and in undertaking contingent liabilities.
· Relatively equal labour contributing, more or less equally, to the success of the company.
· The transfer of one third of the class C shares by the other shareholders to Mr. Giffin.
[408] To keep repetition to a minimum, I will briefly summarize why each of these lends support for the reasonableness of the equality expectation.
[409] As found, the formative understanding was for equality. That did not mean that, as the parties progressed to a definite agreement, they would never settle on terms that treated one shareholder differently than another. But, the overall theme was to be for equality
[410] Equal risk in giving up employment at Western Electrics and undertaking contingent liabilities suggest equal treatment. The $85,000 investment does not seriously diminish the reasonableness of Mr. Giffin's expectation because he understood the investment was a loan to be repaid by the company. And, in fact, it was a loan to be repaid by the company.
[411] Similarly, equal labour in distinct but equally essential roles suggests equal treatment.
[412] In many ways, the agreement disadvantaged Mr. Giffin, especially before the class C shares were brought in line with his expectations. However, once the class C shares got regularized, Mr. Giffin had a right to equal treatment on the real profits. The agreement also made him one of the three directors. So, he had an equal voice on general management.
[413] The shareholder agreement throws into question the reasonableness of Mr. Giffin's expectation of equality. The ways in which it was instructed for and presented go to oppression, but its execution by Mr. Giffin goes to reasonableness.
[414] The expectation remained reasonable for two reasons. Firstly, the agreement did not permit the other two principals to prefer themselves as greatly as they thought they could.
[415] Secondly, an agreement of this kind must be administered over the years. Administration is open to a flexible approach. So, knowing his cousins, the business, and the risks, Mr. Giffin was entitled to think that good performance on his part would be met with good will by the others. The eventual redistribution of class C shares shows that the agreement, disadvantageous though it initially was, could be made to treat Mr. Giffin more equally.
[416] Therefore, the expectation of general equality remained reasonable.
[417] Turning to the second part of the determination of an oppression case, did the conduct complained about oppress Mr. Giffin, unfairly prejudice him, or unfairly disregard relevant interests of his?
[418] I found that Ms. Soontiens and Ms. MacAlpine were aware that Mr. Giffin expected equality from the very beginning of their joint venture. I found that Ms. Soontiens and Ms. MacAlpine faced a dilemma as the venture became more and more successful: placating his expectation of equality while satisfying their desire for unequal shares of the real profits.
[419] There are several examples of active concealment. Despite the advice of the company lawyer, no effort was made to alert Mr. Giffin to the terms in the shareholder agreement that were contrary to the equality he had been led to expect. The prices paid by XL to Mr. Soontiens for the leftover tools and inventory, and the astounding profits realized by him, were kept from Mr. Giffin, even until after he sued and went to trial. And so, the purported amendment to the terms for class A dividends, even until after Mr. Giffin left.
[420] For six years, in which Mr. Giffin worked very hard to make XL a success, he was not told, "We, as primary owners, deserved more." That intent was concealed from him until there were real profits to quarrel over.
[421] This conduct was oppressive. It was a bad faith attempt to take advantage of a minority shareholder.
Fiduciary Duty
[422] It is submitted for Mr. Giffin that Ms. Soontiens owed him fiduciary duties as a result of her undertaking the task of getting XL set up and getting a draft shareholder agreement prepared. It is argued that the duties were breached when Ms. Soontiens caused a draft to be prepared that was inconsistent with the formative theme of equality.
[423] It is also submitted for Mr. Giffin that both Ms. Soontiens and Ms. MacAlpine owed fiduciary duties to him because they had "primary responsibility for financial and legal governance" of XL. It is argued that the duties flowing from those circumstances were breached when XL paid excessive prices to Mr. Soontiens for Western's leftover inventory and tools and when the directors declared unequal dividends.
[424] Acknowledging that there is no established fiduciary category in which Mr. Giffin's claim can be anchored, the submission relies on the principle for imposing fiduciary obligations in unchartered waters, as discussed in Hodgkinson v. Simms, [1994] S.C.J. 84. The plaintiff must establish "a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party" (para. 33).
[425] The submission for the defendants emphasizes Justice Sopinka's statements in Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] S.C.J. 83 to the effect that, as defendants' counsel put it, "one indispensable feature of a fiduciary relationship is that one party be in a position of dependency or vulnerability with respect to the other". They also rely on Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] S.C.J. 64, in which it was held that directors owe fiduciary duties to the corporation, not the shareholders.
[426] Mr. Giffin's counsel refer me to Coleman v. Myers, [1977] 2 N.Z.L.R. 225 (C.A.), Dusik v. Newton, [1983] B.C.J. 2157 (C.A.), and Vladi Private Islands Ltd. v. Haase, [1990] N.S.J. 104 (C.A.), which recognize the possibility of fiduciary relationships between controlling shareholders and minority shareholders. These decisions have to be read now in the light of Peoples Department Stores Inc. and the question whether it is distinguished in cases of small, closely held, family corporations.
[427] If Peoples Department Stores does not preclude the plaintiff's claim, the inquiry will be highly circumstantial: Vladi Private Islands at para. 20. The mere facts that the corporation is small and closely held by family members do not end the question. Also, one wants to be mindful of the kind of legal relationship the parties chose for themselves, a corporation rather than a partnership, and the internal rules the parties chose by memorandum, contract, and other corporate documents.
[428] The question of Peoples Department Stores aside, I am of the view that no fiduciary relationship arose there.
[429] The evidence makes it clear that the three principals trusted one another. However, there was no mutual understanding that Ms. Soontiens relinquish her own self-interest in order to act solely for Mr. Giffin's good when she saw to the incorporation, the share terms, or the shareholder agreement. And, from the other side of the fiduciary coin, Mr. Giffin was not in a position of vulnerability to Ms. Soontiens.
[430] What Ms. Soontiens did in preparing the shareholder agreement was no worse than unfair. She was free to act in her own interests, as was Mr. Giffin. He read the agreement. He heard it explained. He understood enough to know that it was inconsistent with his expectations. He signed it. He did not have to do that.
[431] As regards to the second ground, there were three directors. Mr. Giffin was the equal of Ms. Soontiens, and the equal of Ms. MacAlpine, when it came to the general management of their company. He did not have to vote for the unequal dividends. He did not have to sign the resolution. It was unfair, but there was no fiduciary relationship from which to address the unfairness.
Remedy
[432] The plaintiff succeeds on his claim for oppression remedies. His other claims will be dismissed.
[433] The oppression caused a complete breakdown of the trust between Mr. Giffin and the immediate members of the Berta family, as well as the breakdown of his family bonds to the Bertas. As such, the oppression caused Mr. Giffin's departure from XL. The fair remedy is one that compensates him for the monetary value of XL to him.
[434] In my assessment, the shareholder agreement and the share terms provide the guides for valuing that interest. That is, it should be measured as of the day Mr. Giffin terminated his employment, without any component for future loss.
[435] Therefore, Mr. Giffin's losses have nothing to do with CNCA Holdings Limited. He has no claim against it, and he has no entitlement to the equity in it.
[436] Mr. Giffin's interest is measured by determining what he would have received had XL and Huntec been sold at market value on March 31, 2007.
[437] I will order that Huntec be wound up on the basis that funds in trust, subject to two adjustments, represent its market value. Nothing is to be paid as due to related parties for the cost of Huntec's defence. Secondly, payments by XL to Huntec are to be audited to determine that XL covered, as rent, all expenses related to the premises.
[438] I will order that the defendants cause the equity in XL to be valued by a chartered business valuer on the following bases:
(a) The valuation date is March 25, 2007;
(b) The company is to be valued as a going concern;
(c) The valuation is to be adjusted as if the expenditure for the leftover tools and inventory was $3,000;
(d) The court will appoint the valuer if the parties cannot agree;
(e) The terms for valuation may be added to as the parties agree or the court orders.
I will order that the defendants, or one or more of them as they may choose, purchase Mr. Giffin's shares for a price determined as follows:
(a) the value of the equity;
(b) less the amount due to Ms. Soontiens and Ms. MacAlpine on their shareholder loans over and above any Giffin shareholder loan;
(c) one third to Mr. Giffin for equal shareholder loans, if there is a Giffin shareholder loan balance;
(d) 32.4% of the balance to Mr. Giffin.
[439] Counsel may address costs and prejudgment interest in writing.
J.