Under Section 248(3) of the Ontario Business Corporations Act (the “OBCA”), the Court has broad remedial authority to rectify actions that are oppressive or unfairly prejudicial to minority shareholders. The Subsection specifically authorizes the Court to make an order directing a Corporation, “or any other person” to purchase the securities of a shareholder, or to make an order directing a Corporation or “any other person” to pay a shareholder any part of the money he paid for his shares. In addition, the Court has authority to make “an order compensating an aggrieved person”.
This remedial authority was put to good use in Metcalfe v. Anobile, a recent decision of Mr. Justice Sproat of the Ontario Superior Court of Justice.
The Plaintiff Metcalfe was at one time an employee of an engineering firm which owned an office building in Mississauga. This firm sold its engineering business in the late 1990s, so that it’s only remaining asset was the real estate. The shares of the engineering firm were owned by a numbered company, referred to in the reasons for judgment as “Holdco”. The only substantial asset of Holdco was its shareholding in the engineering firm; Metcalfe owned 4% of the shares of Holdco.
The shareholders of Holdco were parties to a unanimous shareholders agreement which provided that a shareholder’s shares could not be sold unless the shareholder gave the directors authority to sell. The agreement also provided that an individual shareholder’s shares could be purchased by the Corporation for cancellation with the authority of two thirds of the Holdco shareholders. If a shareholder’s interest was purchased for cancellation, the agreement said that Holdco was obliged to pay “fair value” for the shares. Fair value was to be calculated by means of a formula based on the audited financial statements of Holdco.
In 2001, shareholders representing 96% of the shares in Holdco decided that they wanted to accept a proposal from John Hamer to purchase the Mississauga office building through a company called Kingsview that Hamer controlled. They decided to implement the transfer by first selling all of the shares in Holdco to a Holdco shareholder named Anobile, and then using Anobile’s control of Holdco to effect the transfer of the office building.
When Metcalfe was contacted about the proposed sale he took the position that he did not wish to sell his shares. He received notice of a shareholders’ meeting which indicated that one of the items on the agenda was a motion to purchase the Metcalfe shares for cancellation upon payment of fair value pursuant to the shareholders agreement. Metcalfe did not attend any of the meetings dealing with the proposed purchase of his shares for cancellation or the sale of the Holdco shares to Kingsview, in the expectation that his shares would be purchased for fair value at the shareholders’ meeting. At the meeting, however, the motion was amended so that the purchase for cancellation was not to be at fair value, but was instead to be for a proportionate value of the shares based on the Hamer offer.
The majority sold their shares, and Anobile signed an agreement under which the engineering firm transferred the real estate to Kingsview. In this document, Anobile is described as the “Controller”, and authorized signing officer of Holdco. He was not, in fact, an officer or director of either Holdco or the engineering firm, which still held title to the real estate
It appears that Metcalfe’s shares were never purchased for cancellation, at fair value or any other value, although a portion of the funds paid on transfer of the real estate was held back for a period of time after closing. These funds were eventually distributed to persons unknown with no notice to Metcalfe.
Metcalfe spent some six years, from 2001 to 2007, attempting without success to obtain information from Holdco’s officers and legal counsel regarding what had happened to his shares and to the Mississauga office building. In the meantime, the Defendants took no steps to maintain the corporate reporting required under the OBCA, and both Holdco and the engineering firm were dissolved by the Director under Section 241 of the Act.
The matter came before the Court on a motion for summary judgment. The facts outlined above were established by the affidavit filed by Metcalfe, and were largely unchallenged by the Defendants. Hamer filed an affidavit which set out broad, uncorroborated assertions to the effect the engineering firm was in a state of financial crisis and insolvent at the time of the transactions. In his affidavit, Hamer failed to account for a discrepancy of over $2.5 million between the consideration paid for the Holdco shares and the price paid by Kingsview for the real estate. He also failed to explain why Metcalfe’s shares were not purchased for fair value pursuant to the shareholders’ agreement, what became of the hold back funds, and why Metcalfe was not advised of what was going on.
When cross-examined on his affidavit, Hamer through his counsel objected to answering nearly 60 questions, many of which were in the Court’s opinion “clearly relevant”. Mr. Justice Sproat described this approach as “misguided”, and noted that on a motion for summary judgment the Defendant is required to put his best foot forward in terms of providing evidence to support the defence. The lack of detail in Hamer’s affidavit, his failure to deal with key factual issues, and the refusal to answer relevant questions on cross-examination provided the Court with good reason to disregard his evidence and decide the motion on the uncontradicted evidence in Metcalfe’s affidavit. The Judge also took note of the fact that Anobile did not file an affidavit on the motion.
In the circumstances, the Judge found that there was really no dispute about the facts that Metcalfe relied on to establish oppression. Metcalfe was a shareholder in Holdco. That company’s only asset was sold to Kingsview/Hamer. Anobile obtained the shares of Holdco, which he wanted in order to claim a tax loss. All of the shareholders in Holdco were paid something for their shares, except Metcalfe who received nothing. The Defendants allowed Holdco and the engineering firm to be dissolved, and failed to respond adequately to inquiries regarding the cancellation of Metcalfe’s shares and the sale of the property.
A director or officer of a corporation can be held personally liable for a monetary order under the OBCA if that individual is implicated in the oppressive conduct, and if the harm done by the acts of oppression can be rectified by an order requiring an individual to compensate the aggrieved party. Since Anobile failed to file any evidence, the court was prepared to infer that he derived a significant financial benefit from the transactions. The court was prepared to infer that Hamer derived a significant financial benefit as well, and found that both Kingsview and Hamer were parties to the oppression and could be ordered to compensate Metcalfe.
Since Hamer had objected to numerous questions regarding the monies paid for the Holdco shares and for the real estate, Metcalfe was not in a position to prove his damages as of the hearing date of the summary judgment motion. In the circumstances, the Court was prepared to order that the Defendants provide Metcalfe with interim compensation pending assessment of his damages by further order of the Court or by arbitration.
The amount of interim compensation was based on the price per share that was paid to the majority shareholders when they sold their Holdco shares. The Defendants, including Hamer and Anobile personally, were held jointly and severally liable to pay the interim compensation to Metcalfe, together with prejudgment interest and the costs of the motion, all without prejudice to the right of Metcalfe to claim additional amounts based on the fair value of his shares.
Link: Metcalfe v. Anobile CanLII – 2010 ONSC 5087 (CanLII)
Richard Hayles, B.A., J.D.
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