The court decision of Western Larch Ltd. v. Di Poce Management Ltd. (Ontario Court of Appeal, November 29, 2013) was one f thirteen cases that were reported in the Canadian Institute of Chartered Business Valuators’ (CICBV) July 2014 edition of The Valuation Law Review. I obtained permission from the CICBV to provide the attached excerpt from the Review on the case.
The Court upheld a motion judges findings that a buy/sell (shotgun) offer that was made pursuant to a partnership agreement and in compliance with that agreement is enforceable even if it contains an alternative offer on different terms. Further, unless the agreement specifies that an offer be made at fair market value, the court will not require the offers be made on this basis.
THE VALUATION LAW REVIEW — Corporate/Securities Decisions and Certain Canadian Regulatory Developments
Volume 21, Issue 2 — July 2014
The following has been reprinted with permission from the Canadian Institute of Chartered Business Valuators, 2011. Unauthorized copying or reproducing in any way is strictly prohibited.
Western Larch Ltd. v. Di Poce Management Ltd.
Ontario Court of Appeal
2013 ONCA 722
November 29, 2013
The Ontario Court of Appeal upheld a motion judge’s findings that a buy/sell (shotgun) offer made pursuant to a partnership agreement is enforceable if it is made in compliance with that agreement, even if it contains an alternative offer open for acceptance on different terms. The court will not interfere with the reasonable expectations of the parties entering into the agreement and will not require that such offers be made at fair market value, absent such a requirement in the agreement. In addition, minor calculation errors will not invalidate a buy/sell offer.
Alpa Partnership was in the business of manufacturing and distributing wood products for the low-rise residential building industry in Ontario. The partners in the partnership were Di Poce Management Limited (DPM), Western Larch Limited (WL), Large Tooth Aspen Limited (LTA), Red Alder Limited (RA), and Eastern Hemlock Limited (EH). A partnership agreement contained two relevant methods by which a partner could be removed from the partnership. The first exit mechanism could be triggered upon the death of a principal of a partner and the other exit mechanism was a buy/sell (shotgun) provision.
RA’s principal died and the partners other than WL wanted RA to remain in the partnership. WL was the only dissenter and wanted the partnership to buy out RA’s interest as provided for in the partnership agreement. In response, each of DPM, LTA, and EH provided WL with a shotgun buy/sell offer which forced WL to either: (i) buy out DPM, LTA and EH; or (ii) sell WL’s partnership interest to them.
The shotgun buy/sell offer contained two alternatives, each of which allowed WL to accept the alternative as a buyer or seller and the offer stated that WL’s failure to respond would result in WL being deemed to agree to be bought out on the terms set out in the first alternative. If WL agreed to sell its partnership interest in accordance with the buy/sell offer, DPM, LTA and EH anticipated allowing RA to participate in a restructured partnership. WL attempted to secure financing to buy out DPM, LTA and EH, but was unsuccessful. WL then applied to the Court for an interim and interlocutory injunction to restrain DPM, LTA, and EH from implementing or attempting to implement the shotgun buy/sell offer. The application was unsuccessful and WL was eventually bought out and paid $33 million in accordance with the first alternative set out in the shotgun buy/sell offer.
WL subsequently sought a declaration that the shotgun buy/sell offer was invalid and sought damages (as all parties acknowledged that WL could not be brought back into the partnership) for the forced sale of its partnership interest. WL also claimed that it should have received fair market value for its partnership interest.
The motions judge, sitting as a judge on the Commercial List, found that the shotgun buy/sell offer was made in compliance with the partnership agreement, and was thus enforceable even though it did not perfectly comply with the terms of the partnership agreement.
The judge directed a trial on the following matters: (i) although the first alternative was found to be not compliant with the partnership agreement, the second alternative was found to be compliant and therefore WL could have accepted the second alternative offer as either a buyer or a seller. Accordingly, WL was deemed to accept the second alternative and WL may be entitled to damages based on the difference between the two alternatives; (ii) net earnings were calculated using the wrong reference date (it was 2 weeks off); and (iii) net earning interest was improperly calculated.
The Court of Appeal Decision
The Ontario Court of Appeal dismissed WL’s appeal. The court reviewed the law on buy/sell provisions and stated that they are generally seen as “a draconian remedy” which has led courts to require that buy/sell offers “strictly comply” with the buy/sell provisions in the relevant contract. However, “strict compliance is not perfect compliance” and the reasonable expectations of the parties in the particular factual context must be considered. In this case, all of the parties involved were sophisticated parties.
The court also found that DPM, LTA and EH were permitted to offer other alternatives with their shotgun buy/sell offer; however, absent a response, they could only enforce the partnership agreement compliant shotgun buy/sell offer, and not the alternative. Had the shotgun buy/sell offer been conditional on some matter not specifically addressed in the partnership agreement, the court would not have allowed the deemed sale pursuant to the shotgun buy/sell offer.
Moreover, the court held that the amount of the inaccurate calculation of net earnings and net interest earnings were minor matters which did not invalidate the shotgun buy/sell offer, but could result in damages in favour of WL, pending the determination of the issues at trial.
Finally, unless otherwise specified in the partnership agreement, the court found that a buy/sell provision operates to obviate the need for a valuation as it is the very purpose of these types of provisions and the intention of the parties at the time they entered into the Partnership Agreement. Accordingly, the court will not interfere by requiring that buy/sell offers involve purchases at fair market value.