Topics:

  • Deadlocked Shareholders
  • Court Ordered Sale of Company
  • Oppressive Conduct of Shareholder
  • Fiduciary Duty of Directors

Tracey v. Tracey Inc. (Ontario Superior Court of Justice – June 14, 201was one of fifteen cases that were reported in the Canadian Institute of Chartered Business Valuators’ (CICBV) August 2013 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 the trial judge’s findings regarding the relevant issues that the court must consider in situations where the court must decide which party should be required to sell his/her shares in a deadlock situation. The court also dealt with the appellant’s claim of oppressive conduct by the other shareholder and provided the legal points it considered in reaching its decision.


THE VALUATION LAW REVIEW — Corporate/Securities Decisions and Certain Canadian Regulatory Developments

Volume 19, Issue 3 — August 2013

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.

Tracey v. Tracey Inc.

2012 ONSC 3144
Ontario Superior Court of Justice
June 14, 2012

The Ontario Superior Court of Justice upheld the trial judge’s findings that if a court must decide which party should be required to sell his or her shares in a deadlock shareholder situation, the relevant issues the court must consider include the shareholder’s ability to continue the business, the shareholder’s ability to complete the purchase and the effect of the order on the other stakeholders of the company such as employees, customers and suppliers.

The Facts

Elizabeth Tracey (Elizabeth) and her eldest son, Mark Tracey (Mark) owned and operated an ice cream business known as Centreside Dairy. Elizabeth held 51 shares and Mark held 49 shares.

After 10 years of dispute, the parties were in a deadlock for the management and control of the business.

Elizabeth and Mark were unanimous that the corporation should not be wound up and that one side or the other ought to end up owning the entire business.

The Trial Decision

At a trial held before Justice Roy, the Court observed that sections 207 and 248 of the Ontario Business Corporations Act “give the court a very broad discretion to fashion a remedy to rectify a problem such as this one.”

The Court went on to opine that “Clearly in this case the actions of the parties at various times have been burdensome, harsh or wrongful. The parties’ conclusion that there is a state of deadlock is certainly justified. The fact that this is a family owned corporation and there no longer exists any trust and confidence amongst the members of the family means the corporation cannot continue to function and meet the reasonable expectation[s] of the shareholders. The just and equitable remedy will be to either wind up the company pursuant to section 207 of the Act or to have one shareholder buying the other’s shares at a reasonable price.”

Noting that “the parties are unanimous that the corporation should not be wound up and accordingly that leads to the only other remedy, that of a forced sale,” the Court focused its inquiry on determining which side should be required to sell his or her shares to the other side and what the sale price should be.

For the reasons affirmed by the Supreme Court of Justice as summarized below, the trial Court held that Elizabeth should be required to sell her shares to Mark for the calculated fair market value of $271,830.

The Appeal Decision

At the appeal heard by the Ontario Superior Court of Justice, the Court paid great deference to the trial decision and noted that the following factors considered by Justice Roy in deciding which party ought to be required to sell to the other were appropriate:

  • Who has the best ability to continue the business?
  • Which shareholder has contributed the most to the deadlock?
  • Who has the ability to purchase the other’s shares?
  • What weight should be accorded Elizabeth’s majority holding (51 shares) and Mark’s minority position (49 shares) in the company?
  • What effect will the order have on the continued viability of the company?
  • hat effect will the order have on other stakeholders in the company, such as its long-term employees, customers and suppliers?

The appellants argued that in ordering Elizabeth to sell her shares to Mark, Justice Roy erred by disregarding Elizabeth’s “reasonable expectations as a shareholder” and that among other things, he failed to consider: (i) oppressive conduct by Mark towards Elizabeth in various ways, including failing to call regular shareholders and directors meetings, thus excluding Elizabeth from meaningful participation in a company in which she held a majority of the shares. and (ii) Mark’s oppressive conduct in creating and operating “Tracey’s Dairy” to distribute ice cream products which the appellants submitted was a corporate opportunity from which Elizabeth was wrongfully excluded.

The Court did not accept those arguments and placed great weight on Justice Roy’s findings that:

  • Mark had the best ability to continue to operate Centreside Dairy effectively.
  • Mark had the wherewithal to purchase Elizabeth’s shares, but there was good reason to doubt that Elizabeth could pay for Mark’s shares.
  • The continued viability of the business would be jeopardized by removing Mark and placing control in Elizabeth’s hands.
  • The financial risk to the company would imperil the chances of Elizabeth being able to pay for Mark’s shares.
  • Long term employees and other stakeholders in the company would be placed at risk if Mark was removed and Elizabeth was placed in control of the business.
  • Even though Elizabeth held a majority of shares, this factor is overwhelmed by the other factors in favour of requiring her to sell her shares to Mark.

With respect to the alleged diversion of corporate opportunity and self-dealing argument, the appellants argued that Mark appropriated a business opportunity that properly belonged to Centreside when he established and operated a distribution company that carried on business as “Tracey’s Dairy.”

The Court agreed with Justice Roy’s findings that Mark had not diverted a corporate opportunity or breached any fiduciary duties as a director of Centreside.

In coming to that conclusion, the Court observed the following legal points:

  • A director of a company has a fiduciary relationship to his corporation that requires him to be loyal to the corporation, to act in good faith, and to avoid conflict of duty. The nature and extent of fiduciary duties are examined in the overall context in which they arise.
  • A director may not obtain for himself without the knowledge or consent of the company any property or business advantage which belongs to the company.
  • A director is precluded from obtaining for himself, directly or beneficially, a maturing business opportunity for which the company has been negotiating, especially where the director has been negotiating for the business advantage on behalf of the company.
  • A “mere idea” is not a business opportunity in this context. It is a “maturing” or “ripe” business opportunity, immediately available to the corporation, that constitutes a business advantage or opportunity that the fiduciary may not be appropriate to him. On the other hand, a director may pursue a business opportunity that the corporation has rejected, or that the corporation is unable or unwilling to pursue.

Applying the foregoing maxims to the case at hand, the Court found that Centreside did not lose out on a business opportunity because:

  • the business opportunity was not practically available to Centreside in the first place as its banking restrictions would not have permitted it to raise the necessary capital to embark on the business.
  • the appellants had no intention of operating a distribution company.

 

About the author