Ontario – oppression remedy grants party control of dispute resolution covered by funding agreement

In 1515474 Ontario Inc. v. Soocellus Ontario Inc., 2020 ONSC 270, Ontario’s Divisional Court upheld an order granting a shareholder control of the conduct of ongoing dispute resolution.  Post-sale of G’s shares in F Co., G retained non-voting shares in F Co. with a right to receive net proceeds in F Co.’s litigation so long as G provided litigation funding and met other financial terms.  F Co.’s eventual decisions to reduce activity in the litigation, to seek an end to it and to mediate so as to “accept the best reasonable offer we are able to negotiate” combined to qualify as oppression justifying the grant of litigation control. The order sought to rectify for breach of G’s reasonable expectations created by the sale of G’s shares in a company engaged in litigation but, unlike other oppression remedies, limited the grant of control to the conduct of litigation and not overall operations of F Co.

Canada Forgings Inc. (“Forgings”) manufactures forged products.  Mr. Gerald Guilbeault (“Mr. Guilbeault”) was sole shareholder of Forgings through his wholly-owned Canforge Holdings Inc. (“Holdings”), subsequently name-changed to 1515474 Ontario Inc. (“151”).  Mr. Guilbeault sold his shares in 2014.

Prior to that sale, in 2006 Forgings instituted litigation against Atomic Energy Canada Limited (“AECL”) claiming damages for AECL’s breach of a 2004 tender process (“AECL Action”). 

During negotiations leading to the sale of Holdings’ shares in Forgings to Soocellus Ontario Inc. (“Soocellus”), Mr. Guilbeault insisted that he receive the benefit of the 2006 AECL Action which had remained active at the time of the 2014 sale.

Under the terms of the December 5, 2014 agreement, Holdings sold its shares in Forgings to Soocellus for $13.4 million (“Agreement”) and:

a) Forgings issued special non-voting shares to Holdings with the right to receive the net proceeds of any recovery in the AECL Action (“AECL Shares”);

b) Forgings would provide litigation funding for the AECL Action to a maximum of $100,000.00 per year over a three (3) year period commencing December 1, 2014. If legal fees in any of those years exceeds $100,000.00, Mr. Guilbeault would be responsible for any excess amount in any of those years and be required to reimburse Forgings;

c) Legal fees paid by Forgings would be reimbursed by Mr. Guilbeault if the AECL Action either settles or achieves a successful outcome at trial. If the AECL Action is unsuccessful, Mr. Guilbeault was required to pay such legal fees to Forgings; and

d) If the AECL Action is unsuccessful, and a costs order issues against Forgings, Mr. Guilbeault will reimburse Forgings for such costs.

Mr. Scott Naar (“Mr. Naar”) owned Soocellus and had joined Forgings in 2004, first as controller, later as Vice-President and, after the Agreement, as President and CEO of Forgings. Before and after the Agreement, Mr. Naar had primary responsibility for instructing counsel in the AECL Action.

Mr. Justice Laurence A. Pattillo wrote the reasons for the Divisional Court, comprised also of Madam Justice Catherine D. Aitken and Mr. Justice Michael A. Penny.

Pattillo J. summed up the roles adopted by Mr. Guilbeault and Mr. Naar in regard to the AECL Action.  “Guilbeault deposed that because of their background and friendship, at the time of the sale closing, he expected Naar to consult him before any significant step was taken and to follow his instructions on the AECL Action and protect his interests” and “Guilbeault was only involved in major decisions and had little contact with counsel. His only source of information concerning the AECL Action was Naar”.

Two (2) mediations in the AECL Action had occurred without a settlement, with Mr. Guilbeault playing an active role in both and a lead role in the second. 

Holdings instituted arbitration against Soocellus under an arbitration clause in the Agreement, eventually prevailing in a November 13, 2017 arbitration award ordering Soocellus to pay Holdings $2,317,740.56 (“Award”). During the term of the arbitration proceedings and, as Pattillo J. commented, “as a result”, the relationship between the parties “deteriorated”.  Pattillo J. noted that (i) payments to Forgings’ AECL Action counsel were made by Holdings without authorization by Mr. Guilbeault, (ii) requests on behalf of Mr. Guilbeault for information about the AECL Action went unanswered, (iii) invoices disclosed little activity in the AECL Action and (iv) payment to Forgings’ AECL Action counsel was delayed.

Within a month of the Award, on behalf of Forgings Mr. Naar wrote Mr. Guilbeault to advise that Forgings wanted to end the AECL Action.

[14] On December 6, 2017, Naar wrote a letter to Guilbeault on behalf of Forgings advising that Forgings wanted to end the AECL Action because it was worried that the Action would affect its ongoing business in a “challenging environment” and because Naar no longer had the time or resources to work on the Action. Naar stated that Forgings intended to instruct its AECL counsel to pursue a third mediation with AECL immediately. “There we will accept the best reasonable offer we are able to negotiate”.

Mr. Guilbeault served an oppression remedy application in Superior Court seeking a declaration under section 248 of Ontario’s Business Corporations Act, RSO 1990, c B.16 (“OBCA”) that Forgings’ affairs have been conducted in a manner that affects or threatens to affect a result that is oppressive, unfairly prejudicial or unfairly disregards the interests of Guilbeault in his capacity as a shareholder of the AECL Shares. Mr. Guilbeault also sought an order to rectify for that oppression and vest sole authority in him to direct the conduct of the AECL Action or, in the alternative, direct Forgings to give more direct and robust information from AECL counsel.

In first instance, the application judge concluded that the facts justified a finding of oppression in line with the two (2) step test stated in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (CanLII), [2008] 3 SCR 560 paras 68, 70 and 89, in particular the breach of reasonable expectations and whether those expectations were violated by conduct that is oppressive, unfairly prejudicial or unfairly disregards a relevant interest. 

The application judge determined that “it was clear the sale would not be completed without Mr. Guilbeault having input as to how the litigation against AECL concluded” and that Mr. Guilbeault “had the financial benefit of the AECL Action along with the obligation to pay the costs and that his presence and involvement in the Claim appears to have added to its value”.  The only unclear aspect of the parties’ expectations was who would instruct counsel.

The application judge granted Mr. Guilbeault’s application, issuing an order vesting sole authority in Mr. Guilbeault to conduct the AECL Action, as well as the sought-after access to counsel and information. 

Soocellus and 151 appealed to the Divisional Court under section 255 of the OBCA.

The Court referred to Housen v. Nikolaisen, 2002 SCC 33 (CanLII), [2002] 2 SCR 235 and Wilson v. Alharayeri, 2017 SCC 39 (CanLII), [2017] 1 SCR 1037 as touchstones for the appropriate standard of review.  Despite argument by Soocellus and 151, the Court approached the application judge’s reasons in their whole and held that the application judge had made no palpable and overriding error in his interpretation of the evidence.  The Court listed the application judge’s findings at para. 35 of its reasons.

[36] While the application judge did not set out Guilbeault’s expectations specifically or find that they were reasonable before concluding that Guilbeault and Holdings had met the first part of the test concerning reasonable expectations, given the evidence before him and the position of the parties, I do not consider that he committed a palpable and overriding error.

[37] It is clear from the application judge’s reasons that there was no issue with Guilbeault’s expectations regarding his involvement with the AECL Action or that they were reasonable. As the application judge noted, the reasonable expectations were by and large shared by both parties”.

The Court at para. 40 identified key facts, determined by the application judge, which lead to the conclusions regarding reasonable expectations.   

Having met the test for oppression, the issue of an appropriate remedy arose.  Soocellus and 151 argued that granting Mr. Guilbeault control of the litigation was a palpable and overriding error because there was no finding that he had a reasonable expectation of controlling the AECL Action.

[46] In my view, based on the application judge’s findings, the order granted by him was neither an error in principle nor manifestly unjust. It was clear from his findings that the application judge found that the parties could no longer work together in respect of the AECL Action. Forgings and Soocellus clearly no longer wanted to pursue the AECL Action. Guilbeault, on the other hand, having the direct financial stake in the outcome (together with responsibility for the costs) wanted to continue to pursue the AECL Action to a satisfactory conclusion, either at trial or by settlement.

[47] The application judge’s findings that Guilbeault would and did have input into how the AECL Action was resolved coupled with Forgings’ actions in refusing to provide him with information concerning the status of the AECL Action, delaying the prosecution of the AECL Action, and ceasing work on it in June 2017, together with its December 6, 2017 declaration that it intended to settle the AECL Action for the best reasonable offer without Guilbeault’s input or agreement were sufficient, in my view, to enable the application judge to make the order he did”.

ubitral note – First, the list of facts at para. 40 identifies those facts common to many litigation/arbitration matters and relate back to the Agreement’s terms regarding litigation funding, as mentioned at para. 8(b) of the reasons.  The reasons lend themselves to other dispute resolution situations in which related parties exchange shareholdings for a similar division of labour and costing which, in the event of dispute, may qualify as oppression.

Second, the remedy granted in the oppression application targeted the conduct of dispute resolution.  Such a narrow focus is uncommon in oppression remedies.  Rather, control is more often sought of the overall operations of the target corporation’s business.   Those operations may encompass dispute resolution but this decision underlines that oppression can be used, post-sale, to regain control of pre-sale dispute resolution if reasonable expectations of a party (qualifying for oppression) are not met by virtue of oppressive conduct. 

Third, retaining a special non-voting shareholding in the target corporation, coupled with the financial arrangements in financing the AECL Action and in its success, qualified Respondents to make the oppression application if not also ensure its success.

Fourth, the litigation funding in issue shares some key elements with other funding by third party professional lenders referred generally as litigation funding agreements.  The funding in the latter case is contingent.  It provides no recourse to the borrower or its assets, promising only a financial benefit if the dispute resolution is successful.

Fifth, for more on litigation funding, see the Arbitration Matters note “Securities commission exempts filer from filing even redacted copies of litigation funding agreements” which commented on Stans Energy Corp. (Re), 2019 CanLII 36437 (ON SEC). In that decision, the Ontario Securities Commission granted an exemption to a filer from filing two (2) litigation funding agreements despite the documents qualifying as material contracts under Ontario’s 51-102 – Continuous Disclosure Obligations.  To issue the exemption, the Securities Commission relied on (i) prior disclosure of key information, (ii) privilege and confidentiality issues which would be violated if further disclosure was made as well as (iv) not compromising the filer’s relationship with the funders.