ONTARIO – Under section 132 of the OBCA, the onus is on the officer or director with a personal interest in a contract to ensure it is reduced to writing, and is disclosed and approved by the corporation’s board. The court’s jurisdiction in a wind up or liquidation under section 207 of the OBCA is not limited to that of a claims officer appointed to adjudicate contested liquidation claims. In the context of a shareholder dispute, the court has broad powers to make any just and equitable remedy.
Basegmez et al. v. Akman et al. 2022 ONSC 4127
2022 ONSC 4127 (August 9, 2022)
ONSC (Commercial List) J. Koehnen
The parties were shareholders in a company known as Tarn Financial that acquired a land re-development project over which the parties disagreed. In a previous proceeding, the court found oppression against the respondents and ordered a wind up of the company and liquidation of the project pursuant to s. 207 of the Ontario Business Corporations Act (“OBCA”) . A trial was then held to resolve financial issues arising out of the wind up, including the distribution of the proceeds of the liquidation.
At the outset, the trial judge stated that: “This case demonstrates the need for written documentation to memorialize business arrangements even between the best of friends. The failure to do so here has led to misunderstandings, the collapse of a potentially lucrative development opportunity and the destruction of decades long friendships.” (para. 1)
As a preliminary issue, Koehnen J. addressed the applicants’ submission that a number of the issues at trial were res judicata as having been determined by Lederman J. in the oppression proceeding and upheld by the Divisional Court. Koehnen J. held that the issues of hotel management or development fees were not res judicata. (para. 22) The oppression proceedings focused on whether oppression occurred and whether the appropriate remedy was liquidation. Neither Lederman J. nor the Divisional Court focused on division of the proceeds of the liquidation, which was the issue at trial. (para. 25)
In addressing the parties’ claims, the Koehnen J. held that:
- The respondent Akman’s claims to a development fee as a percentage of revenue based on the percentage of completion of each phase and a hotel management fee failed under section 132 of the OBCA. Koehnen J. found that Akman failed to prove on a balance of probabilities that there was the alleged contract to pay him development fees, holding that “both fees involve self-interested contracts that were not approved by independent directors or shareholders as they were required to be by section 132…”(para. 3)
- The project collapsed due to Akman’s poor management and oppressive conduct, no revenue was earned and therefore Koehnen J held that was not entitled to a fee. (para. 43)
- Section 132 of the OBCA puts a limit on officers and directors entering into self-interested contracts with their corporations. Directors and officers cannot contract out of their fiduciary duties to the corporation, which duties require them to avoid conflicts of interest and not to abuse their position for personal gain. Pursuant to section 132, Akman was required to disclose in writing to the corporation the nature and extent of his contract in connection with the payment of development fees at a meeting of the board of directors at which the proposed contract is considered. He did not do so. (paras. 58-61)
- Having failed to abide by section 132 of the OBCA, the court preferred the evidence of one of the applicants over Akman on this issue and held that Akman should be compensated for his work on the development solely through higher shareholdings, not through the development or hotel management fees Akman claimed. (paras. 68-70)
- There are good policy reasons for holding directors to the requirements of section 132. Even if all sides act in good faith, if a development agreement is not reduced to writing, there is “substantial room” for disagreement about its terms and for “mischief” by the controlling shareholders to their benefit and the prejudice of other shareholders if a non-arm’s-length agreement is not fully disclosed in writing. The onus was on Akman to ensure any agreement was reduced to writing and approved by the corporation’s board. (para. 72)
- There was never an agreement for Akman to charge management fees – at best there was an “agreement to agree” on some form of compensation later. (para. 100)
- The court’s underlying jurisdiction in this case was not limited to that of a claims officer appointed to adjudicate contested liquidation claims. The issues arose in the context of a shareholder dispute and equitable litigation. (para. 146) Section 207 (winding up) of the OBCA is a just and equitable remedy that gives the court broad powers to make “any order it thinks fit or considers just”. The court’s starting point was therefore that this was not an ordinary proof of claims procedure. The determination of amounts owing between creditors was already determined within Tarn Financial and its creditors fully paid The decision before the court was how the remaining proceeds from the sale of the project should be divided among the three shareholders of Tarn Financial. (paras. 148-150)
- As for the appplicants’ claim that the calculation of the amount owed to Akman on his shareholder loan be based solely on the amount he advanced to Tarn Financial and the amounts Tarn Financial repaid him, it was not just and equitable to give Basegmez and Koctruk 60% of the unpaid advance that Akman made to Tarn Construction. While Akman acted oppressively, relief from oppression should not be designed to inflict punishment on the oppressor. Giving the applicants a share of these advances that they claimed would be a “windfall”, which would do more than remedy the wrong and penalize Akman. (para. 152) The parties had also agreed that after the shareholders were paid their advances, any surplus would be shared according to their shareholdings, which meant that Akman would be compensated for his “sweat equity” because he advanced less cash for his shareholder loan than the other shareholders. (para. 154) There was no dispute that Akman had advanced the project funds, which had to be re-paid before the shareholder loans were re-paid and any surplus divided among the shareholders. (para. 154-155)