ONTARIO – CONTRACTS – A share purchase agreement arising from the triggering of a non-mandatory buy-sell clause in a unanimous shareholders agreement (“USA”) can be a standalone contract even if it is not a mutual shot-gun provision. If the SPA was a standalone contract, the buyer could not have repudiated the agreement.
ONTARIO – CONTRACTS – Share Purchase Agreement – Where a minority shareholder gives notice of their intention to sell their shares and the majority shareholder agrees to buy them, the buyer is required abide by the terms of the USA as the mechanism for the valuation of the shares. Where the buyer failed to abide by the USA terms by failing to appoint an independent valuator after consultation with the seller, by relying on a valuation which did not comply with GAAP and by relying on real estate appraisals by an appraiser who was not independent, the buyer repudiated the SPA and the Court refused to compel the seller to complete transaction.
ONTARIO – CONTRACTS – Repudiation – Repudiation is justified when the very thing bargained for has been undermined. It allows the non-repudiating party to elect to treat the contract as at an end. The law does not recognise partial repudiation.
Leeder Automotive Inc. v. Warwick
2023 ONCA 726 (CanLII) (November 2, 2023)
ONCA (Trotter, Sossin and Copeland J. JA)
The Appellant Leeder and the Respondent Warwick entered into a share purchase agreement (“SPA”) pursuant to the terms of a unanimous shareholders agreement (“USA”). Warwick was a minority shareholder. Initially, the Respondent wanted to sell his shares to the Appellant and later refused to do so.
Leeder brought a court application seeking an order to force Warwick to close the transaction on the basis that Warwick repudiated the SPA. Leeder’s application was dismissed. The application judge held that even though the share purchase transaction did not constitute a separate contract from the USA, it was repudiated by Leeder and the repudiation was accepted by Warwick. (para.3)
Leeder owned two Volkswagen (VW) dealerships, one Acura dealership and four commercial real estate properties in the GTA. Through his numbered company, John Leeder was the majority shareholder of Leeder Automotive (the “Company”). The Company and its shareholders entered a USA in 2003 and Warwick was one of several minority shareholders. (paras. 6–7)
In 2017, the Company received settlement proceeds of $5 M from VW relating to an emissions scandal. Mr. Leeder received a bonus because of the settlement based on the Company’s profits that year. (para.8)
USA Buy Sell Mechanisms and Valuation Provisions
USA Article 8 (buy-sell mechanism) and Article 12 (valuation) governed the sale of shares. (Para. 9)
Article 8 required a shareholder wishing to sell its shares to give written notice of their intention to sell internally first to the other shareholders and the Company. If the Company wished to purchase, it must provide written notice. If the Company did not provide written notice to purchase the shares, the other shareholders may do so. If they did not so, the offeror of the shares may sell them to a third party. (para.10)
Article 12 set out the method of share valuation. It required that the Company’s auditors or accountants prepare financial statements using generally accepted accounting principles (“GAAP”). It also required that the Company’s real estate be valued by an independent expert agreed upon by the shareholders and that the Company’s goodwill be determined pursuant to a formula set out in Article 12.
The fair market value of the shares was determined by adding up the value of the Corporation’s assets, good will and real estate. (para. 11)
Upon receiving Warwick’s notice of intention to sell his shares on June 26,2020, Leeder instructed the Company’s accountants (“BDO”) to prepare a valuation report and ordered appraisals of the real property from Cushman & Wakefield who had provided appraisals of the real properties in March 2020. Cushman & Wakefield confirmed that their earlier appraisal remained current and accurate. The four properties had a value of $41,870,000.00. (paras. 13 and 14)
On July 16,2020, Leeder gave notice to Warwick of its intention to purchase his shares, triggering the requirements of Article 12. (para. 15)
On July 13, 2020, BDO sent a draft valuation report to Mr. Leeder and noted that USA Article 12.1 required “GAAP” financial statements being a Review or Audit engagement. BDO further advised that the draft report was “not GAAP”. (para.16)
On July 28, 2020, Leeder sent the draft BDO valuation report to Warwick and the other selling shareholders. The draft report did not include the VW settlement proceeds. One of the other selling shareholders raised concerns about the omission of the VW settlement proceeds. (para. 17)
On August 2, 2020, Leeder sent the selling shareholders the real estate appraisal reports prepared by Cushman & Wakefield in March 2020. In his email to the selling shareholders, Leeder represented that the valuation report had been prepared in accordance with the USA except for the exclusion of the VW settlement proceeds. (para. 18)
After concerns were raised by some selling shareholders about the omission of the VW settlement proceeds by email dated August 4,2020, Leeder offered to include 50% of the VW settlement proceeds to the valuation. Attached to this email was BDO’s final valuation report. The report included a “Notice to Reader” statement that BDO had not performed an independent audit and that the report was based on information supplied by management and that “BDO expressed no assurances concerning the veracity of the statements in its report.” (para. 19)
On August 13, 2020, Warwick informed Leeder that he was declining the August 4, 2020, offer.
On August 25, 2020, Leeder put Warwick on notice that Warwick could not refuse to proceed with the share-purchase transaction. On August 31, 2020, Warwick proposed a new valuation for his shares and indicated that the BDO valuation report was not in accordance with the USA.
On October 27, 2020, Leeder tendered the closing documents and Warwick refused to close. (para. 21)
The Application Decision
Leeder brough an application to compel Warwick to complete the transaction. Warwick’s position was that Leeder had repudiated the share purchase transaction agreement. The parties agreed that Warwick’s Notice to sell and the Company’s response constituted a stand-alone contract incorporating the terms of USA Article 12.
They disagreed whether Leeder had repudiated the agreement by lack of compliance with USA Article 12. (para. 24)
After the hearing and before a decision was released, new counsel for Leeder wrote to the application judge to bring their attention to Blackmore Management Inc. v. Carmanah Management Corporation (“Blackmore”), 2022 BCCA 117 in support of Leeder’s position that there was a stand-alone agreement and it had not been repudiated. In their view, the Notice to sell created a contract and it was not revocable. (para.25)
The application judge referred to Blackmore and held that to invoke a buy sell clause is to rely upon a term of an existing contract and therefore the USA as a whole must be considered when examining the enforceability of a share purchase transaction. (para. 26)
The judge held that the buy- sell mechanism constituted a fundamental part of the USA and that the result would be the same even if the share purchase transaction was characterised as a stand-alone contract or as the implementation of the applicable contractual provisions in the USA. (para. 27)
The judge held that Leeder repudiated the contract by failing to comply with the valuation provisions of the USA Article 12.2 because 1) the real estate appraisers were not truly independent or agreed upon by the shareholders (a serious breach); and 2) the BDO valuation report was not prepared according to GAAP. (paras. 30–33) The judge found that Warwick was not consulted on the appointment of Cushman & Wakefield and that these appraisers were not “independent” because of their longstanding relationship with Leeder. (para. 31) In addition, the appraisals were completed in advance of the valuation date set out in Article 12.2.
The judge held that Leeder by-passed the requirements of Article 12.2 without explanation and the noncompliance was sufficient to deprive Warwick of substantially the deal he bargained for when he issued his Notice of Intent to Sell, and Leeder accepted it pursuant to the buy-sell provisions of the USA. (para. 32)
The application judge also held that Leeder breached Article 12.1 and 12.3 of the USA by relying on BDO’s valuation report to determine the value including value of its goodwill. The BDO valuation report did not apply GAAP, contrary to the express language in Article 12.1. (para. 33)
The judge found that Leeder instructed BDO to remove the settlement proceeds from the calculation of net annual income. (paras. 33 and 34) The judge drew an adverse inference that Leeder instructed BDO to remove the settlement proceeds from its draft valuation report and BDO complied.
The judge held that non-compliance with Article 12.1 USA (valuation ) was a fundamental breach of the buy -sell mechanism which deprived Warwick of the bargain he had made in the SPA using the 5 part test set out in Place Concorde East Limited Partnership v. Shelter Corporation of Canada (2006), 2006 CanLII 16346 (ON CA). (para. 35)
The judge found that the two serious breaches each on their own justified the exceptional remedy of repudiation and therefore the share purchase transaction was at an end and Warwick continued to hold his shares. (para.36)
ONCA considered the following issues:
- Was the share purchase transaction a separate stand-alone contract capable of being repudiated?
- If so, did Leeder repudiate the contract?
The ONCA held that the application judge erred in concluding that the buy-sell mechanism did not give rise to a standalone agreement. It was a standalone contract and as such it was capable of being repudiated. There was no error in the application judge’s decision that the agreement was breached and that the breaches amounted to a repudiation. As the judge made an extricable error of law, the standard of review was correctness. (paras. 39–40)
Trotter J.A, writing for the ONCA, held that normally deference is given to the lower judge on matters of contract interpretation. However, in this case, because the decision that the agreement had been repudiated rested on the assumption that it did not matter if the buy-sell agreement was a stand-alone contract or not, the error was reviewable. (para. 42)
Repudiation occurs when the entire foundation of a contract has been undermined; where the very thing bargained for has not been provided. It allows the non-repudiating party to elect to treat the contract as at an end and relieves the parties from further performance of the contract. (para. 43)
There is no such thing as partial repudiation. The application judge could not find, on one hand, that the share purchase agreement was merely an implementation of the USA, but, on the other hand that the transaction agreement alone had been repudiated. The decision was based on an incorrect legal assumption and therefore, the decision was not entitled to deference. (para. 44)
The ONCA did not consider the Blackmore case helpful in the interpretation issues in this case. Blackmore dealt with a shotgun clause that once invoked severs the shareholder relationship and cannot be stopped, which is different than a buy-sell mechanism. The invocation of a shotgun clause is the exercise of a contractual term rather than an offer to create a new contract. (paras. 45-47)
The ONCA noted that unlike a shotgun clause, the buy- sell mechanism in Article 8 was not compulsory until the Company, or the shareholders, agreed to purchase the shares. (para. 50) The ONCA held that USA Article 8.2. created something like a right of first refusal or option, giving rise to a new contractual arrangement based upon the offer to sell and acceptance of the offer by the Company or the other shareholders. The buy sell mechanism required both an offer and acceptance which make it a stand-alone contract. (para. 51-52)
The ONCA held that it was an error to characterize the buy-sell mechanism in this case by relying on the analysis of the shotgun clause in Blackmore. The ONCA held that the agreement to sell Warwick’s shares was a stand-alone agreement that arose from and incorporated the terms of the USA, specifically Article 12, the valuation procedure. (paras. 51-58)
The ONCA agreed with the application judge that Leeder had disregarded contractual provisions that were designed to generate a fair price for the sale of the shares, which was at the heart of the share-purchase agreement. These were not procedural requirements – they were essential terms of the contract. (para. 60)
Leeder repudiated the share purchase agreement by failing to comply with the valuation provisions set out in Article 12 USA with respect to appointment of the real estate appraisers and the requirement that the valuation report be prepared according to GAAP. (paras. 59–66) As a result, Warwick did not have to sell his shares.