ONTARIO – Shareholder Remedies – Oppression – Except in rare circumstances, the principles for granting interlocutory injunctive relief apply when such relief is sought in the context of an oppression case.
ONTARIO – Interlocutory Injunctions – The strong prima facie case test does not invariably apply in an oppression case. However, where the relief sought is in the nature of a mandatory interlocutory injunction, such as an order to preserve assets, the strong prima facie test applies.
ONTARIO – Consolidation – The purpose of the test under Rule 6.01(1) is to avoid a multiplicity of proceedings, to promote expeditious and inexpensive disputes determination, and to avoid inconsistent judicial findings. Where the criteria of the Rule are met, the Court will assess the balance of convenience. While a multiplicity of legal proceedings should be avoided as far as possible, multiple proceedings might be required in some circumstances to secure the just, most expeditious and least expensive determination of disputes. The analysis is fact specific.
ONTARIO – Conversion of An Action into an Application – The four-factor test under Rule 38.10 applies: are material facts in dispute; are there complex issues requiring expert and/or a weighing of the evidence; is there a need for the exchange of pleadings and for discoveries; and what is the importance and impact of the application and of the relief sought.
McGrath et al. v. Desai et al.
2023 ONSC 7094 (December 15, 2023)
Ontario Superior Court of Justice (Vermette J.)
In this oppression application, the Applicants moved for certain interlocutory relief in regard to the Applicants’ shareholdings in The Hiive Company Limited (“THCL”), Hiive Markets Limited (“HML”) and Hiive Technology Limited (“HTL”) (collectively, “Hiive”). The Respondents brought a cross-motion that the application proceed as an action and that it be consolidated with or heard at the same time as or immediately after, an action the Respondents had commenced. (paras. 1-3)
The Court dismissed the Applicants’ motion because they did not meet the test for an interlocutory injunction but granted the cross-motion.
The Applicant Setter Capital, Inc. (“Setter”) was an Ontario-based broker-dealer in the secondary market for private securities. The Applicant Peter McGrath is Setter’s principal. The Respondent Simren Desai was previously Setter’s Managing Director, Head of Venture Capital. Desai operated a sole proprietorship, the Respondent SSD Enterprises (“SSD”). (paras. 6-7)
The Hiive corporations were all incorporated in August 2021. Desai and his wife, Sarah Huggins, are the directors of THCL. HML and HTL are wholly owned subsidiaries of THCL. HTL was recently amalgamated with THCL. The Hiive corporations operate an online marketplace for secondary transactions in private venture capital backed companies. (para. 8)
SSD and McGrath entered into an “Investment Agreement” on July 22, 2021, regarding a business that was described as “an online marketplace for secondary transactions in private venture capital backed companies […] with natural expansions of business lines in the future as determined by its management and shareholders in their sole and collective discretion” (“Business”). The Business was to be transferred to a Canadian corporation or a group of affiliated corporations (para. 9)
Vermette J. noted that there was a significant amount of evidence regarding the events that followed execution of the Investment Agreement. Many issues arose between the parties related to the implementation of that agreement. McGrath was never issued shares in Hiive. Desai took the position that McGrath had repudiated the Investment Agreement in March 2022, which McGrath denied. (para. 17)
Motion for Interlocutory Injunction
When seeking a mandatory interlocutory injunction, the moving party must demonstrate a strong prima facie case that they will succeed at trial, which means a strong likelihood of success at trial on the law and evidence. Justice Vermette held that “[i]n characterizing an interlocutory injunction as mandatory or prohibitive, the motion judge has to look past the form and the language in which the order sought is framed in order to identify the substance of what is being sought.” (para. 27)
The parties disagreed whether the injunctive relief sought was mandatory or not. The Court did not agree with the Respondents that the strong prima facie case test “invariably” applies when an injunction is sought in an oppression case. The Court rejected the “invariably” argument, noting that while this principle had been suggested in some cases, doubts have been raised about such a stand-alone principle. Justice Vermette also noted that most of the Respondent’s authorities pre-dated the SCC decision in R. v. Canadian Broadcasting Corp., 2018 SCC 5 (“CBC”), in which the SCC discussed the applicability of the strong prima facie test. (paras. 28-29)
However, on the facts of this case, Justice Vermette concluded that the strong prima facie case test applied because most of the relief the Applicants sought was to restrain the Respondents from disposing of their assets pending the trial outcome. The Applicants were “effectively seeking execution prior to judgment.” The Court held that the strong prima facie case test applied to that type of relief. (para. 32)
The Court also determined that some of the relief sought was in the nature of a mandatory interlocutory order, such as preserving the disputed Hiive shares, to which the strong prima facie case test also applied. (para. 33)
On the irreparable harm leg of the test, the Applicant argued that “where interim relief is sought under subsection 248(3) of the OBCA, the court ‘has discretion to forego compliance with either or both of the irreparable harm and balance of convenience requirements of the [interlocutory injunction] test where fairness so dictates.’” (para. 36)
Justice Vermette held that the test for interlocutory injunctive relief applied to this case. In doing so, the Court applied Lakhani v. Gilla Enterprises Inc., 2019 ONSC 1727 at para. 37 (“Lakhani”). Vermette J. found that, as in Lakhani, “it cannot be said in this case that the dictates of fairness are so overwhelming that it is appropriate to forego compliance with any part of the test.” The Court also held that “while there may be weaknesses in the Respondents’ case and questions can be raised with respect to some of their conduct, the same can be said about the Applicants and their case.” (paras. 38-39)
Finally, the Court held that “in the current context of backlog and scarce judicial resources, where the provision of urgent hearing dates for urgent matters is difficult at times, I see no valid reasons to allow parties in oppression cases to obtain urgent dates and scarce resources for interlocutory injunction motions – which are presumed to be urgent – if the matter is not truly urgent and does not involve alleged irreparable harm.” (para. 40)
Application to This Case
The Court only found it necessary to address whether the Applicants met the first part of the test for an interlocutory injunction with respect to the relief sought to preserve Mr. McGrath’s alleged right to be a 25% or 30% shareholder of Hiive. (para. 41) That request was “based on the premise that the Applicants would be able to obtain, in effect, an order for specific performance of the Investment Agreement (either at common law or under section 248 of the OBCA) with respect to the issuance of shares to Mr. McGrath.” (para. 42)
The Applicants argued that the Ontario Court of Appeal had endorsed specific performance for purchases of shares in private companies, citing the UBS Securities Canada, Inc. v. Sands Brothers Canada, Ltd. 2009 ONCA 328 (“UBS”) case. Justice Vermette distinguished UBS on the basis that it involved the purchase and sale of 100,000 shares on the Montreal Exchange and did not, like the case before her, involve a small startup company run by a couple. Specific performance was a question “rooted firmly in the facts of an individual case and depends on what would better serve justice between the parties.” (paras. 43-44)
The Court was not satisfied that the Applicants showed a strong prima facie case that there was a strong likelihood the Applicants would ultimately succeed in obtaining the relief they sought in the nature of specific performance regarding issuing the Hiive shares. (para. 45)
The Applicants’ interest in Hiive’s shares was monetary. Because they had not been actively involved in the company’s operation, it was “hard to imagine what legitimate interest they could have, other than a purely monetary one as shareholders.” Where only money was at stake, damages are an appropriate remedy. (para. 46)
There was also no evidence that a valuator would be unable to determine fair value for the shares. If shares can be valued, the Court held that any harm related to them could be compensated in damages. (para. 47)
Given the equitable nature of the remedy and the irretrievably broken relationship between the parties, the Court found that it was highly unlikely that a court would allow Mr. McGrath to become a 25% or 30% shareholder of Hiive again. Such an order would be a “recipe for more disputes and more litigation, which would ultimately have a detrimental effect on Hiive (including its employees and clients). The Court found that such an order would not be the best remedy to serve justice between the parties. (para. 48)
The Court held that the strong prima facie case was not met for the specific performance relief sought. (para 49)
Justice Vermette held that the Applicants failed to establish that they would suffer irreparable harm if the injunctive relief was not granted. “In my view, Mr. McGrath’s evidence and concerns on the issue of harm are speculative. As stated above, bald allegations or general beliefs or concerns are insufficient to satisfy the requirement of showing irreparable harm.” (para. 53)
The Court held that the balance of convenience favoured the Respondents. In doing so, it accepted the Respondents’ evidence that it was more likely that Hiive would be financially successful if the injunction is not granted. (para. 55)
The Court declined to grant the relief sought by the Applicants. (para. 56)
The Respondents filed a cross-motion requesting that this Application be treated as an action and that it either be consolidated with, heard concurrently with, or scheduled immediately following the action initiated by the Respondents in Court File No. CV-23-00704696-0000 (“Action”). The Applicants consented to consolidation but only if that could be effected in a way that avoids prejudicial delay in determination of the Application. The Application was commenced over a year before the Action and was scheduled to be heard in January 2025. They otherwise opposed consolidation. The Applicants argued that any disadvantage from the two proceedings continuing separately could be mitigated by an order that: “(a) the findings in the Application bind the parties in the Action, and (b) the deemed undertaking rule is waived as between the two proceedings.” (paras. 60-61)
Given that the interlocutory injunction was not granted, and the Court could not ensure that a consolidated hybrid trial could take place in early 2025, the Court assessed this issue as a contested one. (para. 64)
The underlying purpose of the test for consolidation under Rule 6.01(1) of the Rules of Civil Procedure “is to avoid multiplicity of proceedings, to promote expeditious and inexpensive determination of disputes, and to avoid inconsistent judicial findings.” The threshold question is to determine if the criteria under the Rule have been met. If they have, the Court must then consider whether the balance of convenience favours consolidation. (para. 66) Citing CN v. Holmes 2011 ONSC 4837, the Court held that “while a multiplicity of legal proceedings should be avoided as far as possible, multiple proceedings might be required in some circumstances to secure the just, most expeditious and least expensive determination of disputes, in accordance with Rule 1.04 of the Rules of Civil Procedure. Whether there should be one proceeding or two ‘turns on the particular facts of any case and the various litigation-related considerations attaching to any case.’” (para. 67)
In 1014864 Ontario Ltd. v. 1721789 Ontario Inc. 2010 ONSC 3306, Master Dash set out a non-exhaustive list of 17 factors the court may consider when determining whether to order consolidation. (para. 68)
The Court found that in this case, at least two criteria under Rule 6.01(1) had been met, namely, common questions of law and fact and relief arising from the same transaction. (para. 69) It then found that the balance of convenience favoured the order based on a number of factors. (para. 70)
Based on the unique facts of the case, the Court concluded that consolidating or hearing the Application and the Action together was the just, most expeditious, and cost-effective approach to resolving the entire dispute between the parties. The issue of whether the proceedings could be consolidated or heard together would be determined after the parties had an opportunity to discuss and agree on the next steps. (para. 71)
Conversion to an Action
The Court addressed the four factors under Rule 38.10 relevant to the determination of whether an application should proceed as an action and found as follows:
- Material facts in dispute – There were material facts in dispute. The parties had distinct factual narratives that were relevant to the issues between them. Vermette J. found that “[a]lthough contractual interpretation is an objective exercise, the parties do not agree about the relevant surrounding circumstances known to the parties at the time of the formation of the contract. They also disagree on the correct interpretation of the Investment Agreement, and extrinsic evidence may be admissible to resolve ambiguities and interpretive problems.” ( 76-77)
- Complex issues requiring expert and/or a weighing of the evidence – There were complex factual issues that would require weighing of the evidence and making credibility findings. While expert evidence was not a significant factor, an industry expert may be required. ( 78)
- Whether there is a need for the exchange of pleadings and for discoveries – Despite the large evidentiary record, the Court found that there appeared to be a need for discoveries. ( 79)
- The importance and impact of the application and of the relief sought – The Court found that the “substantial resources that have been poured into this litigation” show its importance to the parties. The Court also noted that the relief sought in the Application could have a significant impact on the Respondents and their employees ( 80)
The Court found that there was good reason to order that the Application proceed to trial. Justice Vermette held that the Application should not proceed purely as an Application, however, since it will be consolidated or heard together with the Action. There was flexibility in determining how the two proceedings would move forward. The Applicants had proposed procedural terms largely acceptable to the Respondents. The Court agreed with the parties’ submission that if consolidation were ordered, they should have an opportunity to discuss and try to agree on the next steps. If they could not reach an agreement, a case conference would be scheduled before Justice Vermette. (paras. 81-83)