ONTARIO – Corporations – In the absence of a signed Share Purchase Agreement (SPA) and corporate records, the court shall consider other evidence of the contract such as testimony of the professionals retained to complete the transition and the parties’ conduct after the transaction to establish an implied contract or de facto contract on the terms of the unsigned SPA.

ONTARIO –Remedies – Rectification –A rectification order gives effect to the parties’ true intentions, rather than to an erroneous transcription of those true intentions. The remedy is not available to address unanticipated consequences of a prior agreement.

John Richard Southwell v. Carlgate Development Inc. Julie Anne Reis and Isabelle Margaret Southwell
2024 ONSC 822 (CANLII) (February 9, 2024)
Ontario Superior Court of Justice (Jensen J.)

This was an application pursuant to the OBCA for rectification of a Share Purchase Agreement (“SPA”). The parties were family members

Background

The Applicant John Southwell sought: 1) a declaration that the individual respondents were not appointed directors of Carlgate Developments Inc. (“Carlgate”)’ 2) a declaration that his mother Isabelle Margaret Southwell (“Isabelle”) did not purchase shares in Carlgate; and 3) rectification of certain corporate documents pursuant to s. 250 of the Ontario Business Corporations Act . (paras. 1–2)

Carlgate was owned by the Applicant’s father John Richard Southwell (Mr. Southwell), who was initially the sole director and shareholder. In 2005, Mr. Southwell instructed his lawyer and accountant to reorganize Carlgate to minimize tax implications upon his death. Mr. Southwell died in April 2020.

The three individual parties were joint executors of the Estate. Isabelle was removed as executor because she developed dementia. (paras. 16–18)

The minute books and other documents relating to the 2005 corporate restructuring were either missing or destroyed according to the law firm that acted for the Company. (para. 8–11). The lawyer that handled the corporate reorganisation transaction gave evidence and produced signed and unsigned documents he could locate. The SPA that was produced was unsigned. (12–13)

In 2006, Mr. Southwell gifted the Applicant 20 Class A Shares in Carlgate.

Issues

1. Was there a valid and enforceable SPA selling Isabelle shares and valid resolutions appointing Isabelle and Julie as directors in 2005?
2. Should the documents be rectified pursuant to OBCA s. 250?

Analysis

Contract Formation

For a contract to be formed, there must be unambiguous evidence of a meeting of the minds. It must be clear there was an offer, acceptance, and consideration. The judge referred to S & J Gareri Trucking Ltd. V. Onyx, 2016 ONCA 505 (para. 23)

The Judge held that even though there was no signed SPA there was evidence that Mr. Southwell sold the shares to Isabelle. The evidence was that:

1. Southwell instructed the Company lawyer and accountant to undertake a reorganization to restructure the Company to minimize taxes upon his death.
2. The lawyer’s evidence was that he received instructions from the Company accountant to update the minute books and to undertake the reorganization.
3. The lawyer’s reporting letter to Mr. Southwell confirmed that the restructure steps were taken, and that 30 Class A Shares had been sold to Isabelle.
4. The lawyer believed the SPA was signed and was attached to his reporting letter.
5. The lawyer testified that the minute books and share registers were updated and the minute book was provided to Mr Southwell. (para. 27)

The parties conduct after the reorganization transaction confirmed that there had been a share sale to Isabelle. For example, a 2020 valuation report listed Isabelle as owning 30 % of the shares and the 2020/2021 corporate tax returns listed Isabelle as owning shares in the Company. The Judge noted that the Applicant did not object to Isabelle being described in these documents as a shareholder when Isabelle and Julie signed as directors of the Company in relation to a transfer of real property from the Company to the Applicant. (paras. 28 & 29)

The Judge referred to Robert Mandel et al. v 1909975 Ontario Inc et al, 2020 ONSC 5343 for the proposition that it is up to the trier of fact to weigh the conflicting evidence in the context of a particular transaction to determine whether judicial intervention is warranted or not. (para.30– 32)

The judge found that Mr. Southwell’s intention was clear – to sell 30 Class A Shares in the Company to Isabelle to minimize tax consequences upon his death. Even though the supporting director’s resolution was flawed, as only Mr. Southwell signed as director and the two other directors did not, the parties’ post-agreement conduct was evidence that the parties conducted themselves as if the share sale happened. (paras. 33–34)

The Judge disagreed with the Applicant that the SPA was an “agreement to agree” and held that the SPA did not require execution to be valid. The judge referred to Second Cup Ltd. V Niranjan (2007), 39 BLR (4^th) 73 (OSJ) in which the court held that, “the law recognizes that if parties to an unsigned contract conduct themselves as if they were bound by the unsigned contract, they are subject to an implied or defacto contract on the unsigned contract’s terms.” (paras. 35–37)

Directors

The Judge held that the individual respondents were properly appointed as directors of the Company based upon the following evidence:

1. The Resolution dated June 16, 2005, naming the individuals as directors.
2. The lawyer’s evidence set out above.
3. The Corporate Profile Report reflected the additional directors as of June 16, 2005.
4. The evidence of Julie Reis that Mr. Southwell was his “little secretary treasurer and right-hand man”.
5. The Applicant did not contest that Julie and Isabelle were directors after Mr Southwell’s death.
6. Julie and Isabelle conveyed real property from the Company to the Applicant and signed the Vendor’s certificate transferring ownership.
7. Julie and Isabelle signed the 2021 Financial Statements for the Company and the 2021 Valuation Report as directors of the Company. (para. 56)

Rectification

Section 250 of the OBCA codifies the equitable remedy of rectification. The Applicant sought rectification of the SPA and related corporate documents such that Mr. Southwell only intended to give shares in the Company to the Applicant and Julie, not to Isabelle.

The SCC in AG v Fairmont Hotels Inc., 2016 SCC 56 set out the guiding principles for a rectification order, which are to give effect to the parties’ true intentions, rather than to an erroneous transcription of those true intentions. (paras. 59–60) Courts rectify documents that do not correctly record agreements.

The test is set out in Fairmont. The remedy is available on the court being satisfied on a balance of probabilities that:

• There was a prior agreement whose terms are clear and ascertainable.
• The agreement was still in effect at the time the instrument was executed.
• The instrument failed to accurately record the agreement.
• The instrument if rectified, would carry out the parties’ prior agreement. (para. 62)

The Judge held that the Applicant did not meet the Fairmont test for the reasons set out above. Specifically, there was a valid and enforceable SPA by virtue of the parties’ conduct and the evidence that the Company’s lawyer reported the share sale and additional directors in his reporting letter, updated the minute books and share certificates, and sent the minute books to Mr Southwell. (para. 65) The remedy is not available to address the unanticipated negative consequences of a prior agreement. (para. 67)