Denille Industries Ltd. v. Island Enterprises Inc., 2011 ABQB 347

Court of Queen ’ s Bench of Alberta Citation: Denille Industries Ltd. v. Island Enterprises Inc., 2011 ABQB 347 Date: 20110527 Docket: 1103 01107 Registry: Edmonton Between: Denille Industries Ltd. Applicant - and - Island Enterprises Inc. Respondent _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice P.B.

Michalyshyn _______________________________________________________ Introduction [ 1 ] Denille Industries Ltd. ("Denille") applies by originating application filed January 21, 2011 for an order that the respondent Island Enterprises Inc. ("Island") has committed a "Withdrawing Event" as defined in a Unanimous Shareholders Agreement ("USA") such that Island is compelled to sell its shares in Western Camp Services Ltd. ("Western Camp"). For reasons which follow, I decline to make the declaration sought. Background Facts

[ 2 ] Western Camp is in the business of providing camp services in the oil patch. The company was incorporated in 2003 by Wayne Sopp, Menno Admiraal and Guy Bouvier ("the Principal Shareholders") through their respective holding companies and with the following share ownership: Island (40/100); Admiraal Ventures Corp.; ("Admiraal"- 20/100); and Denille (40/100). [ 3 ] Wayne Sopp died February 14, 2010. [ 4 ] On July 30, 2010 Island gave notice under

Article 5.7 of the USA requiring Admiraal to buy 1 of Island's 40 shares. The same notice required Denille to buy 0 shares. On August 16, 2010 Admiraal and Island entered into a share sale and purchase agreement. [ 5 ] On August 24, 2010 Denille objected that Island's July 30, 2010 notice was invalid in that it violated

Article 3.6(

d) of the USA. Denille also gave notice (

a) that under

Article 5.8 of the USA it intended to buy 27 of Island's remaining shares in Western Camp; and (

b) that Island's sale of 1 share to Admiraal was a Withdrawing Event as defined in the USA. [ 6 ] As noted below, Articles 1.1 and 9 of the USA deal with the definition and remedies available on the occasion of a Withdrawing Event. [ 7 ] On January 21, 2011 Denille issued this application seeking a declaration there was a Withdrawing Event, and in the event of such a declaration, certain other consequential orders. Relevant Provisions of the Unanimous Shareholders Agreement [ 8 ] I have considered the entire USA, but in particular the following provisions:

Article 1 -

Interpretation 1.1

Definitions

(1) HOLDING CORPORATION means any body corporate which from time to time is or may become a SHAREHOLDER of the CORPORATION.; (

p) PRINCIPAL SHAREHOLDER means an individual who ultimately directly or indirectly CONTROLS a HOLDING CORPORATION; (

q) REMAINING SHAREHOLDER means any SHAREHOLDER who is not at the particular time a WITHDRAWING SHAREHOLDER; (

x) WITHDRAWING EVENT means, with respect to any SHAREHOLDER: (iii) the failure by that SHAREHOLDER to obtain, perform or carry out any of his obligations hereunder where such failure continues for thirty (30) days after notice in writing from the other SHAREHOLDERS or any one of them demanding that such default be cured; (viii) the death of that SHAREHOLDER or its PRINCIPAL SHAREHOLDER, as applicable, where no Insurance Proceeds are received or receivable;

(ix) that SHAREHOLDER or its PRINCIPAL SHAREHOLDER, as applicable, being judged insane or incompetent to handle his own affairs by a court of competent jurisdiction; (

x) an order made by a court of competent jurisdiction purporting to deal with a SHAREHOLDER'S INTEREST pursuant to the Matrimonial Property Act (Alberta) or other similar legislation; (xi) "a sale, transfer or assignment of that SHAREHOLDER'S INTEREST in contravention of this AGREEMENT"; (

y) WITHDRAWING SHAREHOLDER means the SHAREHOLDER in respect of whom a WITHDRAWING EVENT has occurred or the HOLDING CORPORATION CONTROLLED by the PRINCIPAL SHAREHOLDER in respect of whom a WITHDRAWING EVENT has occurred;

Article 2 - Implementation of Agreement 2.1 Deemed Consents Each SHAREHOLDER shall be deemed to have consented to any transfer of SHARES made in accordance with this Agreement …

Article 3 - Conduct of the Affairs and Business of the Corporation 3.6 Matters Requiring Unanimous Consent Unless other agreed by the unanimous consent of the VOTING SHAREHOLDERS, the SHAREHOLDERS shall not cause or permit the CORPORATION, and the BOARD shall not authorize the CORPORATION or the OFFICERS to: (

d) issue SHARES or grant options to acquire SHARES or enter into or undergo any reorganization which would have the effect of altering the proportionate shareholdings of the SHAREHOLDERS ... (

h) approve the transfer of any SHARES other than those transfers contemplated or permitted by this Agreement; (

j) add or change the restrictions on the transfer of SHARES; 3.8 Full Time Commitment For so long as they are PRINCIPAL SHAREHOLDERS, Wayne Sopp and Menno Admiraal shall devote their full business time and energies to the business and affairs of the CORPORATION.

Article 4 - Shares 4.3 Restriction on Alienation

The SHAREHOLDERS will not sell, transfer, convey or assign all or any portion of their SHARES or ADVANCES except as permitted by this Agreement without the unanimous prior written consent of the SHAREHOLDERS. 4.6 Disposition For the purposes of this Agreement, any transfer, sale, assignment, mortgage, encumbrance or other disposition of shares in the share capital of any corporation having the result (directly or indirectly and either immediately or subject to the happening of any contingency) of changing the identity of the person or persons exercising or who might exercise CONTROL of any HOLDING CORPORATION (from the applicable party exercising CONTROL of any such HOLDING CORPORATION as of the date of execution of this Agreement) shall be deemed to be a transfer by such HOLDING CORPORATION of its SHAREHOLDER'S INTEREST hereunder, notwithstanding whether such change shall be voluntary or involuntary on the part of such HOLDING CORPORATION. 4.3 Restriction on Alienation The SHAREHOLDERS will not sell, transfer, convey or assign all or any portion of their SHARES or ADVANCES except as permitted by this Agreement without the unanimous prior written consent of the SHAREHOLDERS.

Article 5 - Purchase Upon Death 5.1 Insurance Upon approval by SPECIAL RESOLUTION of the VOTING SHAREHOLDERS, the CORPORATION will maintain or cause to be maintained in good standing a life insurance policy or policies on one or more of the PRINCIPAL SHAREHOLDERS (the policies or replacements thereof maintained under this

Article being hereinafter sometimes called the "Insurance"). (As noted, this was done in the present circumstances and the insurance proceeds are available.) 5.2 No Assignment The CORPORATION shall hold the Insurance and receive all proceeds of the Insurance (in this

Article referred to as the "Insurance Proceeds") upon the terms and conditions provided herein. The CORPORATION shall not hypothecate, charge, encumber, assign or dispose of its interest in the Insurance or any part thereof, change the beneficiary thereunder or borrow on the security of that interest, subject always to the terms and conditions of this Agreement. 5.3 Payment of Premiums The CORPORATION shall pay promptly when due all premiums for the Insurance. 5.4 Termination of Obligations (

c) the completion of the various procedures and transactions which, by the terms of this Article, are to come about following the death of any of the PRINCIPAL SHAREHOLDERS (such person being herein called the "Deceased"); or (

d) the existence: at the date of death of the Deceased of the legal disability of the CORPORATION under the provisions of the ACT to purchase the Deceased's Shares (as hereinafter defined) and the continuance of such disability for more than one hundred eighty

(180) days following the date of death of the Deceased. 5.5 Capital Dividend Account The parties acknowledge that, in accordance with applicable law, some portion of the insurance Proceeds shall, upon receipt thereof by the CORPORATION, form part of its capital dividend account (in this

Article called the "CDR"). 5.6 Use of Insurance Proceeds The CORPORATION agrees to use the Insurance Proceeds received on the death of the Deceased for no other purpose other than as required or allowed under the terms of this Agreement. 5.7 Put Arrangements Upon the death of the Deceased and within One Hundred Eighty (180) days thereafter, the personal representative of the Deceased or the HOLDING CORPORATION of which the Deceased was PRINCIPAL SHAREHOLDER, as the case may be (hereinafter in this

Article sometimes called the "Vendor"), shall be entitled to send a notice in writing to the CORPORATION and the surviving SHAREHOLDER(S) (hereinafter in this

Article sometimes collectively called the "Purchasers") requiring each of the Purchasers to purchase such number of shares of the CORPORATION beneficially owned by the. Vendor as the Vendor shall designate (hereinafter in this

Article sometimes called the "Deceased's Shares") and the Purchasers shall purchase from the Vendor the Deceased's Shares for a total purchase price computed in accordance with the terms and conditions set forth in this

Article (in this

Article called the "Purchase Price"). The closing date (in this

Article called the "Purchase Date") for the purchase and sale of the Deceased's Shares shall be that date determined in accordance with the CLOSING ARTICLE. 5.8 Call Arrangements In the event that the Vendor does not send notice in accordance with

Article 5.7 hereof within the time limit set out therein, the Purchasers shall be entitled, for a further period of thirty (30) days, to send a notice in writing to the Vendor requiring the Vendor to sell such number of shares of the Corporation beneficially owned by the Vendor to the Purchasers as the Purchasers shall designate (hereinafter in this

Article sometimes called the "Deceased's Shares") and the Purchasers shall purchase from the Vendor the Deceased's Shares for a total purchase price computed in accordance with the terms and conditions set forth in this

Article (in this

Article called the "Purchase Price"). The closing date (in this

Article Called the "Purchase Date") for the purchase and sale of the Deceased's Shares shall be that date determined in accordance with the CLOSING ARTICLE. 5.11 Payment of Purchase Price The SHAREHOLDERS hereto agree to exercise their vote and influence to cause the CORPORATION to: (

a) collect the Insurance Proceeds as soon as possible and shall use the Insurance Proceeds to pay the Purchase Price on the Purchase Date; If the Insurance Proceeds are insufficient to pay the entire amount of the Purchase Price, the remainder of the Purchase Price shall be paid in accordance with the CLOSING ARTICLE. If the Insurance Proceeds are in excess of the Purchase Price, one hundred (100%) per cent of such excess shall be retained by the CORPORATION. 5.13 Assurances by Parties

Each of the SHAREHOLDERS agrees that he, she or it, as applicable, shall promptly as required take all reasonable steps and use its best endeavours to assure that the Purchasers will be in a position upon the death of the Deceased to purchase the Deceased's Shares or, in the event that the Purchasers are not in such a position, each SHAREHOLDER hereto agrees to expeditiously and in good faith use its best endeavours to place the Purchasers in such position.

Article 6 - Disability 6.1 Sale on Disability … In the event that the Afflicted SHAREHOLDER remains unable to return to active full time employment for a period in excess of twelve (12) months from the date of the affliction (as evidenced by the statements of two independent doctors), the other SHAREHOLDERS (hereinafter referred to as the "Non-afflicted SHAREHOLDERS") may serve notice on the Afflicted SHAREHOLDER intention to purchase the Afflicted SHAREHOLDER'S SHARES in the same proportion as the respective holdings of SHARES in the CORPORATION of the Non-afflicted SHAREHOLDERS.

In the event that the foregoing notice is not served on the Afflicted SHAREHOLDER and he remains unable to return to active full time employment for a period of two (2) years from the date of the affliction, such Afflicted SHAREHOLDER may save notice on the Non-afflicted SHAREHOLDERS requiring them to purchase the Afflicted SHAREHOLDER'S SHARES in the same proportion as the respective holdings of SHARES in the CORPORATION of the Non-afflicted SHAREHOLDERS. … In the event that an Afflicted SHAREHOLDER is unable to continue full time employment as a result of a pre-existing condition or previous illness which re-occurs prior to the fifth (5th) anniversary of this Agreement, the other SHAREHOLDERS (hereinafter referred to as the "Non-afflicted SHAREHOLDERS") may, immediately upon the Afflicted SHAREHOLDER becoming unable to continue full time employment, serve notice on the Afflicted SHAREHOLDER of intention to purchase the Afflicted SHAREHOLDER'S SHARES in the same proportion as the respective holdings of SHARES in the CORPORATION of the Non-afflicted SHAREHOLDERS.

Article 9 - Withdrawing Event 9.1 Remedies Upon the occurrence of a WITHDRAWING EVENT, the REMAINING SHAREHOLDERS may do any one or more of the following ...

Article 12 - General Provisions 12.2 Further Assurances The PARTIES and each of them do hereby covenant and agree to do such things and execute such further documents, agreements and assurances as may be necessary or advisable from time to time in order to carry out the terms and conditions of this Agreement in accordance with their true intent. 12.3 Singular, plural and gender Wherever the singular, plural ... is used throughout this Agreement the same shall be construed as meaning the singular, plural ... where the fact or context so requires ..."

12.6 Entire Agreement This Agreement constitutes the entire agreement between the PARTIES relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the PARTIES and there are no warranties, representations or other agreements among the PARTIES in connection with the subject matter hereof except as specifically set forth herein.

Positions of the Parties [ 9 ] The parties agree the USA is unambiguous and that I must therefore interpret the USA without regard for extrinsic evidence, even where such evidence may appear in the affidavits filed in support of the application, or in opposition to it, and where this may be so I have considered only that evidence that goes to the context of the parties' agreement.

The parties emphasize the existence of the usual 'entire agreement' clause. [ 10 ] Denille argues the USA can be read to require that where a principal shareholder dies - here Wayne Sopp - that principal shareholder's interest in Western Camp must be sold to the remaining shareholders on a pro-rata basis. Denille argues that any available insurance proceeds on the life of the deceased must be used in aid of that purchase.

Denille says it was never the intention of the parties that a third party, e.g., a spouse, friend, or relative, should succeed the deceased by gaining an ownership interest in the company. [ 11 ] Given Denille's

interpretation of the USA, it obviously then objects to Island's sale of 1 of its 40 shares to Admiraal, and 0 shares to Denille. Denille says that on Wayne Sopp's death, Island's 40% interest was to be split pro-rata between the remaining shareholders with Island's beneficiaries to be paid out by way of the insurance proceeds. Denille argues that the July 30, 2010 transaction between Island and Admiraal occurred without its consent and violated Article 3(6)(

d) of the USA in that the sale altered the proportionate shareholdings of the shareholders. Denille says the violation of Article 3(6)(

d) was a Withdrawing Event. Denille says that on the occasion of a Withdrawing Event, it is entitled to exercise the buy/sell provisions of

Article 9.2 of the USA. [ 12 ] For its part, Island argues that if the parties intended to restrict third party succession in the manner urged by Denille, they could easily have said so clearly in the USA. Island notes the absence of any such clear words. Island argues that Denille's position would make the "put" and "call" provisions (Articles 5.7 and 5.8) of the USA superfluous. [ 13 ] Island argues the plain meaning of the USA entitles but does not require Island pursuant to

Article 5.7 to compel the purchase of some or all of its shares. Island argues that likewise,

Article 5.8 entitles but does not require Western Camp and its remaining shareholders to purchase some or all of the shares owned by Island. In any event, Island argues any such purchase cannot be unilateral, but must be made by Western Camp and all the remaining shareholders acting in concert. [ 14 ] Island therefore says it was entitled under

Article 5.7 of the USA to sell 1 share to Admiraal, and to specify it would sell 0 shares to Denille. The insurance on Wayne Sopp's life was not called on to pay for that transaction. As to the aspect of insurance, Island argues the availability of insurance is a convenience in the event a sale/purchase is contemplated; if however there is no sale/purchase or only a limited one, Island argues the USA logically provides that any remaining insurance monies go to the company. [ 15 ] Island disagrees the sale amounts to a Withdrawing Event on account of a violation of Article 3(6)(

d) of the USA. It says Article 3(6)(

d) was in fact complied with; Island points to

Article 2.1 which provides that a shareholder is deemed to consent to any transfer of shares "made in accordance with [the USA]". [ 16 ] Finally - or perhaps as a threshold point - Island says that even if anything occurred which could be called a Withdrawing Event, the USA's

Article 9 remedies must be exercised by the "Remaining Shareholders" and not, as here, by Denille acting unilaterally. Analysis

[ 17 ] Numerous cases are referred to in the parties' briefs all dealing with the

interpretation of contracts in the absence of material issues of fact. The law as set out in, for example Dow Chemical Canada Inc. v. Shell Chemicals Canada Ltd. 2010 ABCA 126 , is not in dispute. In connection with the general principles for the

interpretation of contracts I was referred specifically to and have considered the very recent decision in Keephills Aggregate Company Limited v. Riverview Properties Inc. 2011 ABCA 101 , particularly paragraphs 12-13 and the admonitions that: …it is not the function of the court to rewrite a contract for the parties … [or] to relieve one of the parties against the consequences of an improvident contract; …courts should prefer

interpretations that are consistent with the reasonable expectations of the parties, including compelling notions of business efficacy in such a context, so long as such an

interpretation can be supported by the text; Courts should avoid

interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded [referring to an insurance contract]; The law does not license a judicial exploration of the negotiations of the parties in pursuit of the agreement that the court assumes would best balance the parties' respective interests; But every word in a contract is presumed to make sense and to have a specific role to play in advancing the contractual purpose. To the extent that it is possible to do so, courts should avoid adopting

interpretations that render any portion of a contract meaningless or redundant. [ 18 ] In its originating application Denille seeks a declaration that Island committed a Withdrawing Event as defined in the USA. On the facts and as I interpret the USA I am unable to find such an event occurred. [ 19 ] I agree with Island that

Article 5.7 plainly read does not prohibit Island from requiring Admiraal to buy 1 share, and requiring Denille to buy 0 shares. Granted, Island's notice under

Article 5.7 obviously alters the proportion of shareholdings. Without more, however, the action taken under

Article 5.7 is permitted, and thus attracts the deemed consent provision in

Article 2.1. I could find otherwise only by giving no effect to

Article 5.7 or for that matter its companion,

Article 5.8. I could do so only in breach of the rule of

interpretation repeated in Keephills , and by adopting an

interpretation that rendered those articles meaningless or redundant. [ 20 ] I find, in any event, that

Article 5.8 must be read to enable the "Purchasers", as defined in the USA as collectively Western Camp and the remaining shareholders, to force the sale of the Vendor's remaining interest in the company. As such, I find that Denille's unilateral notice under

Article 5.8 was invalid. [ 21 ] In a similar vein, I find that

Article 9.1 must be read to provide that the "Remaining Shareholders" only acting in concert are able to rely on the remedies provided on the occasion of a Withdrawing Event. As such, again Denille's unilateral reliance on

Article 9.1 is invalid. [ 22 ] I read "Remaining Shareholders" as being all of them, rather than as either of them as urged upon me by Denille in argument. The former reading is logical, internally consistent with other provisions in the USA including

Article 5.8, and consistent with

Article 12.3, which provides that when the plural is used it shall be construed to mean the plural, where the fact or context so requires. [ 23 ] Counsel for Denille acknowledges that Articles 5.7 and 5.8 are difficult to reconcile with the manner in which he argues the USA should be interpreted. [ 24 ] Given my

interpretation of Articles 5.7/5.8 and related provisions, it follows that I am unable to accept Denille's arguments

that the USA, read as a whole, intended to restrict ownership to one or some combination of the original principal shareholders.

To the contrary, I find that the USA as a whole evidences an intention, on the death of an original principal shareholder, to establish a flexible succession regime and one which operates with the unanimous consent - deemed or actual - of the company and all of the remaining shareholders. [ 25 ] Notwithstanding these findings, I will nevertheless address Denille's other specific arguments in favour of the opposite result. [ 26 ] Denille argues that mandatory language around the use of life insurance proceeds supports its cause that a forced sale of a deceased's holding company's interest in Western Camp was intended by the parties to the USA.

The language referred to however is at

Article 5.11 and to some extent at

Article 5.13. These articles do not stand alone, but are triggered by the exercise of the "put" or "call" arrangements in Articles 5.7 or 5.8. It is perfectly logical, as in the facts of this case, that a "put" arrangement could occur without resort to life insurance proceeds. Articles 5.11/5.13 then become irrelevant - but I hasten to add not inconsistent with the USA overall - except to the extent that

Article 5.11 directs the excess life insurance proceeds be retained by the corporation. [ 27 ] Denille refers to

Article 1.1(x)(viii) - which defines as a Withdrawing Event the death of a principal shareholder where no insurance proceeds are received or receivable - as consistent with its view that where insurance does exist, it must be used to buy out the interest of the deceased shareholder. The connection here is not at all obvious. In any event, there is no inconsistency between this very specific

article and the other insurance provisions properly interpreted as part of the overall USA. [ 28 ] Denille refers similarly to Articles 1.1(x)(ix) and 1.1(x)(

x) which define as Withdrawing Events a principal shareholder being judged insane or incompetent, and a principal shareholder's interest being the subject of a Matrimonial Property Act order. Denille says these provisions support an

interpretation that the USA was never intended to allow a principal shareholder's guardian or spouse to gain ownership in the corporation. Again, that is not obvious. And again, these very specific articles are not inconsistent with the USA, properly interpreted. What is more, with regard to these specific Withdrawing Events, it must be said again that they become relevant only when all the Remaining Shareholders bring them into play:

Article 9.1. They are thus optional, not mandatory events. [ 29 ] Finally, Denille refers to Articles 4.3/4.6 which restrict alienation of shares.

Article 4.3 however allows alienation if permitted by the USA or with unanimous prior written consent of the shareholders. I have found that the transfer of shares under

Article 5.7 was permitted by the USA. Conclusion [ 30 ] For the reasons detailed above, Denille's application is dismissed. As I have not found a Withdrawing Event, the further remedies sought by Denille - an order that Island must sell its shares and an order providing for a valuation of those shares - are unnecessary. Costs [ 31 ] If the parties are unable to reach agreement they are free to speak to costs within 45 days of the release of this memorandum. Heard on the 12 th day of April, 2011. Dated at the City of Edmonton, Alberta this 27 th day of May, 2011.

P.B. Michalyshyn J.C.Q.B.A. Appearances: Stephen J. Livingston McLennan Ross LLP for the Plaintiff Gordon R. McKenzie, Q.C. Bishop & McKenzie LLP for the Defendant