Luebke v. Manluk Industries Inc., 2013 ABQB 264

Court of Queen ’ s Bench of Alberta Citation: Luebke v. Manluk Industries Inc., 2013 ABQB 264 Date: 20130513 Docket: 1203 05750 Registry: Edmonton Between: Juergen Luebke and 1568545 Alberta Ltd. Applicants - and - Manluk Industries Inc., FML Technologies Inc., Manfred Luebke and Frank Luebke Respondents _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice S. D.

Hillier _______________________________________________________ Introduction [ 1 ] The Applicants claim, pursuant to s. 242 of the Business Corporations Act , RSA 2000, c B-9 (ABCA), that the Respondents have acted in a manner alleged to have been oppressive, unfairly prejudicial, or in unfair disregard to the interests of the Applicants. [ 2 ] The dispute arises in the context of a highly successful family business. The Applicant, Juergen Luebke, a shareholder and

former director, has opposed certain actions of his father, Manfred Luebke, and his brother, Frank Luebke. The dispute centres on the decision of Manfred and Frank to remove Juergen as a director and employee. [ 3 ] Juergen presents his position based upon affidavit evidence and transcripts of questioning rather than a full trial. Problems were raised during argument as to credibility and conflicting perceptions of events. However, given the basic sufficiency of the evidence upon which the Court is able to rely, I opted not to direct a trial of the issues.

Evidence [ 4 ] Around 1978, Manfred incorporated a machining operation to produce valve components and other metal wear components for the oil and gas industry. Both sons, Juergen and Frank, became employees. While a number of related entities were established, Manfred maintained control and grew the business to a current annual sales volume of over $30 million with approximately 200 employees. [ 5 ] Over time, the structure of the six corporations referred to as the “ Manluk Group ” was divided into two fairly distinct operations: a.

Manluk Mining Inc. manufactures and sells wear components used in the mining industry; and b. Manluk Industries

(2008) Inc. ( “ Manluk Industries ” ) manufactures and sells valve components to original equipment manufacturers (OEMs). These OEMs, in turn, assemble valves from the components to make Well Heads and Christmas Trees and sell them to end users such as Encana or Shell. [ 6 ] The sons began work in the family business on a full time basis when Juergen finished high school and Frank was 14 years old.

Juergen eventually became Vice President in charge of Quality Control, generally responsible for the Manluk 2008 valve components side; Frank worked his way up to Vice President of Sales, generally responsible for the Mining side of the business. Manfred deposed that he had hoped his two sons would work together in the business he had built. [ 7 ] For a long time, Manfred maintained all ownership interest in the Manluk Group and was solely responsible for all business decisions.

Manfred eventually set up a Family Trust which held 10 shares in the major operating corporation (Wetaskiwin Machine Inc.), and Manfred held the remaining 90 shares. [ 8 ] In September 2009, the Family Trust transferred four shares to each of Juergen and Frank. The remaining two shares remained in the Family Trust, and Manfred continued to hold 90 shares with full control of all voting and business decisions as the sole director of all companies. [ 9 ] It was not until December 2010 that Manfred implemented a Succession Plan for the sons to begin to take over the business.

The share structure for the parent company, Manluk Industries, was as follows: a. 49% of the common voting shares were owned by Juergen through his holding company at an estimated value of $1.2M; b. 49% of the common voting shares were owned by Frank through his holding company at an estimated value of $1.2M; and c. 2% of the common voting shares were owned by Manfred, who also converted holdings to redeemable preferred shares with an estimated value in excess of $25M.

[ 10 ] The residual 2% voting shares maintained effective control in the hands of Manfred where the sons were not be able to reach agreement.

The rights attached to Manfred ’ s preferred shares prevent a dividend from being declared on any class of share if it would reduce the value of the assets of the corporation to an amount less than the aggregate of the redemption amount of all of the preferred shares issued and outstanding. [ 11 ] Neither of the sons was obliged to expend or invest funds personally to obtain these shares,; it was simply part of the Succession Plan. [ 12 ] This takes us to an important dispute or problem which arose in relation to an idea which Manfred identified over 20 years ago.

Manfred deposed that as a result of his experience in producing valve components, it became his goal to own a company that would assemble, test and sell a complete valve. [ 13 ] None of the Manluk Group of companies had ever assembled, tested and sold complete valves. Manfred explained in questioning on his affidavit that OEM clients who were at times unhappy with supply from China had asked Manfred for help once in a while. The idea was that a new company would buy valve components from the Manluk Group, which would increase sales volume.

Then the new company would assemble and test completed valves for sale to their OEM customers. [ 14 ] There is no dispute that this idea was discussed with both sons during the 1990s. Steps were taken to set up a company. FML Technologies Inc. was incorporated on August 1, 2008 with Frank and Manfred as shareholders, more than two years before the sons became shareholders or directors under the Succession Plan.

Juergen declined to participate. [ 15 ] Juergen explained that in the summer of 2008 he went to China with Manfred and Frank to evaluate the possible supply of castings to the Manluk Group to build complete valves. After that trip, Juergen told his father and brother that this was a useless idea that was not going to work. However, in 2009 Juergen was assigned - probably by Frank - to design and build a valve. Although he knew that FML was attempting to produce a complete valve, he understood the work he was doing was for the Manluk Group.

I found no other in depth evidence to corroborate that understanding. [ 16 ] The evidence is uncontradicted that Frank remained interested in pursuing the idea, but Juergen declined any opportunity to be involved in the project, since he did not believe it would be a success. Manfred deposes that even after incorporation, Juergen was offered the opportunity to participate in FML, but he refused. Juergen does not recall such a renewed offer but does not dispute it may have been made.

He does recall being offered an ownership interest in FML in January or February 2011, but he was not interested because of the conditions of the offer. He did not elaborate. [ 17 ] Juergen now characterizes the assembly of complete valves as being in direct competition with the Manluk Group's OEM customers and accordingly damaging to the interests of the Manluk Group.

Juergen essentially asserts that: if Chinese materials were used, they would not meet specifications; production of complete valves would not be economical; and it would not be a good idea to compete against the Manluk Group ’ s own customers. [ 18 ] Manfred unequivocally denies any conflict with his OEM customers, with whom he has done business for over 30 years. [ 19 ] Juergen also raises arguments regarding management time and resources of the Manluk Group being used to support FML's business, details of which are outlined below.

Juergen states that he objected to this diversion of time and resources, and insisted that the business be either halted or transferred to the Manluk Group, or that the shareholdings of FML be changed to reflect the shareholdings of Manluk Industries. The timing of these objections is inexact, but Juergen confirms that his demand in relation to the share structure of FML was at a point in time when Manfred owned all of the shares in Manluk Industries. [ 20 ] In early 2011, Juergen became more insistent in his objections to FML.

Juergen says this in turn precipitated two major responses: termination of his employment on March 25, 2011 by Frank, and his removal as a director by Manfred and Frank at a special Shareholders Meeting which took place on April 15, 2011. Juergen complains that he was expelled from the family business where he had worked for 27 years because he raised issues about FML. He asserts that he raised objections to FML because of his fiduciary obligations to Manluk Industries.

[ 21 ] Manfred denies the dispute over FML was the reason for Juergen ’ s dismissal and removal as director. Instead, he points to continued employee complaints with respect to Juergen's management style and behaviour, as well as decisions made by Juergen without notifying Manfred and Frank, and with which Manfred frequently disagreed.

He deposed that he concluded that Juergen was unhappy with Frank being named as President of Manluk Industries, and that Juergen tried to enlist other employees to take his side in the argument. [ 22 ] Without recounting the points or instances of disagreement and whether they would amount to legal cause for termination in separate legal proceedings, the evidence before this Court does not detract from Manfred's conclusion.

He deposed that it quickly became apparent to him after February 1, 2011 that Juergen was not going to work out as part of the management team and that there would be ongoing conflict between Frank and Juergen that would not be in the best interests of the Manluk Industries Group. [ 23 ] Apart from the severance terms, including a two year salary and benefits continuance, Juergen points to differences in executive bonuses between himself and Frank for 2011 and 2012 as being oppressive and unfair. [ 24 ] Juergen commenced a separate wrongful dismissal action.

Since leaving Manluk Industries, he has done some contract work through his holding company. [ 25 ] Juergen seeks reinstatement, and restraints on the diversion of resources, as well as on management bonuses except on a matching basis between the brothers. In addition, he claims entitlement to a derivative action on behalf of Manluk Industries against FML as well as an accounting to set aside transactions diverting costs and resources from the Manluk Group to FML.

Issues [ 26 ] Following a preliminary discussion of standing, I will consider whether the following, alone or in combination, were oppressive to Juergen and support a remedy under s. 242 of the ABCA : a. dismissal of Juergen as an employee, and removal as a director; b. potential competition of FML business with Manluk Industries Group customers; c. diversion of resources from the Manluk Industries Group to FML; and d. differential remuneration between the brothers. Standing [ 27 ]

Section 239 of the ABCA includes in the definition of “ complainant ” a current or former registered holder or beneficial owner of a security or a corporation or any of its affiliates, and a current or former director or officer of a corporation or of any of its affiliates. [ 28 ] The case law demonstrates that generally wrongful dismissal or exclusion from management is not “ oppressive ” because the conduct targets the applicant's interest as an employee, and not as one of the protected categories of security holder, creditor, director or officer: Chan v 160466 Ontario Inc , 2011 ONSC 5654 , 2011 CarswellOnt 12295 at para 33 .

However, exceptions have been made in cases regarding private companies where the relation between service and investment may be closer and gives rise to expectations beyond those of a regular employee.

[29] As with this case, in Naneff v Con-Crete Holdings Ltd., 1993 CarswellOnt 157, 11 BLR (2d) 218 (Ct Just - Gen Div), var’d (ON CA), 23 OR (3d) 481 (CA), the plaintiff was a manager, director and significant shareholder in a family group ofcompanies founded and built by his father. He had worked in the family companies all of his adult life. The trial judge found at para 125that the position of employment was closely connected with shareholder rights. On all the evidence he also found that the complainant’sdismissal was part of an overall pattern of oppression.

The Court of Appeal varied the remedy, noting at para. 26 that oppression actionsare not intended to protect or advance personal interests. [30] With these caveats in mind, I have no difficulty in determining that Juergen is a beneficial owner, former director and aproper person to make application to the Court. I find that he also has standing as a former employee insofar as his employment wasrelated to his investment in the Manluk Group.

Oppression [31] Section 242(2) of the ABCA provides: 242(2) If, on an application under subsection (1), the Court is satisfied that in respect of a corporation or any of its affiliates (

a) any act or omission of the corporation or any of its affiliates effects a result, (

b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or (

c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, theCourt may make an order to rectify the matters complained of. [32] In Re BCE Inc, 2008 SCC 69, the Supreme Court confirmed that the concept of reasonable expectations underlies theoppression remedy. It outlined the two main considerations on an oppression application:

(1) Does the evidence support the reasonable expectation asserted by the claimant? and

(2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms "oppression","unfair prejudice" or "unfair disregard" of a relevant interest? [33] These considerations require a fact-specific analysis of various factors, including those listed by the Court starting at para. 72: - general commercial practice - nature of the corporation - relationship between parties - past practice - steps the claimant could have taken to protect himself

- representations and agreements - fair resolution of conflicting interests between corporate stakeholders. [ 34 ] In an application for oppression the applicant bears the burden of establishing that oppressive conduct by the respondent caused him some harm: Chan v 160466 at para 38.

Dismissal as an Employee and Removal as Director [ 35 ] Before addressing this issue, I note that it is not the role of the Court on this application, particularly as the findings are derived only from affidavits and questioning, to determine whether the test for just cause has been met in this case, or whether severance in lieu of notice was sufficient.

Juergen remains entitled to pursue or otherwise resolve the cause of action for wrongful dismissal. [ 36 ] In terms of general commercial practice, the Manluk Group is responsive to the needs of OEMs in the oil and gas and mining industries and the standards by which their products are measured. The business is a closely held family enterprise.

The Manluk Group built a successful base of customers that have been serviced through more than one company, all of which are identified with the reputation derived from Manfred's decades of experience as the person in charge of a significant workforce that included both sons.

As for the relationship between the parties, only a few of the problems and past conflicts were explored in questioning; but they were sufficient to reveal differing approaches and personalities which placed Juergen at odds with his father and his brother, with whom he had worked closely for years. [ 37 ] As for past practice, Manfred had generally treated his sons equally, despite concerns about Juergen as outlined below. He did give Frank more management authority in implementing the Succession Plan.

Manfred hoped there would be changes in Juergen ’ s behaviour once the Succession Plan was implemented. [ 38 ] The Respondents argue that Juergen has failed to meet the burden of proof as to his own expectations which he alleges have been violated. Certainly, Juergen ’ s Affidavit does not enunciate exactly what he reasonably expected would occur once he became an equal voting shareholder with his brother. He did say, however, that it was a difficult change for him when Manfred decided that Frank would be the boss.

Although he did not like it, Juergen said he knew Manfred had to make a choice and did not expect that he would be chosen as the boss. [ 39 ] However, up to the time of Juergen ’ s dismissal, Manfred had otherwise pursued a pattern of virtually equal treatment of his sons as shareholders and participants in management. It may be inferred from this that Juergen reasonably expected a measure of equality to prevail. The lack of evidence as to how Juergen expected equality in the event conflict arose, or how he reasonably perceived that differences would be resolved, is in fact problematic.

Although Manfred had aspirations for co-management by his sons, he retained two voting shares as security against such an eventuality. [ 40 ] Despite the disharmony there is some evidence to support a reasonable expectation on the part of Juergen that his employment and status with the company would continue indefinitely given the nature of the corporation, the relationship between the parties, past practice and general representations regarding the future . [ 41 ] Specifically, Juergen had been employed full-time in this family business from the time he finished high school.

His continued employment in a responsible position was obviously part of Manfred ’ s original succession plan.

Having worked with his father and brother in some fashion for over 25 years, it would not be unreasonable to infer that he would fairly expect to remain actively involved in management of the business, particularly upon the gift in ownership of a significant portion of the voting shares in Manluk Industries and 50% of the future equity growth. [ 42 ] Juergen ’ s counsel points to the 3 ½ month time frame between the Succession Plan and Juergen's removal, and an even shorter period of 6 weeks from formal appointment as a director and the notice to consider removal.

There is no evidence of any direct warning to Juergen nor are there any detailed particulars of new conflicts. Counsel relies on this lack of evidence to support the reasonableness of Juergen ’ s expectation that he would continue as a director indefinitely.

[ 43 ] The reasoning behind Manfred's decision and actions must be carefully reviewed in order to determine whether the evidence establishes that Juergen ’ s reasonable expectation was violated by conduct which was oppressive, unfairly prejudicial, or that unfairly disregarded Juergen ’ s interests . [ 44 ] The parties have completely different

interpretations of the reasons for Juergen ’ s removal. [ 45 ] The Notice of a Special Shareholders' Meeting for removal of Juergen as a director was given on the same day as his employment was terminated. There is no evidence of what occurred between that notice date and the resolution for removal passed on April 15, 2011, and it is difficult to infer what Juergen ’ s position was during this period. [ 46 ] On the other hand, Manfred's evidence is uncontradicted that he had concerns with Juergen ’ s style and behaviour before and after the Succession Plan was implemented.

Manfred gave specific examples of Juergen's pre-Succession Plan management style and behaviour. In his opinion, Juergen had interfered with decisions of other employees and production managers, and had caused a number of employees to quit. Manfred was questioned in this regard, but his evidence remains uncontradicted. [ 47 ] Likewise, Manfred was troubled by Juergen's post-Succession Plan management style and behaviour which continued to come to Manfred's attention.

Manfred deposed that he continued to hear employee complaints about Juergen ’ s behaviour, and Juergen began to make decisions on behalf of Manluk Industries without notifying Manfred or Frank. Further, Manfred swore that Juergen was unhappy with Frank being named president, and enlisted employees to take his side in the argument.

Manfred was not questioned at all with respect to his concerns about Juergen ’ s post-Succession Plan behaviour. [ 48 ] Manfred deposed that he concluded that Juergen could not work out as part of the management team and the ongoing conflict between Frank and Juergen would not be in the best interests of the Manluk Group. [ 49 ] Juergen continued to oppose the FML plan, declined a share in FML and there is no evidence that he attempted to seek out a workable resolution of the issue.

He swore in his affidavit that from the Fall of 2008, as he became aware of diversion of resources of Manluk Industries to FML, he insisted to Manfred and Frank that the FML business be halted, transferred to the Manluk Group or that shareholdings in FML reflect the shareholdings of Manluk Industries. [ 50 ] Could Juergen have taken steps to protect himself? Juergen knew of the FML initiative as early as 2008. In the first year of the FML initiative, Manfred was the sole shareholder and it cannot be argued that there was oppression in those circumstances.

For around 16 months, Juergen held a 4% equity share but no voting powers. He declined shares in FML. He then accepted without objection Manfred's gratuitous proffer of shares under the Succession Plan. He declined shares in FML again after implementation of the Succession Plan. Juergen knew that FML was Manfred ’ s vision and that Manfred had a deciding vote.

Therefore, to the extent that FML was a sticking point, Juergen knew what he was getting into. [ 51 ] Juergen argued that Manfred was required to provide direct evidence of an ultimatum given to him before or about the time the Succession Plan was implemented. The absence of a warning would be more persuasive if the evidence left open that Juergen may have been unaware that his father was retaining a role as tie breaker against the risk of sibling impasse. [ 52 ] In any event, there is no doubt that Juergen knew for some time that he was at risk.

I quote the entirety of the body of an e-mail sent by Juergen on March 20, 2010, less than a year before implementation of the Succession Plan, to members of management within the Manluk Group: I have just spent the last couple of hours reading Toyota ’ s books. We as a company have a little hurdle in our way to achieve success. This hurdle comes in the way of succession planning. By succession planning I am not saying I want to be the BOSS. Our company has grown substantially without one. I do however want to be a stakeholder. We have people amongst us that want a label on their shirt.

Every time you validate their position it is a vote against me. For example: Frank ’ s birthday party. Yes you do tell me it was juvenile but the fact of the matter is that you went. That is all that they need to say it is a vote against me. In the last meeting it was presented by Frank that I don ’ t work hard. This feeds right into Manfred ’ s opinion that I do not contribute to the organization. BS. That stands for bullshit. Unfortunately you guys are too na ï ve to figure this out. As this rolls down the pipe you guys are going to have to figure your shit

out. I am getting to the point where I am getting tired of solving your problems day in day out without a little respect from Manfred. If Manfred wants Frank to run the show, then he needs to get the cock out of his mouth and say so. Welcome to the shit show. Luckily I will not be a part of it. If you guys want any part of a progressive and dynamic future let me know. Last time I checked I was not Italy. [ sic? ] Not saying that location had anything to do with it.

Good luck and have fun, Juergen. [ 53 ] This is not the voice of a son forlornly ignorant of concerns about his role in the business. [ 54 ] Juergen asserts that FML ’ s activity would harm the Manluk Group. In my view, the evidence does not support the conclusion that sales would be to end users or would otherwise result in competition with the Manluk Group ’ s OEMs. If the FML initiative succeeded, the Manluk Group ’ s sales of valve components would increase. There is no evidence to support the suggestion or fear that FML would acquire Chinese product that would not meet specifications.

As for speculation that production would not be economical, this is unhelpful since neither FML nor the Manluk Group had yet sold a complete valve. [ 55 ] Juergen referred to a specific customer, Cameron, which issued a purchase order for the Manluk Group to produce a complete but untested valve. He said FML could not do this, because FML was not listed as one of Cameron's approved suppliers, despite its links to the Manluk Group. I do not have evidence from Cameron but this makes no business sense.

Moreover, nothing in the evidence renders this point, even if it was accurate, relevant to the issue of removal of Juergen as a director. [ 56 ] Manfred deposed that he realized his own hopes for the two sons to work together in the business he had built were not going to be realized. He provides uncontradicted evidence that the above noted problems continued in the face of making Juergen an equal equity participant with his brother in the Manluk Group. I accept Manfred ’ s explanation.

There is no evidence that Juergen took any steps to reconcile with his family and reacquire his standing in the business before or after the resolution to remove him as director. [ 57 ] Counsel invites the Court to draw an adverse inference from the Respondents ’ failure to prepare an affidavit from Frank who had equal voting shares to offset Juergen. I infer without more that Frank sided with or deferred to Manfred.

It was Manfred who held the deciding vote. [ 58 ] Juergen submitted in argument that the problems with his own conduct as raised by Manfred all occurred between 2006 and 2010, and if those were genuine concerns then it would make little sense to proceed with the Succession Plan. I have no difficulty in accepting that Manfred remained hopeful that roughly equal treatment might inspire a new level of cooperation and harmony. Whether na ï ve or tenuous, that hope does not negate the concerns.

As noted, the evidence was that the problems did not stop in 2010 but on the evidence continued into 2011, leading to Manfred's decision. [ 59 ] Juergen only briefly held the position of director. There is evidence that his abrasive conduct during this period was harmful to Manluk Industries. Manfred had longstanding concerns with Juergen relating to the business interests of the operation. After very careful consideration, I am satisfied that Juergen's objections to FML did not play a major role in the decision to remove him as director, and certainly not at all in the way that Juergen has suggested.

Juergen ’ s uncompromising position on FML represents just one of many differences that put him at odds with his father and his brother.

Equally, if not more important, was that he carried his familial conflict, including criticisms of Frank and Manfred's support of FML, to other senior managers. [ 60 ] Former Plant Manager Larry Fanning deposed: I am now aware that FML is attempting to manufacture valves for the oil industry, not just the components of the values [ sic ], but the valves themselves to sell to end users, in competition both with Manluk and with Manluk's customers, potentially causing severe damage to Manluk. [ 61 ] Fanning fails to attribute either a source or a basis for a reasonable belief in this viewpoint.

I have concluded that this sworn statement of what the deponent is "now aware" captures an illogical and distorted view, promoted by Juergen, of plans for expansion in the context of a family business.

[ 62 ] The

interpretation most favourable to Juergen could support only a tenuous expectation that he may remain as a director given the dysfunctional situation. Even if that expectation was reasonable, the evidence does not establish that it was violated by conduct which could be described as amounting to "oppression", "unfair prejudice" or "unfair disregard" of a relevant interest. [ 63 ] As Walker J. noted in Wong v Mee Hoi Bros Co , 2010 BCSC 1824 , 78 BLR (4th) 255 at para 33 , not every unmet expectation, even where reasonable, gives rise to a remedy.

Walker J. further observed at para. 29 that regardless of whether the company is publicly traded or a closely held family company, shareholders hold, at a minimum, a reasonable expectation that the directors will act in the best interests of the company.

Again, my findings on this point address Juergen’s business interests, not his personal interests. [ 64 ] With respect to loss of employment, Juergen cited Ryan v Hudson Bay Transport Co , 2004 SKQB 397 , 258 Sask R 126 in which Smith J. held: 33 ...this passage ... does suggest that in the circumstances of a closely held family business, where there was an understanding that all of the shareholders should participate in the conduct of the business, only conduct of a grave nature would serve to justify the exclusion of one of the shareholders and that this matter is not to be judged as if the corporation were an ordinary commercial enterprise. ... 35 In light of the approach taken by Saskatchewan courts in these cases, I have concluded that in the circumstances of a closely held family corporation, in which the applicant has worked all of his adult life, he cannot be excluded from continued participation as an employee of the company except for very grave cause.

I conclude, on this basis, that the applicants have made out a strong prima facie case that the actions of the respondents have been unfairly prejudicial to them. [ 65 ] It is important to place these comments in context. The applicant in Ryan had applied for interim costs under s. 235(4) of Saskatchewan ’ s The Business Corporations Act . He had worked for the family business all of his working life. On his termination as director and employee, he had ceased receiving an annual salary of approximately $65,000 plus an annual Christmas bonus. The family business had never paid dividends or director remuneration.

At the time of the application, he had been largely without employment income for three years. There is no indication in the decision that the applicant had instituted a separate wrongful dismissal action. [ 66 ] Smith J. held that in order to succeed on the application for interim relief, the applicant must show that he was impecunious or in financial difficulty, that the financial difficulty arose out of the alleged oppressive actions of the respondents, and that he had made out a strong prima facie case. Smith J. found the first two criteria were met.

It was with respect to the issue of a strong prima facie case that Smith J. made the comments quoted above. Smith J. speaks variably to exclusion of shareholders (para. 33), and exclusion from continued participation as an employee (para. 35).

Interim relief was granted in the form of a non-interest bearing loan secured by a security interest in the applicant ’ s shares in the business. [ 67 ] Some of the cases relied upon by Smith J. addressed interim relief and others the purchase by the company of the former employee ’ s shares.The comments regarding “ grave cause ” underline the importance of assessing the BCE factors in the determination of reasonable expectations.

Indeed, exclusion of a family member from shareholdings or employment in these types of businesses may well defeat entirely reasonable expectations that a certain income will continue indefinitely. However, in my view, nothing in Smith J. ’ s decision in Ryan supports a forced continuation of a dissident as an active business participant. [ 68 ] As emphasized by the Ontario Court of Appeal in Naneff at para 27 , the broad remedial discretion is only for the specific purpose of rectifying oppression and must protect the applicant ’ s interests as shareholder or director.

It is not intended as a means of redress with respect to personal or family interests. Furthermore, it is not designed to act as a dispute resolution mechanism for quarreling shareholders: 864789 Alberta Ltd v Haas Enterprise , 2008 ABQB 555 , 2008 CarswellAlta 1188 para 48 , citing Mikulak v Rubin , 2001 ABQB 594 , 289 AR 190 . [ 69 ] As noted above, Juergen has commenced a separate wrongful dismissal action. In my view, although his employment was intertwined with his status as shareholder and director, his dismissal is best addressed in the context of that other action.

The context of his long-term employment in the family business will undoubtedly be considered in determining his rights and entitlements in that action. Nothing in this decision is intended to reflect on the employee rights and interests which Juergen may advance in that suit.

[ 70 ] Having reviewed the decision to remove Juergen as a director and terminate his employment based on the evidence presented and in light of the BCE factors, I have concluded that there was no oppression. The nature of the business leaves open the opportunity to expand but only if management is able to work effectively together. In terms of past practice, the parties had always relied on Manfred ’ s judgment and the Succession Plan sustained that fail-safe mechanism. Juergen declined to hedge his bet that FML would not succeed. He engaged in divisive conduct which involved employees outside of the family.

Juergen took no steps to protect against the risk that his father may take steps to address and resolve dissension. No representations were made that Manfred would remain neutral. The steps taken to protect the best interests of the Manluk Group were arguably personally harsh with respect to Juergen, but on balance not oppressive, unfairly prejudicial to or in unfair disregard of Manluk Industries or its shareholders in the face of irreconcilable conflict.

Potential Competition [ 71 ] Much of the analysis of this issue is subsumed by my conclusions in relation to the decision to remove Juergen as a director. [ 72 ] Juergen ’ s perception that FML was set up to compete or otherwise represents a conflict with the business of the Manluk Group or its customers is unsupported by the evidence.

The FML initiative certainly cannot be interpreted as an action intended to deprive Juergen of his part of the family company, given the fact that he was offered participation as a shareholder on various occasions. [ 73 ] The evidence reveals that Juergen did not support the assembly of complete valves because he did not think it would succeed. That is inconsistent with his position that FML posed a danger to the relationship with the Manluk Group ’ s OEM customers. [ 74 ] Further, the evidence supports a finding that FML would obtain its components from the Manluk Group, assuming licensing approval.

It is not possible within the scope of this application to assess the financial impact on the Manluk Group of expanding the scope of FML ’ s business to the manufacture of complete valves.

It is impossible to speculate as to how increased demand by FML would equate to any lost demand, if any, by the Manluk Group ’ s OEMs. [ 75 ] Given Juergen ’ s opposition to any involvement in the initiative, there is also no point in speculating as to whether the business of manufacturing complete valves could have been undertaken within the Manluk Group. [ 76 ] In any event, the FML initiative began before Juergen acquired his shares in Manluk Industries. It reflected a vision of Manfred, who had founded and developed the family business into the success from which the sons now benefit.

Whether or not Juergen agreed with it, this remained part of the family ’ s corporate reality in January 2011. Manfred ’ s retention of the deciding vote on any Manluk Industries issue ensured that Juergen ’ s only recourse would be to participate in FML, or to convince Frank and Manfred that it was ill-conceived. [ 77 ] Of course, Manfred and Frank continue to have a fiduciary duty to protect and promote the interests of Manluk Group with full responsibility to conduct business to the benefit of each of Manluk Industries, FML and in consequence with regard to their overlapping customer base.

However, as matters currently stand, there is no basis for a finding of oppression against the Respondents based on competition or conflict and certainly nothing to support a prospective remedy in that regard. Diversion of Resources [ 78 ] It does not follow that FML is free to drain Manluk Group resources so as to affect the value of Manluk Industries ’ shares. Juergen alleges that Manluk Group has diverted resources to FML by: - charging business travel expenses to the Manluk Group for trips solely for FML ’ s benefit;

- attempting to sell valves manufactured by a Manluk subsidiary to a customer on behalf of FML; - paying for engineering review studies and pressure testing activities for FML ’ s benefit; - inspecting castings for the benefit of FML; - directing a Manluk subsidiary to obtain an American Petroleum Institute License on behalf of FML; - directing a Manluk subsidiary to purchase castings on behalf of FML; - hiring an engineer through a Manluk subsidiary to design a valve for FML ’ s sole benefit; - diverting engineering data, being the property of a Manluk subsidiary, to FML so that it could produce a valve in direct competition with the Manluk Group; and - using employees of the Manluk Group for services and labour to FML. [ 79 ] Many of these steps were taken prior to September 2009, during a period when Manfred was the sole equity shareholder; and between September 2009 and January 2011, a period when Manfred held the dominant equity and all voting share interests.

To that extent, the Applicants agree there can be no oppression by Manfred against his own interests. [ 80 ] Juergen reports that labour and services of the Manluk Group were provided to FML by and at the direction of Frank and Manfred, including engineering review studies, pressure testing activities, inspections of castings, applications for API licensing and valve design. [ 81 ] Manfred agrees that such services were provided. He deposed that he directed the corporate accountant to record expenses incurred by the Manluk Group to be identified as repayable by FML as a loan.

The thirteen recorded transactions total approximately $23,000. He has agreed that FML or he personally will repay the funds. The Respondents argue that if Juergen was of the view that the information thus provided was inadequate, his counsel could have pursued it at the examination of Manfred on his affidavit. [ 82 ] The evidence supports a finding that the information provided does not reflect the full story. No account is made of the actual time spent by personnel dealing with the business interests of FML including business trips to China, costs of design, time spent with API and similar efforts.

No attempt has been made to identify the full inventory of such expenditures and when they were incurred, much less to place a monetary value on them. [ 83 ] I find that Juergen was offered and declined an equity participation in FML even after January 2011.

However, that refusal does not disentitle him as a 50% equity shareholder in Manluk Industries to a proper accounting of the Manluk Group resources dedicated to the development of FML ’ s business from and after January 2011. [ 84 ] The changes implemented by the Succession Plan effective January 2011 materially altered the extent to which resources of the Manluk Group could be dedicated or diverted to the benefit of FML without proper accounting.

As a non-shareholder in FML and shareholder in Manluk Industries, Juergen became entitled from that date to a more rigorous separation and accounting of all costs incurred by the Manluk Group for the benefit of FML.

[ 85 ] It is true that a court may tolerate a certain laxness on the part of the directors of a small, closely held corporation in adhering to corporate formalities, which could not be condoned on the part of the directors of a larger public company: M Koehnen in Oppression and Related Remedies (Toronto: Thomson Carswell, 2004) at 93. However, given the shareholder profiles of the two enterprises, Manfred and Frank should have sought and acted on advice in order to set up proper ledgers and any loan terms including repayment of services and expenditures incurred by the Manluk Group for the benefit of FML.

While Juergen took no steps as director, employee or shareholder to insist on or implement such record-keeping, he did make his objections known. [ 86 ] Having regard to all of the evidence, I find that the failure of the Manluk Group to identify what should have been done is not profoundly oppressive in the context of entitlement that only crystalized in January 2011, when changes in past practices had not yet been identified.

Nonetheless, it was and still remains a fair expectation that Juergen, as a shareholder of Manluk Industries, be made aware of the extent to which the Manluk Group subsidizes the FML business. [ 87 ] Although reinstatement of Juergen as a director is not warranted, the Court is mindful that he is a 50% equity shareholder.

In this situation, where Manfred and Frank ’ s interests in FML have the potential to undermine to some extent Juergen ’ s interest in Manluk Industries, proper accounting and auditing are necessary. [ 88 ] In light of Juergen ’ s family status and historical role in the business, the Respondents have in the course of this application invited Juergen to request information beyond entitlement to the audited financial statements.

Relying on Rigaux v Presslogic Inc , 2005 ABQB 884 , [2005] AJ No 1649 at para 23 to 24 , the Respondents characterize such recourse as a fair process by which Juergen can monitor the value of Manluk Industries. [ 89 ] Unlike the circumstances of this case, the decision in Rigaux arose out of interim relief proceedings and the Court found it was appropriate to order information to be provided while the litigation was in process. [ 90 ] The content and manner of Manluk Industries ’ communication model must conform to generally accepted accounting and corporate disclosure principles.

Differential Remuneration [ 91 ] Juergen submits that payment of excessive bonuses is a veiled method of making what is properly shareholder compensation, not management compensation.

He argues that unequal payments effectively deprive him of shareholder compensation which should be issued in the form of a dividend. [ 92 ] Juergen states that prior to his removal as director and termination as a vice-president and COO, all senior executives apart from the CFO were also shareholders, and he and Frank always received the same executive bonus compensation. [ 93 ] In fact, t hey both received bonuses prior to becoming shareholders: for the year ending January 31, 2008, each received $150,000; for the year ending January 31, 2009, each received $200,000.

For the year ending January 31, 2010, when the sons held only four shares, each received a $675,000 bonus and Manfred, who held 90 shares received no bonus. So the payments were not tied to shareholdings at all but they were always equal as between the two sons. [ 94 ] As a rough gauge of appropriate management compensation, both parties initially referred to a 2011 executive compensation report commissioned by counsel for Manluk Industries. [ 95 ] Juergen notes that on its face, the report concluded that the range of such bonuses should be within 39.7% to 42.3% of the executive ’ s base salary.

He points to large discrepancies as unfair and oppressive: that Frank ’ s base salary for 2011 and 2012 was $118,860, and his bonuses in those years were $645,000 and $540,000. [ 96 ] The Respondents submit that the compensation report shows that in the case of a CEO of a company such as Manluk

Industries, the average total compensation in salary and bonus in Alberta was $537,200 and, in Canada, $759,100. Frank ’ s combined salary and bonus for the year ending January 31, 2011 was $442,860, and for the year ending January 31, 2012 it was $658,860.

The Respondents note that both are below the 75 th percentile for compensation of a CEO of a company comparable to Manluk Industries in Canada and both are near the average compensation. [ 97 ] The Respondents argue that by commissioning a consultant to complete the compensation study and by maintaining total compensation for Frank within the range determined to be average for Canadian companies such as Manluk Industries, it has properly exercised its business judgment; the bonuses have been fixed by director ’ s resolutions , and the company ’ s decision should not be disturbed by the Court. [ 98 ] In the end, however, both sides recognized that the results from the Report were ambiguous and so they each abandoned any real reliance on it.

Regrettably, it was the only tendered evidence by which to measure the reasonableness of management compensation. Juergen argues that the numbers speak for themselves and that, even recognizing that Juergen has been precluded from working to the benefit of Manluk Industries since early 2011, the bonuses to Frank are excessive. The Respondents assert that there is no evidence of the reasoning of management for the compensation - Manfred not having been questioned on these figures, although Juergen clearly knew of them.

As such, the Court should not vary the management decision as a matter of business judgment. [ 99 ] I reject that argument in these circumstances. There is no doubt that excessive management bonuses may dilute share value. There was no basis for concern so long as both sons were getting equal distribution, but things have changed and so too must compensation. [ 100 ] The question to be decided is how Frank ’ s bonus should be determined now that Juergen is no longer employed by Manluk Industries. It is true that Juergen did not produce any evidence to assist the court to determine reasonable compensation.

The Report is flawed but it is all that has been provided. It states at page 7 that based on the median percentile, a competitive base salary would be within the range of $215,750 to $280,500, and a short-term incentive opportunity of 35% to 40% of base salary would yield a short-term cash total compensation package of around $350,000.

There may also be a long-term incentive component to remuneration, but in the circumstances, Frank ’ s long-term incentive plan is his actual share ownership. [ 101 ] In my view, Juergen as shareholder can reasonably expect that Frank ’ s compensation will be determined on such an objective basis. Any further monies would be paid out to Frank in dividends (or other form of compensation), which would benefit Juergen and Frank equally as 50% equity shareholders. [ 102 ] Section 242(3) (

i) and (

l) of the ABCA authorize the Court to make an order directing a corporation, subject to

section 43, to pay a dividend to its shareholders, or to compensate an aggrieved person. [ 103 ] Manluk Industries must calculate Frank ’ s compensation since March 2011 in accordance with the methodology espoused and conclusions contained in the Report. Compensation to Frank outside of the recommended range is more properly deemed akin to a dividend to Frank.

Juergen is entitled to a similar dividend (or other form of compensation), less any portion of his severance package which would similarly be outside of the same range for the two years in question. [ 104 ] In order to avoid similar litigation in the future, it would be prudent for Manluk Industries to continue to rely on objective third- party recommendations as to appropriate compensation. Conclusion [ 105 ] In the result, the Court: - declines to reinstate Juergen as a director of Manluk Industries;

- orders a proper accounting under s. 242(3)(

k) of Manluk Industries ’ expenses and resources dedicated to FML activities from January 2011; and - orders Manluk Industries to adjust management compensation to Frank based on the Report methodology for the two year period ending January 2013.

Any additional amounts are ordered to be treated as dividends to be distributed equally between Frank and Juergen; alternatively, at its discretion, Manluk Industries may provide equivalent value to compensate Juergen for the differential excess in Frank ’ s compensation from the method supported in the Report as summarized above. [ 106 ] If the parties are unable to agree on the amount of the compensation adjustment, they may speak to the Court within 30 days of release of this decision.

Similarly in the face of mixed success, if there is any disagreement on costs the parties may speak to the Court within 30 days of release of this decision. Heard on the 20 th and 27 th days of March, 2013. Dated at the City of Edmonton, Alberta this 6 th day of May, 2013. S. D. Hillier J.C.Q.B.A. Appearances: Ian Wachowicz and Rob James Parlee McLaws LLP for the Applicants Bryan Kickham, Q.C. and Alisha Hurley Miller Thomson LLP for the Respondents