Flock v ComplyWorks Ltd, 2016 ABQB 621

Court of Queen ’ s Bench of Alberta Citation: Flock v ComplyWorks Ltd, 2016 ABQB 621 Date: 20161107 Docket: 1301 06771 Registry: Calgary Between: Bradley G. Flock Plaintiff - and - ComplyWorks Ltd. (previously operating as Canadian HSE Registry Ltd.), David P.V. Bischoff, Lorna J. Bischoff, Marian L. Boychuk, Cal Grant Fairbanks (also known as Calvin G. Fairbanks), Judy Fairbanks (also known as Judith Fairbanks), Ivan E. Holloway, Patricia M. Murphy, Ross H. Wickware, David Bischoff Enerprises Ltd., Holloway Family Enterprises Ltd., 1522641 Alberta Ltd. and IMR Consulting Corp.

Defendants _______________________________________________________ Reasons for Judgment of J.T. Prowse , Q.C. Master in Chambers _______________________________________________________

[1] The plaintiff Bradley Flock (“Flock”) commenced this action against the defendants, including the defendant ComplyWorksLtd. (“CWL”). [2] His primary claim is that CWL wrongfully dismissed him from his employment and that the defendants breached theirpromise to provide him with 5% of the shares of CWL. [3] Included as defendants are the eight directors of CWL. Four of those directors have applied to have the claim against themeither summarily dismissed or struck. [4] For the reasons which follow I decline to dismiss or strike the claims against the directors.

Factual background [5] Following is a brief chronology of events: • November 30, 2007 – the voting shareholders of CWL were the four defendant holding corporations. There were eight directors.On November 30, 2007 the shareholders entered into a unanimous shareholders agreement which provided that the unanimous approvalof the board of directors of CWL was required for the issuance of any further shares in CWL.

All subsequent USAs contained this sameprovision. • December 1, 2009 - Flock commenced employment with CWL at a monthly base salary of $10,000 plus bonus and benefits. • July 30, 2010 - It is assumed for the purpose of this application that Calvin Fairbanks and Ian Holloway promised Flock would beprovided with 5% of the shares of CWL if he committed to staying with CWL until March 1, 2013 ( the “5% equity bonus”). • November, 2010 - Flock’s bonus structure was revised.

This was confirmed by a letter which did not mention the 5% equitybonus. • August 1, 2011 - another USA was entered into, again preventing new shares from being issued without unanimous directors’approval. • November 18, 2011 - another USA was entered into, again preventing new shares from being issued without unanimous directors’approval. • April 12, 2012 - the board of directors of CWL unanimously resolved that it would not entertain any further discussion or requestsfrom any party for the issuance of new shares.

This decision was an overarching decision to restrict share ownership and was notdirected specifically at Flock. • December 11, 2012 - another USA was entered into, again preventing new shares from being issued without unanimous directors’approval. • December 11, 2012 - Fairbanks sent an email to Flock and selected other employees of CWL.

This email informed the recipientsthat the shareholders of CWL had signed a USA that would require unanimous approval of the board of directors for any new shares inthe company to be issued, and further that the board had decided not to issue any new shares or to re-distribute existing shares. • December 21, 2012 - Flock sent an email to Fairbanks requesting a meeting of the board of the directors to discuss his 5% equitybonus. • January 27, 2013 - Fairbanks responded to Flock’s December 21st email and advised that the board of directors was not willing tohave a meeting with Flock to discuss his 5% equity bonus. • Flock subsequently engaged in further conversations with Fairbanks, wherein an alternative deal was discussed.

During thesediscussions the existence of the 5% equity bonus was never denied. • March 4, 2013 - Flock, through previous legal counsel, delivered a letter to CWL demanding a 5% equity interest in CWL. Inresponse to the demand letter, CWL terminated Flock’s employment. The

summary dismissal application [6] Four directors of CWL were not actively involved in the day to day operations of CWL. I will refer to them as the “outsidedirectors”. Their names are Lorna Bischoff, Marian Boychuk, Judy Fairbanks, and Patricia Murphy. [7] The outside directors have applied to summarily dismiss the claim against them pursuant to Rule 7.3. [8] On a

summary dismissal application, the usual practice is to assume that the evidence of the respondent (in this case Flock)is true, and to see whether, despite those adverse facts, the applicants, the outside directors, are entitled to

summary dismissal: Clarke v.Connell, (AB KB), 1997 CarswellAlta 513, 10 C.P.C. (4th) 276, at para 4; Goodfellow Inc. v. Woody’s HardwoodFlooring Ltd.., 2003 ABQB 162 (Alta. Q.B.) at paras 20-21; Peters v. Wilson Estate, 2011 ABQB 665 (Alta. Q.B.) at paras 6-7;Sherwood Steel Ltd. v.

Odyssey Construction Inc., 2014 CarswellAlta 1750, 2014 ABCA 320, at para 8; and 776826 Alberta Ltd. v.Ostrowercha, 2015 CarswellAlta 155, 2015 ABCA 49 at para 10. [9] The key area where the evidence conflicts is whether two of the directors of CWL, Calvin Fairbanks and Ivan Holloway, onor about July 30, 2010, promised Flock that CWL would provide him with additional remuneration in the form of a five percent (5%)equity bonus in CWL in return for his continued employment with CWL to March 1, 2013. I will assume that this occurred.

The grounds upon which Flock asserts liability against the outside directors [ 10 ] A review of the amended statement of claim shows the following allegations against the outside directors: • Flock was employed by CWL. • On January 30, 2010, the defendants Calvin Fairbanks and Ian Holloway on behalf of CWL and the other directors and shareholders promised him 5% of the shares of CWL in return for his continued employment to March 1, 2013 (emphasis added). • The 5% equity bonus arrangement was with both CWL and with the shareholders and directors of CWL. • The plaintiff fulfilled his obligations under the equity agreement. • On December 11, 2012 Flock was advised (

i) of the existence of a unanimous shareholders agreement (“USA”) which required the unanimous approval of all the shareholders before any new shares of CWL could be issued, and (ii) that the directors of CWL had passed a resolution that they would no longer entertain any requests for new shares. • The defendants induced CWL to breach its equity agreement with Flock. • The defendants conduct constituted an intentional interference with Flock’s economic interests • When Flock pursued enforcement of the equity agreement he was fired. • The conduct of the defendants constituted oppression of Flock within the meaning of the Business Corporations Act . • The defendants were wrongfully enriched as they enjoyed the benefit of Flock establishing its most profitable venture, being its real estate business, while Flock suffered deprivation by foregoing alternative business opportunities under which he would have earned three to four times his salary at CWL. • Flock was wrongfully dismissed from his employement. • Flock has not been paid outstanding bonuses and wages.

The outside directors’ evidence in support of

summary dismissal [ 11 ] The outside directors submit case law, in support of their application for

summary judgment, to the effect that directors acting in good faith within the scope of their authority and in the best interests of the corporation are entitled to immunity from personal liability for claims brought against the corporation. [ 12 ] One would have expected, therefore, that each of the outside directors would swear an affidavit in support of

summary dismissal, giving the background to the corporate resolutions and asserting that they were acting in good faith, within the scope of their authority and in the best interests of the corporation. In fact, none of the outside directors provided an affidavit in support. [ 13 ] Instead, the applicants rely on an affidavit and supplemental affidavit of one of the other defendants, Calvin Fairbanks. It is permissible for evidence in support of

summary judgment to be provided by someone other than the applicant: Terrigno v Kretschmer , 2012 ABQB 750 , 2012 CarswellAlta 2283; Grivicic v Alberta Health Services , 2014 ABQB 444 , 2014 CarswellAlta 1544. [ 14 ] However, what Calvin Fairbanks did in his affidavit, in order to provide the requisite evidence, was to attach answers to interrogatories provided by the outside directors under an arrangement pursuant to which these answers stood in the place of examinations for discovery. There are two problems with this: (

i) it is hearsay evidence, and (ii) a party cannot use its own answers to discovery questions as evidence: see Johnston v Day (Litigation guardian of) , 2015 ABQB 43 , 2015 CarswellAlta 186 at para. 32 . [ 15 ] In the result, there is no non-hearsay evidence in which the outside directors disavow any involvement in the 5% share issue. [ 16 ] The tactic of attaching hearsay statements to an affidavit in support of

summary dismissal, presumably to shelter the applicants from being cross-examined, is to be discouraged.

This is why hearsay evidence cannot be used in applications that may dispose of all or part of a claim: Rule 13.18. [ 17 ] Counsel attempts to make up for this lack of evidence by referring to “the business judgment rule” which is a rebuttable presumption that directors and officers act on an informed basis, in good faith, and in the best interests of the corporation: Jim Pattison Developments Ltd. v Fudex International Inc. , 1996 CarswellAlta 851, 4 C.P.C. (4 th ) 325 . [ 18 ] I have a number of problems with this approach: • A rebuttable presumption may provide proof on a balance of probabilities at trial, absent evidence to the contrary, but I doubt that it establishes that the applicants’ case is ‘unassailable’ which is the standard of proof which must be attained to achieve

summary dismissal. • The applicants need to bring forward evidence regarding the circumstances and background to the corporate decision in order to trigger the rebuttable presumption. That is lacking here. Even if the ‘answers to interrogatories’ were properly before the court (which they are not) they do not deal with the circumstances and background to the corporate decision.

They essentially are just copies of minutes evidencing the decisions which were made. • It is not at all clear to me that the business judgment rule is applicable to a corporate decision dealing with shareholdings, as opposed to the business of the corporation. The corporate resolution in question did not deal with how CWL would carry on its business

of “compliance management specifically for contractor and supplier management and supply chain processes”.

It is a decision which essentially dealt with the existing shareholders declining to have their shareholdings diluted. [ 19 ] Given the assertions in the statement of claim that an agreement to provide shares to Flock was made on behalf of both CWL and the shareholders and directors of CWL, with the concurrence of the directors, and then that agreement was breached by the action of the directors, including the outside directors, and given that I have been given no evidence by the outside directors to the contrary pursuant to the evidentiary onus on them as applicants to establish that their defence is unassailable, I decline to summarily dismiss the claims against the outside directors. [ 20 ] Further, under the heading of oppression, I have no evidence to refute the allegations that the outside directors agreed to the arrangement alleged by Flock and later disavowed it, and this leaves me unable to dismiss the claim in oppression against them.

Application to strike under Rule 3.68 [ 21 ] The submissions of the outside directors confounds arguments for striking (where no evidence is admissible) with arguments for

summary dismissal (where evidence is admissible). [ 22 ] With respect to the striking application under Rule 3.68 I am obliged to consider the allegations made in the statement of claim as being true.

This would include Flock’s allegation that the ‘equity agreement’ was made between Flock on the one hand, and CWL and its directors on the other. [ 23 ] If that one allegation is taken to be true then clearly the outside directors are proper defendants to the action. [ 24 ] Guidance can be taken from the case of Micro-Watt Control Devices Ltd. v Leathem , 2012 ABQB 503 , where, similar to this case, the statement of claim included a claim against directors for inducing breach of contract. The defendant directors attempted to strike the action under Rule 3.68.

After noting that the statement of claim asserted the components of an action for inducing breach of contract, the Court noted: 54 It is well established law that knowingly inducing another party to breach a contractual obligation with a third-party constitutes a legally recognized cause of action in tort: Quinn v Leathem , [1901] A.C. 495 (U.K. H.L.) , app'd in Pocklington at para 39.

Knowingly inducing a breach, which is a separate cause of action from breaching the contract itself, may therefore ground a claim that a director or officer of a corporation is personally liable for the actions of the corporation: Craik at para 19. 59 I also acknowledge the Applicants' position that the director of a company acting bona fide within their scope of the authority and in the best interests of a company generally will not be held personally liable in tort for inducing breach unless something more is proven.

However, this is a question to be decided at trial. [ 25 ] In other words, the evidentiary based defence of outside directors that they were acting bona fide and in the best interests of the corporation is not a basis for striking a claim under Rule 3.68. [ 26 ] Accordingly I dismiss the application of the outside directors to strike out the statement of claim against them on the basis that it discloses no cause of action. Costs [ 27 ] If the parties cannot agree on the costs of this application they may approach me for a ruling in that regard.

Heard on the 20 th day of June and 6 th day of July, 2016, with supplemental written argument in September of 2016. Dated at the City of Calgary, Alberta this 4 th day of November, 2016. J.T. Prowse, Q.C. M.C.C.Q.B.A. Appearances:

Zul Verjee, Q.C. Verjee & Associates for the Plaintiff Lindsay A. Mullen Norton Rose Fulbright Canada LLP for the Defendants