Rothwell v Kemik Inc, 2017 ABQB 310

Court of Queen’s Bench of Alberta Citation: Rothwell v Kemik Inc, 2017 ABQB 310 Date: 20170505 Docket: 1201 15076 Registry: Calgary Between: Jeromy Rothwell and 1199206 Alberta Ltd Plaintiffs - and - Kemik Inc., Sigit Group Inc. and John O’Rourke Defendants _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice Gillian D. Marriott _______________________________________________________ Introduction [ 1 ] The Plaintiff, Mr. Jeromy Rothwell, as the principal of 1199206 Alberta Ltd. (“119”) entered into a business relationship with Mr.

O’Rourke who at all the relevant times was the CEO and sole director of all of the Sigit companies including Sigit Group Inc. (“SGI”). SGI was the parent company of Sigit Automation Inc. (“SAI”), Sigit Products Ltd. (“SPL”) and Sigit International Inc. (“SII”), whose name was changed to Kemik Inc. (“Kemik”) in February 2011. The companies are collectively referred to as the “Sigit Group”. [ 2 ] Mr. Rothwell alleges that the relationship culminated in an agreement dated February 9, 2011 between him, 119 and SGI by which 119 was to receive shares in Kemik, which it did not receive. The Plaintiffs allege that Mr.

O’Rourke, SGI and Kemik sold the assets of Kemik in total disregard for the Plaintiff’s interest in Kemik. They allege that as a result of the Defendants failure to acknowledge the Plaintiff’s interest in the shares they were treated either, by Kemik’s actions or by Mr. O’Rourke’s and SGI’s actions in

directing Kemik, in a manner that was oppressive, unfairly prejudicial or that unfairly disregarded their interests. They also allege that Mr. O’Rourke exercised his powers as the sole director of Kemik in the same way and that he failed to act in accordance with his statutory duties as the sole director of Kemik. [ 3 ] The Defendants deny the claims of the Plaintiffs. They say that the Plaintiffs never acquired ownership of any of Kemik’s shares as Mr.

Rothwell did not accept SGI’s offer, refused to complete the acquisition of shares in Kemik, and refused to execute the Unanimous Shareholders Agreement (“USA”) as was required. As a result they state that there is no basis to the claim and nothing owing to the Plaintiffs. Background [ 4 ] Mr. Rothwell and Mr. O’Rourke were social acquaintances. In early 2010 Mr. Rothwell was looking for a partner in an opportunity he had. He had been a shareholder in a corporation named “Raider”. Raider was the distributor of a chemical compound 5044N which was delivered to one customer: Trican Well Services (“Trican”). Mr.

Rothwell and Raider were the middlemen between the producer of the chemical, Wacker Chemicals Corporation (“Wacker”) and the end user, being Trican. Mr. Rothwell and Raider sourced 5044N (trade named TLA) and ensured delivery of it to Trican, at a considerable markup. The venture was profitable. Over time Mr. Rothwell had developed an excellent reputation with Trican. [ 5 ] Mr. Rothwell sold Raider to WestCorp but he continued to work with it as a consultant and was responsible for the delivery of TLA by Westcorp to Trican.

He was paid a monthly stipend, although there was no formal agreement between them. [ 6 ] In late 2009 or 2010 WestCorp began to experience financial difficulty. Mr. Rothwell became aware that WestCorp was not paying Wacker in a timely manner and that as a result Trican was having issues with the consistent supply of TLA. This appears to have led Mr. Rothwell to consider other options for the delivery of TLA to Trican. By June of 2010 he was pursuing alternate means of delivering TLA to Trican notwithstanding he was in a business relationship with WestCorp. [ 7 ] Mr. Rothwell approached Mr.

O’Rourke in June of 2010 to see if he would be interested in becoming involved in the delivery of TLA to Trican. Mr. O’Rourke indicated he was interested but made it clear to Mr. Rothwell that any business venture would have to be run through the Sigit Group. Mr. Rothwell knew that Mr. O’Rourke ran Sigit, but it is clear from the evidence that Mr. Rothwell had no understanding of the complexity of the Sigit Group. [ 8 ] In 2010 Mr. O’Rourke was in the process of restructuring the Sigit Group into a shared services model.

SGI as the parent provided all the broad operating services: accounting, finance, technology, health and safety, etc. to the other companies who remitted a management fee back to SGI for their share of the services. The amount of the fee was determined by a formula that Mr. O’Rourke developed which was based on the profit realized by the company and was applied to each of the companies in turn. SGI had no active business activities other than to provide services to the Sigit Group. [ 9 ] In 2010 the shareholders of SGI were the Mr. O’Rourke Family Trust, the Krease Family Trust, and the Bohme Family Trust.

SGI was the sole shareholder of SPL which was wound up in early 2012. SGI was also the sole shareholder of SAI and SII/Kemik between 2010 and December 13, 2012. SII changed its name to Kemik Inc. on February 8, 2011. On November 30, 2012 Kemik’s assets were sold to a third party, Sodium Solutions Inc. On December 13, 2012 Kemik changed its name to 1563305 Alberta Ltd. and SAI became its sole shareholder. By October 31, 2013, the sole shareholder of SGI was the Mr. O’Rourke Family Trust. On November 1, 2013 SGI amalgamated with SAI. [ 10 ] By September of 2010 Mr. O’Rourke and Mr.

Rothwell had come to an understanding. Mr. O’Rourke agreed to utilize SPL to deliver TLA to Trican for a 6 month test period at the end of which the parties would assess the viability and profitability of the enterprise. During this period Mr. Rothwell would be employed as the Business Unit Manager of SPL. It was also understood that the business would have to fit into the Sigit Group and that Mr. Rothwell or his company would have to sign a USA, as had all of the other partners in the Sigit Group. If the enterprise was profitable, the business would be owned as to 75% by Mr. O’Rourke’s company and 25% by Mr.

Rothwell or his company. There were some exchanges between Mr. O’Rourke and Mr. Rothwell about how Mr. Rothwell was to hold his 25% as Mr. O’Rourke’s other partners held their shares through a family trust. Mr. Rothwell saw this as expensive and as a result it was agreed he would hold the shares in a company, being 119. [ 11 ] In September 2010 the circumstances crystalized. Mr. Rothwell became aware that WestCorp was not going to make a delivery of TLA. He told Trican that he could deliver the TLA through another supplier. He then went to Mr.

O’Rourke, who financed the purchase of the TLA from Wacker and the delivery to Trican. On October 21, 2010 the first delivery was completed and the relationship between SPL, Trican and Wacker was established. On October 22, 2010 Mr. Rothwell resigned from WestCorp. The second delivery of TLA by SPL was completed on October 27, 2010. [ 12 ] On Nov. 12, 2010 Mr. Rothwell signed an employment contract with SPL and became the Business Unit Manager for SPL, reporting to Dave Smethurst, the Chief Operating Officer for the Sigit Group. Mr. O’Rourke’s’ other business partners also held this same position in SAI and SII.

Mr. Rothwell’s responsibilities were outlined in the employment contract and there is no issue that up to a point in time he fulfilled them very well. His primary responsibility was to ensure that the TLA arrived at the warehouse, was repackaged and delivered to Trican. Mr. Rothwell did not spend that much time at the head office but he did attend regular meetings with the Mr. O’Rourke, Mr. Smethurst, senior management and the other Business Unit Managers. [ 13 ] Sigit Group had previously been financed through TD Bank and Mr. O’Rourke had personally guaranteed the debt.

He and Smethurst, as COO, had investigated changing the financing to either ATB or HSBC. They determined that HSBC was the best option and the financing was negotiated through late 2010 and put in place by February 2011. The line of credit extended to the Sigit Group was based on a General Security Agreement held by HSBC against all of the companies and a cross guarantee by the companies, such that each company guaranteed the other company. Mr. O’Rourke executed all of these documents as the sole director of each of the companies, making up Sigit Group, including Kemik (previously SII).

[ 14 ] By early 2011 Mr. Rothwell was aware SPL was in financial trouble and that the companies were not servicing the debt owed to HSBC. Mr. O’Rourke, Mr. Rothwell and Mr. Smethurst confirmed that this was a major part of the discussions at the meetings held by the management group, including the Business Unit Manager meetings. Mr.

Rothwell was also aware that guarantees had been put in place with HSBC, although it is unclear if he knew the nature of the guarantees or that the companies had cross – guaranteed each other. [ 15 ] In April 2011, upon the completion of the 6 month test period it was concluded that the TLA business was profitable and viable. SII had changed its name to Kemik and was held 100% by SGI. Mr. O’Rourke instructed SGI’s lawyers to draw up the documents to transfer 25 shares of Kemik from SGI to 119. Those were forwarded to Mr.

Rothwell by email dated April 12, 2011 and included the Director’s Resolution approving the transfer, the share transfer form, the Share Purchase and Sale Agreement, and the USA. The documents are for some reason backdated to February 9, 2011 but it is clear that the test period was not completed until April. [ 16 ] At some point Mr. O’Rourke executed the Director’s Resolution (Kemik) issuing the share certificate (25 shares) to 119, the share transfer form (SGI to 119), and the Share Purchase and Sale Agreement (SGI selling 25 shares to Kemik). Mr. O’Rourke did not sign the USA. Mr.

Rothwell came into possession of these originals and held them up to the trial. [ 17 ] Mr. Rothwell’s evidence is that after April 2011 he was constantly pressing Mr. O’Rourke about the partnership and finalizing the arrangement between the two of them. Mr. O’Rourke does not recall Mr. Rothwell pushing for this. He did not say that it did not happen – his evidence was that he could not recall it. He said that he was waiting for Mr. Rothwell to sign the documents. After April 12, 2011 there was no significant exchange of emails or other correspondence that would support Mr. Rothwell’s position.

On November 3, 2011 when Mr. Rothwell emailed Mr. O’Rourke asking “where are we at with the shares of Kemik it’s been a year and I would like this completed”. Mr. O’Rourke’s response on November 3, 2011 was “Just need you to sign it,”. Mr. Rothwell did not sign the documents nor, it seems, did he do anything else that would have facilitated the closing of this agreement. [ 18 ] In March of 2012 Mr. Rothwell became irate when he saw the management fees that were being paid to SGI by Kemik.

This fee was being paid pursuant to the contract that all of the Sigit Group of companies signed in January of 2012, retroactive to October 31, 2011. Mr. Rothwell requested the financial information for Kemik and this was provided to him. In cross –examination Mr. Rothwell stated that he knew money was being pulled out of Kemik to pay for the other companies expenses but “as the deal was not signed” he felt he was powerless to do anything. [ 19 ] In May of 2012 Mr. Rothwell had a meeting with Mr. O’Rourke but rather than insisting on the existing arrangement being finalized he told Mr.

O’Rourke he wanted 50% of Kemik and the management fees that had been paid by Kemik to SGI to be paid back. He said that he made this offer to Mr. O’Rourke because he was not happy and wanted to “spur” on the deal. This intention however, was not made clear to Mr. O’Rourke, nor does it appear that Mr. Rothwell backed down or revoked his counter offer. Mr. O’Rourke considered this counter offer but ultimately rejected it. Nothing further happened with respect to the share transfer. Mr.

Rothwell continued to work as the Business Unit Manager for SPL/Kemik and was paid for doing so pursuant to his employment contract. SPL was wound up sometime in 2012 and Kemik assumed the business. [ 20 ] In June of 2012, Mr. Rothwell requested a copy of his employment agreement and the confidentiality agreement he had signed. He advised Mr. O’Rourke in an email that he had been offered a job by another company. About this time he also refused to host an employee of Wacker who was in town – stating that perhaps the owner of Kemik should do so. In reply to a request from Mr. O’Rourke to

schedule a meeting with Mr. Smethurst to discuss matters, Mr. Rothwell emailed, “this meeting is between you and I. You are the sole shareholder of Kemik and as far as I know Dave is not”. In this same time period Mr. Smethurst received information that suggests that Mr. Rothwell was competing against SGI and Kemik. [ 21 ] At the end of June 2012 the relationship between Mr. O’Rourke and Mr. Rothwell was deteriorating. Mr. O’Rourke, wanted out and offered Mr. Rothwell the opportunity to purchase 100% of the assets of Kemik. This was accepted by Mr. Rothwell. Mr.

Rothwell’s employment with Kemik was terminated on August 2, 2012. The parties exchanged drafts of the Purchase Agreement and it was signed August 27, 2012. The closing date was scheduled for September 30, 2012. Upon the closing an issue arose as to how the value of the inventory held by Kemik would be dealt with. Kemik was continuing to purchase and sell TLA during this time so there were significant fluctuations in the amount of it on the floor. As a result Mr. Rothwell was unable to close the deal as his company could not raise the financing to pay for the inventory by the closing date. Mr.

O’Rourke’s’ evidence was that timing was not a significant issue for him and that he would have entertained an extension of the closing to give Mr. Rothwell more time but that Mr. Rothwell did not request that. The sale did not complete. [ 22 ] Subsequently Kemik’s assets were sold for $1.8 million to Sodium Solutions, Inc. (“Sodium”). That sale closed on November 30, 2012. Mr. O’Rourke and Mr. Smethurst had negotiated letter agreements with Wacker and Trican, which it appears, had a significant impact on the asset value. Mr.

O’Rourke was clear that Kemik had to be sold in order to satisfy HSBC as it was demanding payment of $1.4 million. HSBC only approved the sale of Kemik on the basis that this debt would be repaid. [ 23 ] On November 23, 2012 the Plaintiffs sent a letter to SGI indicating they were aware of the sale of Kemik’s assets or shares and stating that Mr. Rothwell owned 25% of the shares and was objecting to the sale. On November 27, 2012 Mr. Rothwell and 119 issued a Statement of Claim against Kemik, SGI, Mr.

O’Rourke and Burstall Winger LLP (BW”) seeking a declaration that 119 was the owner of 25 common shares of Kemik, or that Kemik held them as constructive trustee, an order directing Mr. O’Rourke, SGI and Kemik to complete the sale of the shares to 119 and to provide an accounting, and an injunction preventing the sale of Kemik as well as costs. That Statement of Claim was amended on December 6, 2012, as the sale of Kemik’s assets to Sodium closed on November 30, 2012.

In the Amended Claim the allegations against BW were expanded upon, and included the claim that BW had acted on the sale of the assets in total disregard of the Plaintiff’s interest. The claim against BW was subsequently summarily dismissed. The Issues to be Determined are [ 24 ] Whether there was a binding agreement between Mr. O’Rourke and Mr. Rothwell to the effect that they would develop a business in which Mr. O’Rourke would own a 75% equity interest and Mr. Rothwell a 25% equity interest. If there was an agreement,

did Mr. O’Rourke breach it by failing to transfer the 25% to Mr. Rothwell (or by failing to cause Kemik to do so). [ 25 ] If there was a breach, does the conduct of Mr. O’Rourke, Kemik, or SGI ground an “oppression” claim. In other words, has the claimant, Mr. Rothwell/119, established that their reasonable expectations were violated:

a) Does the evidence support the reasonable expectation asserted by the claimant; and

b) Does the evidence establish those reasonable expectations were violated by conduct falling within the terms of “oppression”, ‘unfair prejudice” or the “unfair disregard of a relevant interest”? Was there an agreement between the parties [ 26 ] Based on the evidence before me I find that the parties did not enter into a binding and enforceable agreement to the effect that Mr. Rothwell or 119 acquired a 25% interest in Kemik. [ 27 ] The evidence of Mr. Rothwell and Mr. O’Rourke is not contradictory when it comes to the significant points.

Both parties agree that they started discussions as to a joint venture in 2010. They both agree that there were discussions about the ownership being 75% to Mr. O’Rourke and 25% to Mr. Rothwell (or their companies). They are consistent in their evidence that Mr. O’Rourke made it clear to Mr. Rothwell that this venture would have to be done through Mr. O’Rourke’s existing business relationships being the Sigit Group as he could not go into a business distinct from his current partnerships. It is clear that the Sigit Group was very important to Mr.

O’Rourke. [ 28 ] They both agree that prior to the agreement being finalized three conditions had to be met:

a) the business would be operated for a 6 month test period to assess its viability and profitability;

b) Mr. Rothwell would have to execute a Unanimous Shareholders’ Agreement; and

c) Mr. Rothwell would hold his interest in a family trust (this was subsequently changed to the numbered company, 119). [ 29 ] The evidence is that in April 2011, some 6 months after the initial business transaction and the completion of the test period, Mr. O’Rourke, acknowledging that the venture had met expectations and was successful, arranged for the necessary documents to be given to Mr. Rothwell to complete the transaction. These documents if completed would have transferred a 25% interest in Kemik to Mr. Rothwell’s company 119. These documents, other than the USA, were all signed by Mr. O’Rourke and Mr.

Rothwell continued to hold the originals at the commencement of the trial. [ 30 ] Mr. O’Rourke’s evidence was that he had not signed the USA as that needed to be reviewed by Mr. Rothwell. Mr. O’Rourke had recently restructured his businesses and brought in partners and he knew that there could be lengthy negotiations about the terms of a USA. His previous negotiations had taken over a year to complete. He assumed that Mr. Rothwell was obtaining legal advice regarding the terms of the USA and would get back to him [ 31 ] Of significance is that Mr.

Rothwell had previously been a participant in a USA when he was involved with Raider and had obtained legal advice with respect to that agreement. Mr. Rothwell knew he would have to enter into a USA. Mr. O’Rourke was quite clear about this from the beginning of the discussions and it is reasonable from a business perspective that there would be a USA setting out the terms of the shareholding. Mr. Rothwell acknowledged that he received the USA, read it and understood it. He said he did not seek legal advice in relation to its terms. [ 32 ] Mr.

Rothwell’s evidence was that he wanted to have a meeting in the boardroom, to have all the documents before him, including the minute book and the actual share certificate. He stated that he wanted to see the share certificates (notwithstanding the power of attorney) and the minute book of Kemik. No explanation was given by him as to why such a meeting was necessary for him nor why he did not insist on the completion of the transfer at the meeting the parties had in May 2012. Nor was this conveyed to Mr. O’Rourke. [ 33 ] It was clear that Mr.

O’Rourke’s position was that there was no deal until the USA was signed. Given his commitment to his other partners in the Sigit Group, this was entirely reasonable. Throughout this time he was preoccupied as he was restructuring the Sigit Group and this was clearly his priority. He was also experiencing significant financial issues with HSBC. Consequently Mr. Rothwell and Kemik were not top of mind for him and as he said, he was waiting for Mr. Rothwell to sign off on the documents. This is evident from his response to Mr. Rothwell in November of 2011, when Mr.

Rothwell asked him in an email about the deal and Mr. O’Rourke’s response is “just need you to sign it”. Even at that time Mr. O’Rourke was prepared to close the deal once Mr. Rothwell signed the documents. [ 34 ] It is significant that Mr. O’Rourke gave the documents to Mr. Rothwell – as signed by him in April 2011. He did not see these signed documents again until this litigation. Mr. Rothwell took the original documents but has never signed them. Much is made by Mr. Rothwell that he wanted a “closing” – the pomp and circumstance so to speak – but that appears to never have been of any significance to Mr.

O’Rourke. No explanation was given by Mr. Rothwell as to why he did not just sign the documents and close the deal or specifically demand a meeting and the minute book if he wanted those. There is no specific request for the minute book or the share certificates to be produced. Mr. Rothwell’s evidence is that there were a lot of conversations about this issue but Mr. O’Rourke has little recollection of those conversations being significant. The question remains: if this is what Mr.

Rothwell wanted why was it not put in writing? [ 35 ] The Plaintiff presented the argument that as the USA could only be signed by a corporation once it had the shares. Therefore, the fact that it was not signed by Mr. Rothwell should not be taken as the failure by him to complete one of the conditions of the agreement. However, the evidence is that Mr. O’Rourke signed the documents to transfer the shares to Mr. Rothwell and that those documents were in Mr. Rothwell’s possession. To become the owner of the shares all he had to do was to sign the documents, including

the USA and deliver them to Mr. O’Rourke. [ 36 ] So what conclusion could be drawn by Mr. O’Rourke, or any reasonable person, in the circumstances? Mr. Rothwell knew the USA had to be signed for there to be a deal. He did not sign it. The evidence is that he had no problems with it, or with the other documents. He just wanted a meeting: yet there is nothing in writing requesting such a meeting. There are numerous other emails from Mr. Rothwell to Mr. O’Rourke when it seems that matters are not going as he expected. [ 37 ] After April 2011, when the documents were delivered to him, it was up to Mr.

Rothwell to complete the transaction. Mr. O’Rourke was waiting for him to sign the documents. Consistent with this is that during this time Mr. O’Rourke was continuing to operate the Sigit Group including Kemik as the sole owner. Mr. Rothwell was continuing in his role as a Business Unit Manager of Kemik. He was attending their meetings, at which the management fees, the HSBC financing issues and the financial stress that the Sigit Group was experiencing were discussed. All of this was being raised but from the evidence it does not appear that Mr.

Rothwell was engaging as anything other than a Business Unit Manager – he was certainly not acting nor being treated as an owner. [ 38 ] In May of 2012 Mr. Rothwell met with Mr. O’Rourke and told him that he wanted 50/50 or an equal share of Kemik. Mr. Rothwell’s evidence was that this was to put pressure on Mr. O’Rourke to complete the 75/25 deal but that was not communicated to Mr. O’Rourke. As Mr. O’Rourke had done what he needed to do for that deal to be completed and Mr. Rothwell had not, it is only reasonable that Mr. O’Rourke took this as a counter-offer. Mr.

O’Rourke said that he went away from the meeting considering this counter-offer but subsequently decided not to accept it. [ 39 ] In late June the parties met again and the discussion moved to Mr. Rothwell purchasing 100% of Kemik. Mr. Rothwell and Brian Gibbs signed a Non-Disclosure Agreement on July 9, 2012 allowing them access to the financials of Kemik, and to use that information for discussion relating to the sale of the business of Kemik. Negotiations commenced and there was an exchange of draft agreements between the parties’ lawyers. It is clear that Mr.

O’Rourke was becoming frustrated by the failure of the parties to reach a final agreement. [ 40 ] In early August 2012, Mr. Rothwell became aware that Mr. O’Rourke was entertaining other offers for Kemik. In an email exchange, Mr. Rothwell states that his lawyer has told him to contact a potential purchaser and advise it of his “equity position”. Mr. O’Rourke’s response in an email to Mr. Rothwell was: “As for your so-called “equity stake” you are not a shareholder in the company.... there has never been a signed legal document that asserts or supports this belief of yours.” There is no correspondence from Mr.

Rothwell or his lawyer in response to Mr. O’Rourke’s statement. [ 41 ] Negotiations continued and culminated when 1689016 Alberta Ltd. (“168”), which was incorporated by Mr. Rothwell and B. Gibbs, offered to purchase the business of Kemik as a going concern, including all of its assets. The offer was accepted by Kemik and SGI on August 27, 2012 (“the August Agreement”). [ 42 ] The Plaintiff suggests that as

Schedule “A” of the drafts of the Offer exchanged in July, included an adjustment in the value by deducting 25% (less 25% discount) Mr. Rothwell’s interest in Kemik was being recognized. Mr. O’Rourke’s evidence was that this discount did not relate to that but to his need to have the deal finalized. He needed to sell Kemik and wanted out of the ongoing issues with Mr. Rothwell. His evidence was that it could have been 15 or 35 per cent. He stated that there was no discount in the first draft or in the final document.

Of significance is that the discount is not noted in the copy of the August Agreement signed by Mr. Rothwell. As well there are significant changes in the allocation of asset values between the drafts and the final signed August Agreement. [ 43 ] There were extensive negotiations as to the content of the August Agreement. There are significant emails and comments exchanged between Mr. Rothwell’s counsel and Mr. Smethurst, on behalf of SGI. There was really no evidence as to how any of the values or the final price was calculated. What is known is that the parties signed the August Agreement.

They then acted upon it. When the issues with the value of the inventory were not resolved Mr. Rothwell was unable to complete the transaction. This litigation does not involve a breach of contract claim with respect to the August Agreement. [ 44 ] What could any reasonable person conclude from the behaviour or responses of Mr. Rothwell? No explanation was provided at to why Mr. Rothwell did not take any steps, at any time to assert his interest prior to filing the Statement of Claim if he, in fact, believed that he had a legitimate business ownership position in Kemik.

To the contrary, he took the position that he was not a shareholder until the deal was done; that there needed to be a meeting at which he views the minute book and the share certificate. Even by his own evidence it is reasonable to draw the conclusion that he did not think he or 119 owned the shares. [ 45 ] There is little if any inconsistency between Mr. Rothwell’s and Mr. O’Rourke’s accounts of the events over the two years that they were engaged in business together. The only point of inconsistency is Mr. Rothwell’s statements that he was constantly pestering Mr.

O’Rourke to meet with him to finalize the documents. Mr. O’Rourke does not recollect these efforts as being as significant as they were to Mr. Rothwell. At this time however, he was dealing with HSBC and with restructuring the Sigit Group. As he stated numerous times he was just waiting for Mr. Rothwell to sign the documents. [ 46 ] It was within Mr. Rothwell’s capacity to complete the transaction or address his issues through a more formal process and that he did not, in my view, undermines his position and his expectations to a level that has me questioning his recollection of the events.

If any inconsistency does exist I prefer the evidence of Mr. O’Rourke over Mr. Rothwell. Plaintiff’s counsel attempted to discredit Mr. O’Rourke on the basis of the lack of documents in the Affidavit of Records and on the basis of a statement he made in an affidavit that suggested he had signed the USA. I do not find these to be sufficient to raise a doubt as to Mr. O’Rourke’s credibility. Mr. O’Rourke was clear in his evidence and his recollection was supported by Mr. Smethurst, whose evidence I also find to be credible and reliable. [ 47 ] As a result of Mr.

Rothwell’s failure to complete the transaction, no final agreement was reached with respect to the transfer of 25 shares to 119. Mr. Rothwell made a counter offer when he told Mr. O’Rourke he wanted a 50/50 or an equal split. Mr. O’Rourke did not accept this counter-offer. Then the parties entered into the August Agreement which provided for the purchase by Mr. Rothwell of 100% of Kemik’s assets. The August Agreement was fully signed and was enforceable. This clearly shows the share deal was terminated if it existed at all. It failed to close on September 30, 2012 because of disputes as to the inventory count.

However, Mr. Rothwell did not commence an action on the August Agreement. Kemik’s assets were subsequently sold to Sodium.

[ 48 ] I see no basis upon which to conclude that the parties came to a meeting of the minds so as to form the basis for an agreement for the transfer of shares, enforceable at law. There was no certainty as to terms as the parties had not yet agreed to the fundamental terms of the USA. It is significant that the completion of the original transaction was solely in Mr. Rothwell’s control. I have reviewed the case law provided by both counsel. The Plaintiff provided numerous authorities addressing the oppression remedy but little to do with this issue. The Defendants authorities focused on this primary issue.

The fundamental elements of the law of contract are “offer and acceptance”. A conditional offer is just that – and is complete when the conditions are met. A counter-offer is neither an acceptance nor a completion of the conditions. I accept and rely upon the Defendant’s authorities on this point. [ 49 ] Therefore, based on the evidence before me I find that there was no contract completed between the parties. As a result Mr. Rothwell/119 never became a shareholder of Kemik nor did they become the beneficial owner of such shares.

I cannot see any basis upon which it could be concluded that the Plaintiffs have a claim by way of a constructive trust in the shares given my findings. As they have no legal or beneficial interest in Kemik they have no standing under the Business Corporations Act , RSA 2000, c. B-9 (“ ABCA ”) to commence an application for the oppression remedy they seek pursuant to that statute. [ 50 ] This concludes this matter. However, if it were to be determined that Mr. Rothwell and 119 were entitled to a 25% share in Kemik then they would be proper complainants within the meaning of 239(

b) of the ABCA . Are the Plaintiffs entitled to the shareholder’s oppression remedy [ 51 ] The issue then to be addressed would be whether the actions of Mr. O’Rourke, SGI and Kemik were of such a nature that they would constitute “oppressive” conduct as contemplated by s. 242 of the ABCA and as claimed by the Plaintiffs. If the Plaintiffs are Complainants as defined in s.239 of the ABCA then s. 242 of the ABCA provides them with the ability to seek relief from the Court. 242(1) A complainant may apply to the Court for an order under this section.

(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, the Court may make an order to rectify the matters complained of.

(3) In connection with an application under this section, the Court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing, any or all of the following: (

a) an order restraining the conduct complained of; (

b) an order appointing a receiver or receiver-manager; ... (1) an order compensating an aggrieved person;... [ 52 ]

Section 242 also provides the court with broad discretion to formulate an appropriate remedy, including an award compensating an aggrieved person. [ 53 ] One of the leading authorities in shareholder’s oppression is Re BCE Inc., 2008 SCC 69 (“ BCE” ). To prove an action for oppression, the claimant must satisfy a two-part test showing that their reasonable expectations were violated: Does the evidence support the reasonable expectation asserted by the claimant?

And 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? (BCE , at para 68) [ 54 ] The Plaintiffs claim that the acts or omissions of Kemik were oppressive, unfairly prejudicial to, or unfairly disregarded, their interests. There is no evidence that Kemik acted in that manner. The allegation is that Kemik should not have entered into the management fee contract and the HSBC financing.

This was completed by Kemik in January and February 2011 prior to the Plaintiffs obtaining any interest in it. The Plaintiffs say that the Plaintiff’s interest arose in February 2011 as that is the date of the documents. Those documents were not signed by Mr. Rothwell and they were not even prepared until April of 2011. The evidence was clear that the Plaintiffs had no interest until the test period was complete which was April of 2011 and the documents were signed by them. Further, if the Plaintiffs had an interest at that time they had the opportunity to engage to protect it.

The evidence was clear that these matters were discussed at a number of meetings. There was no attempt to hide this information. Mr. Rothwell cannot say that he was unaware or that he did not know about this and claim that Kemik should not have engaged in these activities. He did not hold an interest in Kemik at that time. [ 55 ] The Plaintiffs claim that SGI and Mr. O’Rourke caused the business of Kemik to be carried on in an oppressive manner. There is no evidence of this. Mr. O’Rourke was clear that the corporations were run as a group and that Mr. Rothwell would have to conform to the Sigit model.

This was the rationale for the USA, which his other partners had also entered into. SGI, and Mr. O’Rourke,

not only attempted to complete the initial transaction, they then entered into the August Agreement, the intent of which was to transfer all of Kemik’s assets to 168/Mr. Rothwell. [ 56 ] The Plaintiffs then allege that Mr. O’Rourke exercised his powers as the sole director of Kemik in an oppressive manner and contrary to his statutory duties as the sole director of Kemik. I find no evidence to support this. If anything Mr. O’Rourke was acting in the best interests of Kemik and exercising sound business judgement in making the decisions he did. There is no evidence to the contrary.

It would not have been beneficial to Kemik to have HSBC realize its security and Mr. O’Rourke’s evidence was that HSBC approved the ultimate sale of Kemik, pursuant to its finance arrangements; on the basis the debt which was guaranteed by Kemik would be paid. I have found that Mr. Rothwell knew about these arrangements prior to April 2011. He had the ability to exercise due diligence with respect to that information. That he now takes the position that they were prejudicial to him and to 119, is inconsistent with his failure to object to them at the time.

To think that this complex of an organization would not have significant financing obligations is unreasonable and it is clear that Mr.

Rothwell knew that HSBC was involved with the Sigit Group. [ 57 ] I am satisfied, having regard to the specific facts of this case, the relationships at issue and the entire context establish that the Plaintiffs may have had expectations but those expectations were not reasonably held, nor were they violated by the Defendants’ conduct. [ 58 ] As stated in BCE “the claimant must identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held.” (para 70).

The Court is to look beyond legality to what is fair, given “all” the interests at play, however, not “all” conduct that is harmful to a stakeholder will give rise to the oppression remedy. (para 71) [ 59 ] At paragraph 72, the Court stated: Factors that emerge from the case law that are useful in determining whether a reasonable expectation exists include: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders. [ 60 ] On the facts of this case there is no evidence that there was any departure by Mr.

O’Rourke or Sigit from general commercial practices having regard to the nature of the corporation. Mr. Rothwell was well aware of the structure of the Sigit Group and that Mr. O’Rourke was the sole director and operating mind of the group. Although the sub companies had additional partners, the controlling shareholder of all the companies was SGI and Mr. O’Rourke was the sole director and shareholder of SGI. He was also the sole director of the other companies. Mr. Rothwell was well aware that his agreed arrangement with Mr. O’Rourke would be subject to that structure. Mr.

Rothwell’s evidence was that when he initially proposed the venture Mr. O’Rourke made it clear that any new business venture he entered into would have to fit into his existing business structure and that there would have to be a USA. Mr. O’Rourke also made it clear that all his partners had signed USA’s and Mr. Rothwell would have to. There is nothing unusual about requiring a USA to complete the transaction.

If anything that would be the norm in this type of situation: a closely held corporation, integrated businesses and corporate entities and minority shareholders. [ 61 ] The next factors to consider are the relationship between the parties and past practices. Of significance is that these parties had no business relationship prior to this venture. The met because Mr. O’Rourke coached Mr. Rothwell’s son in hockey. So even though this was a closely held corporation the parties were neither family nor friends, at best they were acquaintances. Mr. Rothwell entered into the business relationship with Mr.

O’Rourke and Sigit Group, without a clear understanding or appreciation of the organization or the business he was engaging with. It appears that he made no real efforts to understand it. [ 62 ] There is no evidence that Mr. O’Rourke exercised his powers as the sole director of Kemik or SGI in any manner that was oppressive or contrary to his statutory duties as alleged by the Plaintiffs. Mr. O’Rourke had an open management style, there were monthly and weekly meetings with all the Business Unit Managers. Mr. Rothwell attended meetings; he recalled the general discussions but not specifics of them.

His contact with Mr. O’Rourke appears to have been mostly through email and phone, however there is no evidence to support his position that he was constantly talking to Mr. O’Rourke about getting the deal done. It is not until March of 2012 that Mr. Rothwell asks to see any of the financial information for Kemik, let alone for any of the other companies, including SGI, who he was going into partnership with. [ 63 ] There is no evidence that any information was withheld from Mr. Rothwell. In fact the evidence is that when he did ask he was provided with it.

He was also aware, or should have been, that the Sigit Group was undergoing business practice changes between October 2010 through 2012 and this would not be considered unusual. The management fee was implemented in January 2011and the change to HSBC in February 2011, all of which was known or knowable by Mr. Rothwell.

As well, senior people left their positions and two of the other partners left during this time. [ 64 ] In the absence of any evidence that there were no valid commercial reasons for the change, or that those changes were done to undermine the complainants rights, the only conclusion that is reasonable to draw is that they were made in good faith, utilizing sound business judgement and were made in recognition of the business realities of the time. [ 65 ] The next and perhaps the most relevant factor in the determination of whether Mr.

Rothwell’s expectations were reasonable is whether he could have taken steps to protect himself from the prejudice he claims to have suffered and the evidence is clear, and I find, that he could have done so:

a) Firstly, he could have undertaken his “due diligence” once the test period was complete to ensure that he understood the entities that he was intending to enter into business with. If he had done so in early 2011, he would have become aware of the specific obligations that Sigit Group, including Kemik was subject to, specifically the HSBC financing as that was in place in February 2011. He could have asked for and seen the written Management Fee Contract, executed by the Sigit Group in January 2011. He clearly was aware of these as they were discussed at the meetings he attended. Mr.

Rothwell could have made a written request to see the Minute Book and the financial information for Kemik. There is no evidence that such a request, had it been made, was or would have been denied. In fact the evidence is to the contrary

b) Secondly, after April 12, 2011 Mr. Rothwell could have signed the Share Purchase Agreement which SGI had already executed, and which was in his possession. He then could have executed the USA which he also had in his possession, which he said he read and understood and had no issues with. He could have retained counsel to assist him with the completion of the transaction, even by having them request a formal meeting. He certainly could have signed all of the documents in November 2011, when Mr. O’Rourke, in response to Mr. Rothwell’s question as to where the deal was, replied “just need you to sign it”.

c) Finally, he took no steps to assert his interest in the face of the statement from Mr. O’Rourke that he did not have an equity position in Kemik, when Mr. O’Rourke is looking to sell Kemik in the summer of 2012. Even though, he told Mr. O’Rourke that his lawyer has suggested he call the potential purchaser so he obviously had legal advice at that time. [ 66 ] Mr. Rothwell did not act in a manner consistent to his alleged expectations. If he did not do so then how can they be seen to be reasonable and violated by the Defendant’s conduct.

The Defendants were prepared at all times to complete the transaction on the terms agreed to. There is no evidence that they were not. But once the counter offer was made by Mr. Rothwell in May of 2012 and August Agreement was signed it was unreasonable for anyone to think that the share agreement was revitalized and enforceable. [ 67 ] Another factor the Court has to consider is whether there were any representations or agreements that would reflect the reasonable expectations of the parties. Clearly Mr. O’Rourke was of the view that until the documents were signed by Mr. Rothwell there was no deal and Mr.

Rothwell was not an owner. Mr. Rothwell continued to be employed as a Business Unit Manager until August 2012, when his position was terminated. He continued to report to Mr. Smethurst, the COO of the Sigit Group. There is no evidence that he was being presented as an “owner” to anyone. This is one of the facts that distinguish this case from Vaillancourt v. Carter, 2016 ABQB 492 . It was clear in that case that Ms. Vaillancourt was held out to be an owner to third parties by Mr. Carter in a very substantial manner, which contradicted his position that she was not an owner and supported hers: that she was.

There is none of that in this case. [ 68 ] Rather than insisting, in writing, on the completion of the transaction in November of 2011 or May of 2012, Mr. Rothwell, in June of 2012 writes to Mr. O’Rourke advising him that he had another job opportunity that he was considering. This is in violation of the non-competition clause of his employment contract. As well, his supervisor, Mr. Smethurst hears that Mr. Rothwell has been talking to a customer about another supplier of the product, whether true or not, this would have been contrary to his employment contract.

It was and is not what would reasonably be expected of an owner of the business. [ 69 ] This leads me to the final factor in this determination: that the directors of the corporation must resolve conflicts between the interests of the corporate stakeholders, inter se and between stakeholders and the corporation in accordance with their fiduciary duty to act in the best interests of the corporation. [ 70 ] The Plaintiffs allege that the Management Fee Contract and the HSBC Financing put in place by Mr.

O’Rourke, as the sole director and majority shareholder were contrary to their interests as a minority shareholder in Kemik. However, at the time all of that transpired the Plaintiffs did not have a beneficial or legal interest in Kemik. All parties are clear that the test period was running for 6 months and that it did not complete until April 2011. Further, I have found that Mr. Rothwell was aware or should have been aware of both the management fee and the financing arrangements, the details of which were easily discoverable. They were regularly discussed at the business meetings.

It is also clear that pursuant to the USA, Mr. O’Rourke was to continue to be the sole director of Kemik, as he was of all the companies. Further, there is no evidence that any of the decisions made by Mr. O’Rourke as the sole director of the companies comprising Sigit Group were contrary to the business judgement rule or were not made in the normal course of business.

All would seem to be reasonable business practices. [ 71 ] In BCE the Supreme Court stated, “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences.

Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholder’s reasonable expectations... (para 67) [ 72 ] In the case of shareholders, it is reasonable to expect the directors to act in the best interests of the corporation, making informed business decisions in good faith that endeavour to serve the corporation’s best interests: BCE at para 66; Krulc v Krulc , 2015 ABQB 213 , 40 B.L.R. (5 th ) 142 (Alta. Q.B.), at para 2 . [ 73 ] After the August Agreement did not close it appears there was no notice of any claim by Mr.

Rothwell until his counsel’s November 23, 2012 letter was received by the Defendants. By this time the sale to Sodium was underway and due to complete on November 30, 2012. Realistically, and financially, SGI and Mr. O’Rourke had no option but to close that deal. Failing to do so would not have been in the best interest of either SGI or Kemik. Result [ 74 ] The evidence supports Mr.

Rothwell’s position that he had a reasonable expectation that a 25% of ownership interest in Kemik would be transferred to him by SGI up to that point in time when he made the counter offer that he wanted 50% rather than 25%, which was rejected by Mr. O’Rourke. The initial agreement, incomplete at this time, was thereby terminated. This was clearly accepted by Mr.

Rothwell as he then entered into the August Agreement to purchase 100% of the assets of Kemik. [ 75 ] If the Court were to find that there was an enforceable agreement reached between the parties such that the Plaintiffs were entitled to 25% of the shares of Kemik, then clearly they would be complainants pursuant to the ABCA . The issue is then whether the Defendants or any of them violated the Plaintiffs reasonable expectations and conducted themselves in a manner that was “oppressive, unfairly prejudicial, or unfairly disregarded the interests of the Plaintiffs.

[ 76 ] The evidence does not support the conclusion that SGI or Kemik acted in such a manner for the reasons already given. I would therefore dismiss the claim of the Plaintiffs against SGI and Kemik in its entirety. [ 77 ] I also do not find that Mr. O’Rourke, personally acted in any manner that was oppressive, unfairly prejudiced or disregarded, the Plaintiffs reasonable expectations. He was acting with a view to the best interests of Kemik. It is clear that Mr. O’Rourke was the sole director and CEO of all the companies throughout this matter.

As such he owed a duty to all of the companies to act in their best interests. There is nothing to suggest that he acted contrary to those interests including Kemik’s as it required the parent’s services to operate and operated as a part of an economic group. That Mr. Rothwell thought that this was not necessary for Kemik, does not change the fact that it did so and that Mr. Rothwell was aware of that. [ 78 ] The evidence is that Mr. Rothwell was well aware that HSBC was financing the companies. He knew that Kemik was part of the Sigit Group. He attended meetings and was aware that the companies and Mr.

O’Rourke were off their covenants. These issues were apparent in February 2011 and were certainly known as of April 2011. If Mr. Rothwell was a “shareholder/owner” or was intending to become one in April 201l, due diligence on his part would have revealed these issues. There was no evidence at all that Mr. O’Rourke was not open and transparent about the liabilities and the difficulties Sigit Group was facing. [ 79 ] It is clear that Mr. O’Rourke did not believe the original transaction was alive. His belief was reasonable. He acted in the best interests of Kemik based on the facts. Those facts indicated that Mr.

Rothwell terminated the negotiations relating to the Share Purchase Agreement. [ 80 ] There is no evidence of bad faith, improper motives or preferring of one group or another. At best, the Plaintiffs may have established a mere error of judgement. That is not enough for the Court to find Mr. O/Rourke personally liable. I dismiss the claim against him.

Damages [ 81 ] If 119 were entitled to be compensated by Kemik or SGI, for breach of contract, for failing to transfer the shares, or a finding was made that they or one of them acted in an oppressive manner, then the issue becomes: what damages would the Plaintiffs be entitled to. The Plaintiffs’ position is that they are entitled to 25% of $1.8 million as that is what Kemik’s assets sold for.

The Defence position is that there is no evidence of the damage claim and the Plaintiffs have not proven this. [ 82 ] If the Plaintiffs were entitled to the shares in April of 2011, as that was when the test period was completed and the documents provided to Mr. Rothwell, then the breach arising from the failure to transfer the shares would have occurred at that time. There is no evidence of the value of Kemik in April 2011.

The financial statements which are as of October 31, 2011 are of little assistance in assessing the value of the shares as of April 2011. [ 83 ] Kemik’s assets were sold for $1.8 million as of November 30, 2012. By that time Mr. Rothwell was no longer involved in Kemik at all. This was an asset sale and not a share sale. Mr. Smethurst and Mr. O’Rourke’s evidence was that even after the sale of Kemik’s assets there were outstanding liabilities, including the lease rental on the warehouse.

The position of the Plaintiffs that they should receive the benefit of the sale of Kemik but should not bear the burden of Kemik’s liabilities, including the HSBC guarantees is unreasonable. [ 84 ] In short, Mr. Rothwell agreed in April 2011 to take 25% of a company that was clearly subject to the liabilities that Mr. Rothwell is now seeking to avoid. No one misrepresented Kemik’s obligations to Mr. Rothwell and Mr. Rothwell chose to go forward without asking about them. Cross-guarantees among related companies in an economic group are not unusual. Mr.

Rothwell bears the responsibility for his choice to proceed without the due diligence that would have revealed the exact details, not the Defendants. [ 85 ] Notwithstanding that Mr. Rothwell knew about the HSBC financing and the sale to Sodium it appears that the Plaintiffs did not seek these documents through the discovery process. Counsel for the Defendants (who was retained shortly before trial) raised the issue of their non- disclosure by previous counsel.

It appears the documents were in a box and as soon as Counsel discovered them she sent them to Plaintiff’s Counsel and offered to adjourn the trial if that was desired. She also raised this at the beginning of the trial. The Plaintiff did not seek an adjournment of the trial in order to review and assess the documents but took the position that the documents should be excluded as they had not been disclosed in the appropriate manner.

The documents are general banking documents and the sale closing documents created in the normal course and clearly would be necessary to assess the loss or damages suffered by the Plaintiffs. In the absence of that information there is no evidence as to the loss or damages. There is no accounting evidence, business valuation evidence or the like to assist the court is determining this. [ 86 ] The evidence of the liabilities is contained in the closing documents which the Plaintiff objected to at the trial.

The Plaintiffs seek an Order directing the Defendants to provide a full accounting of the business of Kemik to them. Kemik’s assets were sold on November 30, 2012. How can an accounting be provided without addressing the terms of the sale, the liabilities of Kemik which were paid and those that remained after the sale? All of which is in the documents the Plaintiffs object to. [ 87 ] The sale closing documents indicate that the following liabilities were paid from the sale proceeds: Alberta Pallet Co $5218.50 Bugle Forklift $327.08 Burstall Winger $88,265.98 City of Calgary $3900 Hood Packaging $13,229.30

KPMG $3197.25 PSKR Holdings $80,000.00 HSBC $1,400,000.00 [ 88 ] The total liabilities amount to $1,594,228.10. After they were paid through the solicitors the net proceeds would have been $205,771.9. The Plaintiff objected to the evidence of the Sigit Group accountant, Mr. Pilling, who gave evidence as to how the sale was recorded for tax purposes on the books of the various companies including Kemik.

As a result there is no clear and concise evidence as to the value of the shares of Kemik before the Court. [ 89 ] It is unrealistic to take the view that the loss or damage is 25% of the value of the assets of Kemik without considering the liabilities that Kemik was subject to.

With or without the documentation I find that the Plaintiff has not proven or quantified the loss which it alleges to have suffered. [ 90 ] Having found that there is no enforceable or binding agreement between the parties that would entitle the Plaintiffs to the remedy they seek, and even if there was, I find that the Defendants have not conducted themselves in a manner which would constitute oppressive conduct, I dismiss the Plaintiff’s claims, against all the Defendants. [ 91 ] The Defendants are entitled to costs which may be spoken to if necessary. Heard on the 16 th day of November, 2016.

Dated at the City of Calgary, Alberta this 5 th day of May, 2017. Gillian D. Marriott J.C.Q.B.A. Appearances: Lukas Rasmussen / Karolina Kluz De Waal Law for the Plaintiffs Kimberly Setrakov Warren Benson Amantea LLP for the Defendants