Meyer v Altex Energy Ltd, 2021 ABQB 582

Court of Queen’s Bench of Alberta Citation: Meyer v Altex Energy Ltd, 2021 ABQB 582 Date: 20210723 Docket: 200113089 Registry: Calgary Between: Randy Meyer and Greg Molaro Applicants - and - Altex Energy Ltd, Kern Energy Partners Management Ltd, John Zahary, Jeff Van Steenbergen, Dale Holm, Francesco G. Mele, David Pearce, Scott Pearl and Cal Buchanan Respondents _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice M.

David Gates _______________________________________________________ Introduction [ 1 ] In this application, two minority shareholders and former employees of the Respondent corporation seek leave to pursue a derivative action on behalf of that corporation against, inter alia , its directors. Permitting such an action is an unusual step that requires the court to consider the factual matrix and to weigh a number of considerations. Facts [ 2 ] Altex Energy Ltd (“Altex”) is a corporation incorporated under the

Canada Business Corporations Act , RSC 1985, c C-44 (the “ CBCA ”). Altex carries on the business of “crude by rail”, meaning that it delivers crude oil products to markets using tank cars and railroads as a “pipeline”. It connects producers of bitumen and crude oil products from Canada’s oil sands to markets in Alberta, Canada, the United States midwest, the United States Gulf coast and elsewhere.

In addition, Altex has developed specialized software for use in the oil by rail sector and holds a number of patents. [ 3 ] Altex was incorporated in 2005 by five individuals, including the Applicant, Greg Molaro, who served at one time as Altex’s Vice President, Operations. Molaro is also a minority shareholder of Altex. [ 4 ] The other Applicant, Randy Meyer, was an employee of Altex from December 2012 to March 2017, holding the positions of Vice President, Corporate Development and Logistics and Vice President, Transportation and Marketing. He is also a minority

shareholder of Altex. [ 5 ] Both of the Applicants left their employment with Altex on March 24, 2017. Significantly, both filed Statements of Claim against the Respondents on March 23, 2017 alleging, inter alia , constructive dismissal and oppression. [ 6 ] The individual Respondents, John Zahary, Jeff Van Steenbergen, Dale Hohm, Francesco G. Mele, Scott Pearl, David Pearce and Cal Buchanan, are all members of Altex’s Board of Directors (the “Board”). [ 7 ] The other Respondent, Kern Energy Partners Management Limited (“Kern”) is a private equity fund manager that sells units in its investment funds.

At some point, Kern changed its name to Azimuth and I will refer to it as such in the balance of these Reasons. [ 8 ] The Applicants’ complaints leading to this application relate to several transactions, largely, though not exclusively, in respect of the shareholdings of Altex. The following events are at issue between the parties. A. The 2014 Put and Call Agreement [ 9 ] In late 2013 and early 2014, efforts were being made to secure additional investment in Altex.

On July 2, 2014, Altex entered into a financing agreement with three large, non-Canadian investors (the “New Investors”) and Azimuth (collectively, the “Investors”). Under that agreement, the Investors paid $40.75 million for 16,300,000 units each consisting of one common share, one special voting share and a related Put and Call obligation. The Call option permitted an Investor to purchase an additional common share of Altex at a strike price of $2.50. The corresponding Put option entitled Altex to put an additional common share to the Investor, also at a strike price of $2.50.

Accordingly, exercise of either the Put or Call option would result in the issuance of an additional 16,300,000 common shares of Altex for consideration of an additional $40.75 million. The Put and Call options expired on July 1, 2016 and it is common ground that neither was exercised. [ 10 ] The Applicants assert that the Put was not optional. They contend that if the Investors did not exercise their Call options prior to expiry, Altex was required to put any unsold shares to the relevant Investor.

The Respondents assert that exercise of the Put option required other criteria to be met and that this did not occur. B. The 2016 Agreement [ 11 ] In late 2016, there was another agreement, the terms of which are the subject of considerable dispute between the parties. The Applicants describe this agreement as follows in their brief: At this same time, Altex and the New Investors signed a new Put and Call Obligation Agreement (the “Second Put & Call Agreement”).

However, unlike in the 2014 Put and Call Agreement (in which there were true Put and Call obligations and rights), the New Investors and Azimuth were not obligated thereby to actually purchase any common shares if shares were Put to them. In other words, there was no actual contractual “Put”. The net effect of this Second Put and Call Agreement was that Altex gave away (1,811,111 shares) for no consideration. Because the Board offered shares to the remainder of the shareholders at $2.25 per share, the value of each of these shares was approximately $2.25 per share.

Hence, the December 2016 stock “give-a-way” cost Altex about $4 million and call options valued at approximately $9.6 million. ... On or about December 3, 2016, the Board issued approximately 16 million new Call options, with a reduced strike price of $2.00 per share, to the New Investors and Kern Fund No. 3 as part of the Second Put and Call Agreement. The intent of the Board was to allow the New Investors and Azimuth, on the eve of a sale, to call Altex and demand approximately 16 million newly issued shares, hold them for the required two weeks, then sell these shares to the purchaser(

s) for a profit. This practice is often called a “cash sweep”. Like the 1,811,111 shares mentioned above, these Put and Call options were also issued in December of 2016 and were given to the New Investors and Azimuth only, with no consideration flowing to Altex. [ 12 ] By contrast, the Respondents refer to this transaction as a renegotiation and extension of the 2014 financing. In their brief, the Respondents contend: The presentation proposed to extend the term of the agreement by one year and refresh the materially adverse clause to the date of the amendment in return for (

a) a further 1,811,112 common shares being issued to reduce the average share price of the Investors initial subscription to $2.25 from $2.50 and (

b) the reduction of the strike price under the extended Put and Call Agreement to $2.00. [ 13 ] Whatever its nature, this agreement expired on July 1, 2017 with neither a Put nor a Call having been exercised. C. Business Operations [ 14 ] The Applicants also take issue with the way the Board managed Altex’s business. They point to several examples that they say illustrate that the Board failed to properly pursue Altex’s operations for the benefit of its shareholders: (

a) Altex paid for the design and permitting of a new rail terminal at Claysmore, but abandoned the project; (

b) Despite several violations of its patents being brought to the attention of the Board, Altex did not prosecute any of those infringements; (

c) No efforts were made to market Altex’s iGoRail software; and

(

d) Plans to build a terminal at Tsawwassen were abandoned, despite having attracted a potential customer. [ 15 ] The Applicants assert that failure to pursue these opportunities resulted in lost value to Altex exceeding $100 million. [ 16 ] The Respondents note that the Applicants were part of Altex’s management during the decision-making process in respect of all these matters, as well as the 2016 agreement. [ 17 ] With respect to Claysmore, the Respondents argue that, without an identified customer, the project was not financially viable and that the Applicants were so advised on several occasions prior to expiry of the relevant options in May 2016.

D. The Returns of Capital [ 18 ] Perhaps most significantly, the Applicants complain of what they characterize as the “Return of Capital Scheme”. In their supplemental brief, they assert that this “scheme” was comprised of the following four elements: (

a) The Directors’ decision to not exercise the 2014 Put and Call Agreement. This meant that the New Investors would be relieved of their contractual obligations to invest an additional $40.75 million into Altex; (

b) The Directors’ decision to not pursue Claymore, or any of the other potential projects or investments (for example, the patents, the iGoRail software or the Tsawwassen project), so that the New Investors would not have to put more capital into Altex and Altex would keep what capital it had; (

c) The Directors’ decision to approve the 2016 share-give-away so that the New Investors would receive additional shares for no charge and to deliver to themselves and the New Investors free call options; and (

d) The Directors’ decision to issue the 2018, 2019, 2020 and 2021 returns of capital (as opposed to a taxable dividend) so that the New Investors would receive free money on their free shares. [ 19 ] The Applicants also contend that the returns of capital were funded not by way of excess capital held in Altex, but through debt. [ 20 ] The Respondents acknowledge that Altex made returns of capital in September 2018, September 2019 and March 2020. They assert, however, that Altex was in a strong financial position and that the returns of capital were appropriate.

While Altex’s line of credit was accessed to effect the returns, the Respondents argue that it was repaid within a reasonable period of time and dispute the Applicants’ argument that the returns of capital were funded through debt. [ 21 ] The Respondents also point out that the returns of capital required and received shareholder approval, with in excess of 97% of shareholders approving each one. They also note that the Applicants did not object to the returns of capital at the time and received and cashed cheques in respect of their own shareholdings.

Issues [ 22 ] As will be clear from the above recitation of the facts, several of the events upon which the Applicants rely occurred some years ago. The Applicants filed this application on January 25, 2021. Therefore, the Respondents take the position that claims arising from events prior to January 25, 2019 are statute-barred. I will address that argument below as a preliminary issue. [ 23 ] Otherwise, it is common ground that the issues to be determined on this application are: (

i) Are Meyer and Molaro entitled to commence a derivative action against Zahary, Van Steenbergen, Hohm, Mele, Pearce, Pearl and Buchanan pursuant to

section 240 of the CBCA ? (ii) If so, what additional interim or final orders are appropriate pending the outcome of the action pursuant to

section 240 of the CBCA ? Analysis A. Limitations [ 24 ] The Applicants argue that their claims are not statute-barred for two reasons. [ 25 ] First, they argue that their complaints are based not on discrete acts of wrongdoing, but on the Return of Capital Scheme, as described above. Notwithstanding that some of the events comprising that alleged scheme occurred more than two years prior to the filing of this application, the Applicants contend that the chain of events must be considered in toto .

They assert in their brief that “The Return of Capital Scheme only became discoverable in September 2019 when the Directors approved a return of capital to the shareholders in the amount of $27,000,000.” [ 26 ] The Applicants maintain that the 2019 return of capital was only the second such in Altex’s history and that the prior return in 2018 was relatively small. They argue that the larger 2019 return of capital “allowed [them], for the first time, to begin to understand the Return of Capital Scheme and its monetary scope”.

They refer to the statement in Report No. 55 of the Alberta Law Reform Institute that “...the discovery period will not begin until the claimant first knew that the injury was sufficiently serious to have warranted bringing a proceeding.”

[ 27 ] The Respondents point out that, in their 2017 constructive dismissal Statements of Claim, the Applicants refer to three of the four parts of the Return of Capital Scheme with only the subsequent returns of capital themselves missing. They also note that, in those Statements of Claim, the Applicants indicate that they intend to seek leave to bring a derivative action. Citing Fernandes v Jennings Capital Inc , 2016 ABQB 594 at para 93 , the Respondents argue in their brief that “It is not possible to lack the requisite awareness for limitations purposes once a party has already brought an action.”.

The Respondents also contend: If a wrongful act is discrete or part of a scheme, if it independently causes injury then it is actionable and the limitation period starts to run at the discovery of the injury. The Applicants’ pleading in the main action recognizes that the acts that occurred prior to 2017 caused injury, it is entirely inconsequential if they now discover that the acts were part of a scheme. [ 28 ] In the alternative, the Applicants argue that a “rolling limitation period” applies.

They cite L Egoroff Transport Ltd v Green Leaf Fuel Distributors Inc , 2020 ABQB 360 at para 71 for the proposition that “rolling limitation periods arise when claims are based on a series of acts or continuous behaviour, rather than one indivisible act.” They argue that the Return of Capital Scheme is based not on one discrete action, but on a continuing course of conduct. [ 29 ] The Respondents assert that this Court in Fernandes referred to three types of breaches: (1) a “once and for all” breach; (2) a periodic breach; and (3) a continuing breach.

In the second and third types, the limitation period recommences with new or recurrent breaches. Nevertheless, regardless of the applicable category of limitation period, the Court held that a plaintiff may claim damages only going back two years from the commencement of the action. [ 30 ] Finally, the Applicants cite these comments from the Court of Appeal in Seidel v Kerr , 2003 ABCA 267 at para 54 : Even if some of his claims are barred by the expiry of the limitation period, Seidel may have a remedy for acts of oppression or those damages arising within the limitation period.

The limitation period may define the time during which a remedy will be awarded, but does not eliminate the entire claim... [ 31 ] In my view, the rolling limitations analysis is not appropriate to the Applicants’ claims. As will be discussed infra , each of the returns of capital at issue required, and received, shareholder approval. I find that they are not sufficiently intertwined to constitute a continuing course of conduct, let alone a cohesive “scheme”. That said, the returns of capital in 2019, 2020 and 2021 are not outside the limitation period.

Similar to the situation discussed by the Court of Appeal in Seidel , to the extent the Applicants can establish a cause of action in respect thereof, those claims are not statute-barred. B. Entitlement to Leave to File Derivative Action (

i) Status and Notice [ 32 ] The parties are largely ad item as to the analytical framework to be applied on an application for leave to bring a derivative action.

Section 239 of the CBCA provides as follows: 239(1) Subject to subsection (2), a complainant may apply to a court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.

(2) No action may be brought and no intervention in an action may be made under subsection (1) unless the court is satisfied that (

a) the complainant has given notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the court under subsection (1) not less than fourteen days before bringing the application, or as otherwise ordered by the court, if the directors of the corporation or its subsidiary do not bring, diligently prosecute or defend or discontinue the action; (

b) the complainant is acting in good faith; and (

c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued. [ 33 ] “Complainant” is defined in

section 238 as follows: (

a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, (

b) a director or an officer or a former director or officer of a corporation or any of its affiliates, (

c) the Director, or (

d) any other person who, in the discretion of a court, is a proper person to make an application under this Part. [ 34 ] The Applicants are both shareholders and former officers of Altex. It is undisputed that they are “complainants” within the above definition. The Respondents concede that the Applicants gave appropriate notice of their intention to seek leave to bring a derivative action. [ 35 ] Accordingly, the matters in dispute are whether the Applicants are acting in good faith and whether the proposed derivative action is in Altex’s interests. (ii) Good Faith

[36] In respect of the good faith requirement, both parties refer to Valgardson v Valgardson, 2012 ABCA 124, where the Court ofAppeal said at para 20: The question of good faith requires the court to ensure that the proposed action is not frivolous or vexatious... There is both a subjectiveand objective component to the requirement of good faith. The subjective aspect requires that the applicant believes the proposedderivative action has merit. This guards against actions spurned by self-interest or private vendetta.

But even where the applicant believesthat the proposed action has merit, the court must still consider whether objectively viewed the action is not frivolous and vexatious.[Citations omitted.] [37] Beginning with the subjective component, the Respondents note that while Meyer swears in his affidavit that he believes theproposed derivative action has merit, there is no corresponding affidavit from Molaro. Therefore, the Respondents argue, it is notpossible to determine whether Molaro also holds this belief.

They point to 2538520 Ontario Ltd v Eastern Platinum Ltd, 2020 BCCA313, and Discovery Enterprises Inc v Ebco Industries Ltd (1997), (BC SC), 40 BCLR (3d) 43 (SC), as authority forthe proposition that good faith is a question of fact that cannot be presumed and must be established on evidence. [38] While I agree with the Respondents that good faith must be established as a fact, I do not agree that the absence of an affidavitfrom Molaro is sufficient, in and of itself, to negative good faith. I note that the courts in other cases have been prepared to find goodfaith in the absence of such an affidavit.

For example, in Porter v Anytime Custom Mechanical Ltd, 2014 ABQB 193, Justice Graesserof this Court held at para 45: Mr. McCoy is acting in good faith. I do not see that it makes a difference whether good faith has been specifically sworn to. In manycases, such an averment would be useless. Good faith, or the absence of it, is going to be determined on the facts and circumstances andnot a bald statement. The legislative requirement is different from the requirement in the old Rules of Court where a defendant seekingsecurity for costs had to positively swear that he has a defence to the action.

But there, the defendant had to also specify the nature of thedefence, and was subject to cross-examination on that averment. Those requirements no longer form part of the Rules; the merits of theparties’ positions are a factor to be considered, but there are no longer magic words necessary in the affidavit in support of theapplication. [39] This Court reached a similar conclusion in First Edmonton Place Ltd v 315888 Alberta Ltd (1988), (ABKB), 60 Alta LR (2d) 122, reversed on other grounds, 1989 ABCA 274.

There, the Court held: On behalf of the respondents it is contended that evidence of good faith must be given by affidavit... These cases do not appear to standfor the proposition that an affidavit of the applicant showing evidence of good faith is always necessary. Indeed, in Appotive v.Computrex Centres Ltd. (1981) 16 B.L.R. 133 (B.C.S.C.), Rae J. said, p. 136: ...I am persuaded on the material before me that it is more likely than not that the applicant is acting in good faith and thisnotwithstanding that there is no affidavit from him in person.

There is an affidavit from the applicant’s solicitor in support of the petition. [40] In Thomson Estate v Thomson, 2017 SKQB 87 at para 21, the Court held: While paragraph 19 of the claim pleads that Margaret Thomson is acting in good faith, she does not expressly depose in either her initialor reply affidavit that she is acting in good faith. I do not regard this as fatal to her position that she is acting in good faith.

An affiant’sstatement that they are acting in good faith speaks at most to the subjective aspect of good faith and is of little weight in decidingwhether on an objective basis good faith is established. Given the self-serving nature of a statement that an affiant is acting in good faith,decision makers usually place much more reliance on whether external facts or circumstances provide evidence of the existence orabsence of good faith, both subjective and objective. [41] I agree with all of the above statements.

In my view, treating such an affidavit as an absolute requirement risks devolving intoa pro forma incantation that does little to assist the court in making the necessary finding of fact. I note that over the years, the courtshave tended to move away from such strict adherence to formalities and toward a more pragmatic approach. I am prepared, accordingly,to accept Meyer’s affidavit as sufficient to establish the subjective component of good faith.

There remains the question of the objectivecomponent. [42] The Applicants assert that the proposed derivative action is not frivolous or vexatious and point to the indicia of vexatiouslitigation enumerated in Chutskoff v Bonora, 2014 ABQB 389 at para 92. They assert that none of those indicia are present here. [43] I am not persuaded that reviewing these indicia is the proper approach. The trial judge in Valgardson reviewed in detail thefactual matrix in that case, identifying several areas of concern.

The Court of Appeal held at para 26 that several of these factors wereneutral or, with the passage of time, no longer relevant and, on that basis, found palpable and overriding error. The Court of Appeal didnot, however, take issue with the trial judge’s approach of reviewing the facts before him. [44] This appears to be consistent with the approach taken by the courts in other jurisdictions.

In Bertram v Fundy Tidal Inc, 2018NSSC 165, the Court set out its approach to good faith at paras 27 and 28: Good faith is not defined but it is a question of fact in each case, on all the evidence and the particular circumstances. The court mustanalyze the facts to see if there is bad faith which would, of course, negative good faith. On a motion for leave I am not to decide the issues for trial or weigh credibility. Justice Hamilton in L & B Electric Ltd. v. Oickle, 2006NSCA 41 said: 59. As set out by D.H. Peterson, Shareholder Remedies in Canada ...

Good faith is said to exist where there is prima facie evidencethat the applicant is acting with proper motives, such as a reasonable belief in its claim, and is ultimately a question of fact to bedetermined on all of the evidence and the particular circumstances of the case.

60. This principle is restated in Winfield v. Daniel, 2004 ABQB 40 , 2004, 352 A.R. 82 (Alta. Q.B.) at para. 16: Section 24(2)(

b) of the Act requires that the court be satisfied that the complainant is acting in good faith. Good faith is a question of factto be determined on the facts of each case. The typical approach by the Courts is not to attempt to define good faith but rather to analyzeeach set of facts for the existence of bad faith on the part of the applicant.

If bad faith is found, then the requirement of good faith has notbeen met. [45] Similarly, the Court in He v Zhong, 2020 BCSC 1867 held at para 39 that “Good faith is a question of fact to be determinedon all the evidence.” [46] In Eastern Platinum, at paras 29, 32 and 33, the Court of Appeal considered the requirement of good faith in the context ofthe purpose of derivative actions: The requirement that the complainant be acting in good faith focuses on the primary purpose for the bringing of the derivative action.The primary purpose must be to benefit the company.

The onus is on the applicant to provide evidence proving this question of fact:Jordan Enterprises Ltd v Barker, 2015 BCSC 559 at paras. 27-30. ... A conclusion that there is an absence of “good faith” simply means that the applicant has not met the onus of showing that the primarypurpose of the action is to benefit the company. There is no requirement that the respondent show the applicant is acting in bad faith.

A finding of good faith, or of a failure to prove good faith, is a finding of fact in the purview of the trial judge, typically based oninferences drawn from the record... [47] With the benefit of all of this guidance, I now turn to the Respondents’ specific arguments respecting good faith. [48] The Respondents point out, first, that the Applicants have an existing Action in which they claim both oppression as minorityshareholders of Altex and wrongful dismissal as its employees.

They contend that bringing both a derivative action and an oppressionclaim based on the same facts and seeking the same relief is vexatious. They cite Acapulco Holdings Ltd v Jegen, 1997 ABCA 40. [49] I do not see how Acapulco Holdings supports the Respondents’ argument. The Court of Appeal stated at para 11 that“duplication of suits is far from bad faith, or even absence of good faith.” Significantly, however, the Court of Appeal found in that case,at para 18, that the derivative action would yield benefits that the oppression action would not.

The Respondents argue that, in this case,the existing oppression claim and the proposed derivative action seek essentially the same relief. [50] I have reviewed the Statements of Claim for the proposed derivative action and for Meyer and Molaro’s oppression andemployment claims. While there are references to some of the same facts and, arguably, some of the relief claimed is similar, I find thatthe relief sought is by no means duplicative.

Therefore, I find that the Applicants’ extant actions do not negative good faith. [51] Next, the Respondents assert that the Applicants are using this application to exert pressure on the Respondents to settle theexisting actions.

In their brief, the Respondents state, “The appearance of an attempt by a complainant to capitalize on a derivative actionto derail existing proceedings or to use it as leverage in another forum or to create settlement pressure in existing proceedings will likelybe indicia of lack of good faith.” [52] The caselaw is clear that self-interest alone is not sufficient to negative good faith: Richardson Greenshields of Canada vKalmacoff (1995), (ON CA), 22 OR (3d) 577 (CA). That self-interest, however, must be consonant with the interestsof the corporation.

In Winfield v Daniel, 2004 ABQB, this Court held, at para 18, that “An applicant will not be acting in good faithwhere the derivative action is simply a means to advance the personal interests of the applicant that conflict with the interests of thecorporation.” In Zhong at para 33, the Court held “The interests of the applicant and the interests of the company may align, and the factthat the applicant may benefit from a successful derivative action is not an indicator of bad faith...”.

In Schafer v International CapitalCorp (1996), (SK KB), 153 Sask R 241 (QB), affirmed (1997), (SK CA), 152 Sask R 273 (CA),the chambers judge held at para 32: The fact alone that the applicant has a personal interest in the outcome of the derivative action is not evidence of bad faith if that personalinterest is related to and is not contrary to the interests of the corporation.

But a personal interest in the derivative action that is unrelatedto or is contrary to the interests of the corporation, is an indication of bad faith. [53] The Respondents note that there has been a substantial delay in bringing this application. As noted above, both Meyer andMolaro indicated in their 2017 Statements of Claim that they intended to seek leave to bring a derivative action, but this application wasnot filed until January 25, 2021.

The Respondents contrast this case with Holdyk v Adolph, 2012 BCCA 37, where the Court of Appealfound at paras 31 and 33 that there was a reasonable explanation for the delay: The third indicium of bad faith identified by the Chambers Judge is the delay in seeking leave to bring the proposed action. Heconcluded that, as no derivative action was pursued when the applicants were removed as directors of the Company, this is an indicationthat the petitioners’ primary motivation in advancing the claim is their own self-interest. ...

With respect, it does not appear to me that the Chambers Judge considered the reason offered by the appellants for the delay. Theirexplanation was that it was not until they received the report of the chartered accountant and chartered business evaluator that they werein a position to responsibly seek leave to commence the derivative action that they wished to pursue on the Company’s behalf against therespondents. As I have already said, the report was dated February 20, 2010 and the petition seeking leave to commence the proposedproceedings was brought May 5, 2010.

[ 54 ] I agree that the Applicants have proffered no such explanation here. As discussed above, they take the position in their supplemental brief that the Return of Capital Scheme was not discoverable for limitations purposes until late 2019. Nevertheless, their 2017 Statements of Claim reference the 2014 and 2016 agreements and raise the same issues in respect thereof that they propose to make the subject of the proposed derivative action. Moreover, the Statements of Claim stated affirmatively the Applicants’ intention to seek leave for a derivative action.

They have provided this Court with no explanation for their subsequent inaction. Therefore, leaving aside the limitation issue addressed above, I am concerned that the considerable delay in bringing this application is indicative of an ulterior motive on the Applicants’ part. [ 55 ] The Respondents also argue that the Applicants are bringing this application in furtherance of a personal vendetta against Altex and Zahary.

They assert that it is clear that there is animosity between Meyer and Molaro on the one hand and Altex and Zahary on the other. [ 56 ] The cases indicate that animosity is not sufficient to constitute a vendetta; see, for example, Valgardson at para 21 and Black Fluid Inc v Opulence Clothing Inc , 2014 ABQB 138 at para 22 . However, it is by no means clear to me when the former rises to the level of the latter. [ 57 ] The cases I have seen in which the courts have found evidence of a vendetta involved rather egregious behaviour.

In McAskill v TransAtlantic Petroleum Corp , 2002 ABQB 1101 , the Court cited several troubling examples, including that the applicant had proposed “a solution which calls for a monthly retainer to his company of $10,000 a month and an airplane.” The Court found that this proposal was a “shakedown” and held at para 56: “Looking at this letter, the other matters I have referred to, and the application as a whole, I am utterly unable to find that McAskill is acting in good faith.” [ 58 ] More recently, the Court in Link v Link , 2020 NSSC 293 held at paras 59 – 61 : I conclude that Jay is seeking leave before this Court as part of a pattern of vengeful conduct he has unremittingly evinced since at least 2005, as against his father Jack, his brother Troy, and, incidentally, John Hermeier.

A review of the extensive evidence of the history of the parties ... suggests there is long-standing enmity by Jay against the Individual Respondents. However, that factor by itself is not determinative of the “good faith” dispute herein. The uncontradicted evidence also reveals that only Jay personally has to gain from a grant of leave to proceed with the derivative action. There are no other shareholders who could complain. ... Therefore, the litigation is fairly characterized as, in essence, a personal dispute with the trappings of corporate structures – it is really Jay versus Jack, Troy, and John Hermeier.

I further conclude that Jay is, and has been, acting only in his own personal interest throughout. Only he and Troy are shareholders of Link Global. The proposed derivative action is not intended to benefit Link Canada in any real sense. It could have been seen to benefit if it was truly conceived to be an independent entity, and to otherwise have been on an independent path as a “going concern”, but the circumstances of this case cause me to conclude that it is not so.

It is primarily intended to benefit Jay, and to incidentally prejudice Jack, Troy, and John Hermeier. [ 59 ] While it is apparent that there is animus between the Applicants and Zahary, I see nothing in the record before me that is analogous to the facts in McAskill or Link . I am not satisfied that the proposed derivative action is the product of a vendetta by the Applicants.

Moreover, I note that the Court of Appeal in Valgardson at para 25 said that “...the existence of a private vendetta is only a secondary factor in determining the absence of good faith.” Therefore, I am not prepared to find a lack of good faith on this basis. [ 60 ] In light of my conclusion below in respect of the best interests criterion, it is not necessary for me to make a definitive finding as to the Applicants’ good faith.

Nevertheless, I will say that, taking all of the foregoing into account, I have grave concerns that the substantial, largely unexplained delay in bringing this application reveals an ulterior motive on the part of the Applicants, namely to exert pressure on the Respondents to settle the existing oppression and constructive dismissal actions. (iii) Best Interests a. The Law [ 61 ] In Valgardson , the Court of Appeal held at para 27 that “The derivative actions can only be in the interests of Vauxhall and Rivers if they have some chance of success.

Courts have also described this standard as meaning the claims are not bound to fail...”. [ 62 ] Consideration of this factor requires something of a balancing exercise. The court must make some assessment of the merits of the matter without straying too far into trying the case. In Groeneveld v Groeneveld Brothers Holdings Ltd , 1998 ABQB 749 at para 25 , the Court held: ...the Applicant must also show that the proposed action has some reasonable chance of success and unsubstantiated allegations are not enough to satisfy the sub-section.

While I am not going to try the claim, I am required to, or should, make a preliminary assessment of the parties’ chances to the extent of determining whether the proposed claim has a reasonable chance of success. [ 63 ] There is much guidance to be had from the caselaw in respect of this balancing. Recently, the Ontario Superior Court of Justice made the following helpful comments in Hevey v Wonderland Commercial Centre Inc , 2021 ONSC 540 at paras 59 and 60 : An overlapping issue with whether the applicant is acting in good faith is whether it is in the interests of the company for leave to be granted.

As noted, this is a low bar to surpass. At this stage of the analysis, the court is not called upon to determine questions of credibility or to resolve the issues in dispute, and ought not to try. Some courts have adopted the test “where the intended action does not appear frivolous or vexatious and could reasonably succeed” or an “arguable case” (see L&B Electric Ltd. v. Oickle , 2006 NSCA 41 ). In my view, however, the Court cannot ignore the evidence presented to it and simply rubber stamp that the proposed claim is

“arguable”. There must be some judicial scrutiny. [ 64 ] Similarly, the British Columbia Court of Appeal held in Eastern Platinum, at para 37, that “What the authorities illustrate is that the approach to considering the merits of the proposed action lies somewhere on a spectrum. The court should do more than skim the surface of the pleadings and should consider the evidence but ought not to dive so deeply into the merits as to try the case.” [ 65 ] It is clear that this assessment can be done even in the face of conflicting evidence.

In Amack v AW Holdings Corp , 2014 ABQB 623 , affirmed 2015 ABCA 147 , the Court cited Valgardson and went on to say this at paras 39 and 40: The comment by Mr. Justice Marceau in Pathak v. Moloo , 2008 ABQB 389 , at para 13 is also relevant: “...the onus on the Applicant is to show a prima facie case; to do so he must show that the issues are at least arguable even if the proffered evidence is contradictory. I take this to mean that for the purposes of section 240(2)(

c) showing a prima facie case is a pre- condition to a finding that “it appears to be in the interests of the corporation that the action be brought.” The fact that there is contradictory evidence does not mean that the Applicant has failed to establish that prosecuting the Proposed Derivative Action is in the interests of the corporation. Certainty of success is not required at this stage. Questions of disputed facts and possible defences are matters for trial. [ 66 ] On the other hand, conflicting evidence does not guarantee that leave will be granted.

The Saskatchewan Court of Appeal held in Jahnke v Johnson , 2018 SKCA 59 at para 63 : A judge hearing an application for leave to commence a derivative action should not be drawn into an exercise that amounts to trying the proposed claim on its merits. ... However, particularly when as here there are no issues of credibility to cloud the picture and there are no contradictions in the evidence, an examination of the proposed action at this level of detail is appropriate. The s. 232(2)(

c) inquiry is not a trial of the proposed action but neither is it an exercise as limited as asking whether the pleadings reveal a cause of action. Regard must be had for the evidentiary record underpinning the application. [ 67 ] Finally, the Court in Barrett v Ballott , 2019 NLSC 82 , while it found that there was sufficient evidence before it, accepted that bare allegations were not sufficient to establish an arguable case, saying at para 93: To support their position, the Respondents referred the Court to the case of Infineon Technologies AG v.

Option Consommateurs , 2013 SCC 59 , in which the Supreme Court of Canada indicated that bare assertions, in and of themselves, do not prove that there is an arguable case. Rather, the factual underpinnings of those allegations, through evidence, are necessary in order to establish that there is an arguable case. At paragraph 134 the Supreme Court of Canada stated this, as follows: 134 On their own, these bare allegations would be insufficient to meet the threshold requirement of an arguable case.

Although that threshold is a relatively low bar, mere assertions are insufficient without some form of factual underpinning. [ 68 ] Even if an applicant can show that the proposed derivative action is not bound to fail, that does not end the analysis.

There are other matters to consider in determining whether it is in the best interests of the corporation. [ 69 ] In BCE Inc v 1976 Debentureholders , 2008 SCC 69 at para 43 , the Supreme Court of Canada said that “The requirement of leave [to bring a derivative action] serves to prevent frivolous and vexatious actions, and other actions which, while possibly brought in good faith, are not in the interest of the corporation to litigate.” (Emphasis added.) [ 70 ] In Jahnke , the Saskatchewan Court of Appeal addressed this in more detail at para 68: That noted, I should clarify that the “interests of the corporation” inquiry is not tightly restricted to nothing more than an assessment of the apparent strength of the proposed action.

This is because, as recognized in the Dickerson Report itself, there are circumstances when it would clearly not be advisable for a corporation to pursue a claim even where success seems almost certain. I have in mind here, for example, situations such as those where an action will cost far more to prosecute than it can possibly yield in damages, where pursuing a claim will harm important and ongoing business relationships, or where going to court will generate problematic publicity for the corporation.

In all of these sorts of situations, the narrow question of whether a claim is arguable will not properly answer the question of whether that claim is in the interests of the corporation. This is not a new idea. ... Thus, while the strength of the proposed action is the central consideration in any s. 232(2)(

c) inquiry, it is not the only consideration or, necessarily, the deciding consideration. [ 71 ] Among those other considerations is the fundamental requirement that the subject of the proposed derivative action be a wrong done to the corporation itself rather than to its shareholders. In Sevaal Holdings Inc v LCB Properties Inc , 2014 SKQB 47 at para 25 , the Court quoted as follows from Kevin P. McGuinness, The Law and Practice of Canadian Business Corporations (Toronto: Butterworths, 1999), at para 9.171: Derivative actions must be distinguished from personal rights of action belonging to a shareholder.

In deciding whether a particular cause of action is derivative or personal, the question to resolve is whether the essence of the action is the violation of some right of the corporation or some personal right to which the shareholder is entitled. Either one can produce a loss to the shareholder.

The difference is whether the loss is suffered by the shareholder directly or by the reduction in the value of his or her shares. [ 72 ] I note also that in Jerry v Gillard , 2005 ABQB 73 at para 38 , Watson J (as he then was) emphasized the need to particularize the effect on the corporation: ...the Legislature of Alberta’s intention in limiting by the requirement of a grant of leave under s. 240(2) would be frustrated if in fact leave could be granted on the basis of some broad generalities contained in the Statement of Claim which do not give rise to a very clear indication of what it is exactly that is in the interest of the corporation in relation to the matter.

[ 73 ] The Applicants acknowledge that, even if a proposed derivative action is found not to be bound to fail, the court must undertake a cost-benefit analysis to determine if it is in the corporation’s best interest. [ 74 ] In Black Fluid at para 23, Justice Veit noted that “...a cost/benefit analysis has, from the beginning, been part of the analysis that is required in determining whether a particular derivative action appears to be in the best interests of a corporation. Indeed, the notion of the cost benefit assessment can be found in much other case law...”.

See also Budd at para 41 and Chen v Sumwa Trading Co , 2018 ABQB 269 at para 43 . [ 75 ] The Court in Discovery Enterprises spoke to this at para 63: The cost and inconvenience of commencing a derivative action is an important consideration in deciding whether to grant leave.

This is so because it likely would not be in the interest of a corporation to have an action commenced on its behalf where potential recovery was very small in relation to the cost and inconvenience to the company. [ 76 ] Finally, in assessing whether a proposed derivative action is in the best interests of a corporation, the courts have been mindful that, ordinarily, deference should be given to the decisions of the corporation’s board of directors.

The Supreme Court of Canada described this “business judgment rule” in BCE at para 40: In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia , shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule. The “business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives...

It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies to decisions on stakeholders’ interests, as much as other directorial decisions. [ 77 ] The business judgment rule has been considered by this Court in a number of applications for leave to bring a derivative action.

In Winfield at para 32 , Gallant J held: Courts, at the hearing stage, have also shown a willingness to defer to the decisions of directors not to proceed with legal action by applying what is known as the “sound business judgment rule.” Under this rule, a Court should “be reluctant to substitute its own opinion for that of the directors where the business decision was made in reasonable and informed reliance on the advice of financial and legal advisors appropriately retained and consulted in the circumstances”...

However, Courts will be wary of applying the rule in cases where the directors stood in a dual relationship that may have prevented them from applying unprejudiced judgment... [ 78 ] Similarly, McIntyre J held in McAskill at para 61 that “In my view I should be cautious in applying hindsight to the business judgment of company directors...”. [ 79 ] In Black Fluid , Veit J noted at para 24 that “It has also been emphasized in much of the case law that, when determining what is in the best interests of the corporation, courts must be careful not to interfere inappropriately in the management of companies...”. [ 80 ] More recently, Dario J considered the business judgment rule in some detail in Chen at paras 39 – 42 , saying at para 41: ...the business judgment rule requires deference to the business decisions of the company’s Board of Directors, as long as it has chosen one of several reasonable alternatives, and no rejected alternative was “definitely available and clearly more beneficial to the company than the chosen transaction.” b.

The Parties’ Positions [ 81 ] As set out in the facts above, the Applicants’ complaints fall into four categories: the 2014 Put and Call Agreement, the 2016 agreement, the business operations of Altex and the returns of capital. In my assessment of whether the proposed derivative action is in the best interests of Altex, I will address each of these in turn. [ 82 ] As noted above, the Applicants contend that the Put contemplated by the 2014 Put and Call Agreement was not optional and that the Directors’ failure to exercise it resulted in a loss to Altex of $40.75 million. They point to

section 2.1 of that agreement, which provides: For greater certainty, any Obligation Shares which have not been issued by the Corporation and sold to the Subscriber pursuant to the provisions of

Section 2.2 prior to the Expiry Time shall be issued by the Corporation and sold to the Subscriber at the Expiry Time as set forth in

Section 2.3 hereof, all subject to the terms and conditions of this Agreement. [Applicants’ emphasis] [ 83 ] The Respondents’ position is that the Put was not mandatory and, further, could not be exercised because certain required criteria were not met. First, they say this in their brief: ...there needed to be an “Approved Purpose” for which the funds would be utilized.

In order to issue a drawdown notice under the Put and Call Obligation Agreement, Altex Management was required to make a recommendation to the Board of Directors with respect to how they would use the funds that would be requested under the drawdown notice; this recommendation then required approval by the Board. The drawdown notice was required to be for a minimum aggregate amount of $10 million. There was no mechanism under the Put and Call Agreement for smaller draw downs. The Approved Purpose therefore needed to be of a sufficient magnitude to require a drawdown of at least $10 million.

Altex Management, of which the Applicants were part, did not at any point between July 2014 and July 2016 put a recommendation

before the Board requesting their approval of a project requiring capital funds of any size.

There was therefore never an “Approved Purpose” for the purposes of the Put and Call Agreement. [ 84 ] Second, the Respondents argue that, before funds could be demanded under the 2014 Put and Call Agreement, Altex would have to certify that certain representations and warranties remained correct, including that there had been no “material adverse change”, defined as follows in the 2014 Put and Call Agreement: “any material change in the business, affairs, results of operations, condition (financial or otherwise), assets, liabilities or obligations (absolute, accrued, contingent or otherwise) of the Corporation or any Subsidiary” [ 85 ] The Respondents contend that Altex could not have given the necessary certification because there had been several events since December 13, 2013 that could constitute material adverse changes.

The Applicants dispute that there was any material adverse change, arguing that the events referred to do not fall within the definition. [ 86 ] The Applicants’ second complaint is that, under the 2016 agreement, Altex gave away shares without consideration, the result of which was to allow the Investors to extract value from Altex. [ 87 ] The Respondents do not dispute that shares were issued, but take issue with the Applicants’ characterization of the transaction. They contend that the Board considered it in Altex’s best interests to extend the 2014 financing opportunity for an additional year.

They also considered it important to “refresh” the material adverse change clause so as to obviate the events of concern from prior years. In exchange for these modifications, a further 1,811,112 common shares were issued, which reduced the Investors’ average share price from $2.50 to $2.25, and the strike price was reduced to $2.00. The Respondents point out that the 2016 agreement was agreed to by the Board by written resolution dated October 5, 2016 and that all shareholders, including the Applicants, were invited to participate on equivalent terms.

They also note that the Applicants were part of Altex’s management at the relevant time. [ 88 ] Third, as set out above, the Applicants complain of the Board’s management of Altex’s business affairs. The Respondents argue that these were business judgments that do not give rise to a cause of action against them by Altex. [ 89 ] Finally, the Applicants assert that it is in Altex’s best interests to pursue an action against the Respondents in respect of the Return of Capital Scheme.

In essence, they argue that the Respondents permitted the Investors to strip out the value of Altex and, indeed, caused Altex to incur debt to facilitate these payments to the Investors. [ 90 ] The Respondents argue that no cause of action lies against them in respect of the returns of capital because, while the reductions were recommended by the Board, they required and received approval from over 97% of the shareholders, including not only the Investors, but numerous minority shareholders.

They assert in their brief that “No loss arose from the Board’s recommendations themselves, and there is no suggestion that the recommendations were in breach of any duties owed. ... The Respondents cannot and should not be held legally responsible for any losses (which are denied) flowing from the decision of the shareholders.” c.

Assessment of Best Interests [ 91 ] Bearing in mind the admonitions in Hevey and Eastern Platinum that the Court must do more than “skim the surface” and must provide “some judicial scrutiny”, I have had regard not only to the parties’ submissions and to the proposed Statement of Claim, but also to the voluminous documentation provided. For the reasons that follow, I find that the proposed derivative action is not in Altex’s best interests. [ 92 ] Turning first to the 2014 Put and Call Agreement, I agree with the Respondents that the Applicants’ position is unsustainable. While

section 2.1 does provide that all Obligation Shares “shall be issued” if not already sold to the Subscriber at the Expiry Time, it expressly makes this requirement “subject to the terms and conditions of this Agreement”. Those terms include the requirements in sections 2.2(b), (

c) and (

d) that Draw Down Notices must be approved by the Board, must be for an Approved Purpose and must be for an aggregate amount of not less than $10 million. The Respondents assert that these requirements were not met. [ 93 ] I note also that

section 2.3 of the 2014 Put and Call Agreement provides that: To the extent that there are any unissued Obligation Shares as at the date that is fifteen (15) business days prior to the Expiry Time, the Corporation shall promptly notify the Subscriber of that fact and the Subscriber may then exercise all remaining Put and Call Obligations by issuing a Draw Down Notice in respect thereof at least ten (10) business days prior to the Expiry Time, and in such event all such remaining Put and Call Obligations held by a Subscriber may be exercised in full and the Draw Down Closing Date in respect thereof shall be the Expiry Date such that such unissued Obligation Shares shall be paid for by the Subscriber and issued by the Corporation on the Expiry Date. ... [ 94 ] While this provision requires notice and permits a Subscriber to make a final Call for Obligation Shares prior to the Expiry Time, I see no concomitant obligation for Altex to issue a final Put. [ 95 ] In their Questioning of Mr.

Zahary on his affidavit, the Applicants appeared to suggest that the Claysmore project could have constituted an Approved Purpose; Mr. Zahary disagreed. In Questioning on his affidavit, Mr. Meyer acknowledged that the Claysmore project was not sufficiently large to be an Approved Purpose because of the $10 million minimum. [ 96 ] Further, “Approved Purpose” is defined as a use of the Draw Down funds that has been approved by the Board.

It seems to me unreasonable to read the above provisions as requiring Altex to issue a final Put merely because there may have existed some project on which the funds might have been expended. That would render Board approval meaningless. For a Draw Down Notice to be issued – that is, for Altex to have exercised a Put – required the Board to have approved of a use for the funds to be generated. I find that such approval is precisely the kind of decision to which the business judgment rule applies. Mr.

Zahary avers in his affidavit that “As Altex had no viable capital projects or needs, Management did not seek to obtain and therefore the Board did not approve an approved purpose prior to July 2, 2016.” It would not be appropriate for me to interfere in that decision.

[ 97 ] Turning to the 2016 agreement, I am satisfied on the record before me that the Applicants’ characterization of this agreement as a “stock giveaway” is bound to fail. It is clear to me from both the agreement itself and the October 5, 2016 Board resolution that the agreement represented a quid pro quo . Further, while the Applicants may feel aggrieved by this arrangement, I find again that it is the kind of business judgment to which I must give deference. [ 98 ] The same is true of the Applicants’ complaints about the management of Altex’s business operations.

While Meyer, in particular, may have been disappointed that the Claysmore project did not come to fruition, it is by no means unusual for corporations to invest funds in projects that are abandoned when they prove unviable. This, along with the software and patent issues, are business decisions that this Court will not second-guess. Moreover, I agree with the Respondents that there is no evidence before me to suggest that these decisions represent a breach of fiduciary duty on the part of the Directors or any other cause of action against them.

Therefore, I conclude that the Applicants’ claim in this regard is bound to fail. [ 99 ] Finally, I find that the Applicants’ arguments in respect of the returns of capital also are bound to fail. Regardless of what they may have recommended, I do not see how a cause of action can arise against the Respondents in respect of an action that was required to be, and was, approved by the shareholders. (iv) Residual Discretion [ 100 ] It is important to remember that a derivative action is an equitable remedy and that the Court retains a residual discretion to refuse it irrespective of the criteria discussed above.

The British Columbia Court of Appeal said this in Eastern Platinum at paras 39 – 41: Even where the conditions in s. 233(1) are met, the court retains discretion to grant or not grant leave: Discovery Enterprises (C.A.). Section 233(1) provides that the court “may” – not must – grant leave if the requirements are met. Not much has been said about the remaining exercise of discretion to grant or not grant leave. A common approach to the exercise of discretion in analogous circumstances is to consider the required factors as a whole, rather than separately.

This is a sensible approach in derivative action applications as well. It is conceivable that there may be cases where the requirements are met but so thinly established that in the end the court will exercise its discretion to not grant leave. More likely, however, if an application fails it will fail on one of the requirements of the test. [ 101 ] To this I would add this guidance from the Nova Scotia Court of Appeal in Budd v Bertram , 2018 NSCA 95 at para 34 : Granting leave to commence a derivative action is a discretionary remedy arising out of equitable principles, [ Black Fluid ], para 23.

Leave should not be granted where there is an adequate alternative remedy available to the complainant, Crescent

(1952) Ltd. v. Jones , 2011 ONSC 756 , para 21 and authorities stated therein. The parties agree there is no alternative remedy in this case. [ 102 ] Even if I had found the good faith and best interests of the corporation criteria to have been satisfied, I would have been inclined to exercise my discretion to refuse leave for the proposed derivative action. In my view, the pleadings do not demonstrate a wrong to Altex that requires redress.

As for the Applicants themselves, while they may have a legitimate complaint that their employee and/or minority shareholder interests have been unfairly disregarded, I find that they have an adequate remedy in their existing actions for oppression and constructive dismissal. [ 103 ] Put simply, I am not satisfied, as the CBCA requires me to be, that a derivative action is warranted in these circumstances. Conclusion [ 104 ] In the result, the application for leave to bring a derivative action is dismissed.

That being the case, I need not address the question of what additional orders might be appropriate. [ 105 ] The Respondents shall have their costs. If counsel cannot agree on the quantum thereof, they may seek directions from the Court within 31 days of the release of these Reasons. Heard on the 03 rd day of May, 2021. Dated at the City of Calgary, Alberta this 23rd day of July, 2021. M. David Gates J.C.Q.B.A.

Appearances: C.E. Marble and K. Stenner for the Applicants S. Fairhurst and J. Thompson for the Respondents