Rick Elliott Plaintiff / dEFENDANT BY COUNTERCLAIM And: Rod Elliott Defendant / PLAINTIFF BY COUNTERCLAIM, 2023 NLSC 113

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION Citation : Elliott v. Elliott , 2023 NLSC 113 Date : August 4, 2023 Docket : 201901G6507 Between: Rick Elliott Plaintiff / dEFENDANT BY COUNTERCLAIM And: Rod Elliott Defendant / PLAINTIFF BY COUNTERCLAIM Before: Justice Alexander MacDonald Place of Hearing: St. John’s, Newfoundland and Labrador Dates of Hearing: April 17–21, 25, 26 and 28, 2023 Appearances: Greg A.C. Moores and Kara A. Harrington Appearing on behalf of the Plaintiff / Defendant by Counterclaim Kevin F. Stamp, K.C. Appearing on behalf of the Defendant / Plaintiff by Counterclaim

Authorities Cited: CASES CONSIDERED: Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53; Reardon Smith Line Ltd. v. Hansen-Tangen, [1976] 3 All E.R. 570, [1976] 1WLR 989 (U.K.H.L); Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98, [1998] 1 WLR 896(U.K.H.L.); White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23; K/S A/S Offshore Atlantic v. MarystownShipyard Ltd. (1990), (NL CA), 271 A.P.R. 324, 87 Nfld. & P.E.I.R. 324 (Nfld. C.A.); W J Alan & Co. v. El NasrExport & Import Co, [1972] 2 All E.R. 127, [1972] 1 Lloyd’s Rep. 313 (U.K.C.A.); Brown v.

Brown, 2010 NBCA 5 STATUTES CONSIDERED: Income Tax Act, 2000, S.N.L. 2000, c. I-1.1 RULES CONSIDERED: Rules of the Supreme Court, 1986, S.N.L. 1986, c. 42, Sch. D REASONS FOR JUDGMENT MacDonald, J.: INTRODUCTION [1] Rick Elliott and Rod Elliott are brothers. Over the last three decades, they built a successful pharmacy business. They eachowned 50% of the business with a gross value of about $52 million. They organized the business into a number of corporate entities,which they call the Elliott Group.

I refer to the companies in more detail in paragraph [10]. [2] In the fall of 2015, their shares in the Elliott Group were worth about $34 million or about $17 million each. When adjusted fordebt, bonuses, accounts payable and shareholder loans, Rick Elliott’s total net share value was in excess of $23 million while Rod’s wasin excess of $22 million. [3] It would have been impossible for these brothers to build a successful enterprise without diligence, hard work and perhaps a bitof luck.

They could not have built the business without trusting each other. [4] However, their personal relationship deteriorated, and in 2015, they agreed to divide the Elliott Group and end their businessrelationship. On January 20, 2016, the Elliott Group, and Rick and Rod Elliott hired their accountants, BDO Canada LLP (BDO) to valuethe Elliott Group, and to help with this division (Initial Valuation Retention).[1] Dan Jennings, a partner at BDO and a witness at thistrial, lead the effort. [5] On June 29, 2016, BDO provided the brothers with the Elliott Group’s share value (Initial Valuation).

BDO calculated sharevalue by first estimating the “enterprise value” (EV) of each of the Elliott Group effective November 30, 2015 (Initial Valuation Date). [6] BDO used the mid-point between a high and low range of the EV.

It then adjusted for debt, redundant assets, real estatetrapped in taxes, and shareholder bonuses and loans to calculate the share value of each of the companies in the Elliott Group.[2] Thevalues I used in paragraph 1 come from the Initial Valuation.[3] [7] The brothers used the Initial Valuation to divide their business on terms set out in a Memorandum of Understanding datedNovember 4, 2016 (MOU).[4] [8] Rick Elliott agreed to acquire nine of the Elliott Group entities, and Rod, four. Each brother would acquire half of thecondominiums owned by 10475 Newfoundland Limited (10475).

Rick acquired 100% of that company. [9] Because Rick was to acquired more of the Elliott Group than his brother, based on the Initial Valuation Rick Elliott would payRod about $8.92[5] million on the closing date, expected to be January 1, 2016. [10] The brothers eventually closed the transaction on March 21, 2017 (Closing) when they executed the Share PurchaseAgreements (SPAs) for each of the Elliott Group. After Closing, the Elliotts own 100% of the shares of the companies as describedbelow[6].

[ 11 ] However, the brothers in both the MOU (in general terms) and SPAs (in more specific terms) agreed they could not finalize the share valuations until each of the Elliott Group prepared (with BDO’s help) “Closing Financial Statements.” The SPAs defines these Closing Financial Statements as the statements for the “period from the date of the most recent financial statements [for each of the Elliott Group] up to and including the Closing Date.” [7] The period between the dates of these most recent financial statements and the Closing is the “stub period.” [ 12 ] The implications of this stub period became evident when the brothers and Jennings became concerned that the Canada Revenue Agency (CRA) might adjust the Initial Valuation for any change in value during the stub period, particularly because the brothers were not at arm’s length to each other.

I will discuss this concern later in this decision. [ 13 ] Accordingly, the brothers agreed that after BDO completed the Closing Financial Statements, BDO would revalue shares in certain circumstances. I will refer to these circumstances as the Revaluation Trigger. [ 14 ] The brothers’ trust of each other disappeared during the stub period. Rick Elliott testified he had not spoken to his brother since the fall of 2016. [ 15 ] The Elliott Group and BDO completed the Closing Financial Statements on August 3, 2018.

Anticipating this, the Elliott Group, and Rick and Rod Elliot hired BDO by letter dated July 27, 2018, to decide whether the Revaluation Trigger applied (Revaluation Engagement). [8] If it did, BDO would then conduct a revaluation of the fair market value of each brother’s shares (Revaluation). [ 16 ] In September 2018, BDO decided that the Revaluation Trigger applied to seven of the nine pharmacy operations owned by the companies involved in the transaction. [9] It then started the Revaluation.

It did so by first calculating changes in the pharmacies’ EV. [ 17 ] BDO issued a number of versions of a report reflecting the change in each of the pharmacy’s EV in its “Comparison of Normalized EBITDA trends and EV conclusions (EV Conclusions). [10] BDO was to draft a complete report by adjusting the EV, and then share value as I describe earlier. It would then calculate the set-off that one brother owed the other because of this change (Revaluation Report). [ 18 ] In a draft of the Revaluation Report, [11] BDO calculated the set-off amount.

It decided that Rod owed Rick $227,493. [12] This compensated him for the larger reduction in Rick’s share value from the Valuation Date until Closing. Everyone agrees this calculation was wrong. It should have been $22,794 higher. According to BDO’s corrected calculation, Rick actually owed Rod $250,287. Most of this change in value related to three issues. [13] [ 19 ] The first issue was that the Elliott Group incurred an audited liability for Health and Postsecondary Education Tax (HAPSET). The taxing authority issued an assessment for this tax.

It allocated it to some to of the pharmacies subject to Revaluation. BDO, in Version 1 of the EV Conclusions, then reduced the value of the affected pharmacies to allow for this liability. [ 20 ] The second issue was that much of Nucare’s (a division of Elliott Drugs Inc., a company acquired by Rick Elliott) income was from a fixed-term contract with a retirement home.

BDO, in Version 1 of the EV Conclusions, reduced the Nucare share value because the net present value (NPV) [14] of the contract fell between the Valuation Date and the Closing. [ 21 ] The third and the most contentious issue was that BDO reduced the EVs of six of the pharmacies [15] to reflect that the pharmacies’ rental arrangements with doctors were at “gross market rent.” Gross market rent reflected that doctors occupying Elliott Group real estate paid less than fair market as I will describe in paragraph [76].

BDO had assumed in the Initial Valuation Report that the rents were higher triple net market rents. [ 22 ] This change reduced the EV of all the affected pharmacies. As Rick Elliott bought most of the pharmacies, his pharmacies incurred more total loss in value because of this adjustment. BDO made these adjustments in Versions 2 through 6 of the EV Conclusions. Position of Brothers [ 23 ] Rick Elliott says: (

a) the brothers agreed that BDO would decide both the applicability of the Revaluation Trigger and any resulting Revaluation. Although the brothers could comment on the versions of the Revaluation Report and the EV Conclusions, they could not veto BDO’s decisions. Although BDO did not issue a final Revaluation Report this was because Rod Elliott thwarted its ability as he refused to sign the Revaluation Representation Letter I will describe later; and

(

b) under the final draft of the Revaluation Report, Rod Elliott owes Rick $227,493 plus the $22,749 error I referred to earlier. He also owes him his actual out-of-pocket expenses and legal fees associated with collecting this amount, together with contractual interest at the Bank of Nova Scotia prime lending rate +3%. [ 24 ] Rod disagrees. He says: (

a) BDO should not have concluded that the Revaluation Trigger applied to Nucare. Therefore BDO should have not reduced the EV, and the resulting share value of that pharmacy; (

b) BDO should not have made the gross market rent adjustment, and reduced the EVs of the affected pharmacies; (

c) Rick Elliott violated

Article 12 of the MOU because Rick caused 10475 to incur $51,000 in maintenance costs during the stub period. Rod says Rick owes him one-half of this amount or about $25,500; and (

d) Rick Elliott, before Closing, caused Elliott Enterprises Ltd., a company now owned solely by him, to enter into a contract with Eastern Health for methadone treatments. Rod says that Elliott Enterprises Ltd. used some of the Elliott Group’s assets and personnel. He says the Elliott Group should be the beneficiary of this contract. Rick should account for the profit. ISSUES [ 25 ] Therefore I am decide: (

a) Does

Article 10 of the SPAs allow BDO to consider gross market rents in the Revaluation? (

b) Did BDO improperly apply the Revaluation Trigger to Nucare and thus improperly revise Nucare’s EV? (

c) Did Rick Elliott improperly cause 10475 to incur $23,943 in maintenance expenses for paving? (

d) Did Rick Elliott improperly cause 10475 to incur $27,456 for air conditioning units? (

e) Did Rick Elliott improperly cause Elliott Enterprises Ltd. to enter into a methadone contract with Eastern Health that should have been for the benefit of the Elliott Group? [ 26 ] I find that: (

a) Article 10 does not allow BDO to consider gross market rents in the Revaluation; (

b) BDO improperly applied the Revaluation Trigger and therefore improperly revised Nucare’s EV; (

c) Rick Elliott did not improperly cause 10475 to incur $23,943 in maintenance expenses for paving; (

d) Rick Elliott improperly caused 10475 to incur $27,456 for air conditioning units; and (

e) I need not decide if Rick Elliott improperly caused Elliott Enterprises Ltd. to enter into a methadone contract because Rod Elliott did not suffer a loss even if this were so. [ 27 ] Therefore, Rick Elliott will pay Rod $48,941 , together with interest from September 2, 2018, at the Bank of Nova Scotia prime lending rate from time to time. Rod Elliott is entitled to his costs on a Column III basis of the Rules of the Supreme Court, 1986 , S.N.L. 1986, c. 42, Sch. D . [ 28 ] I will now explain why I made these decisions. I will first deal with whether

Article 10 of the SPAs allow BDO to consider gross market rents in the Revaluation. DISCUSSION Does

Article 10 of the SPAs allow BDO to consider Gross Market Rents in the Revaluation? [ 29 ] I will first decide on the legal parameters I should apply in this

interpretation of

Article 10 of the SPAs.

Interpretation of Commercial Contracts [ 30 ] The Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp ., 2014 SCC 53 , gives me guidance on how I am to interpret commercial contacts: (

a) At paragraph 47, the court says, “the

interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine ‘the intent of the parties and the scope of their understanding.’” (

b) To do so the court directs that, “a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract . Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning.” [emphasis added]; (

c) The court quotes Lord Wilberforce in Reardon Smith Line Ltd. v. Hansen-Tangen , [1976] 3 All E.R. 570, [1976] 1 WLR 989 (U.K.H.L), at para. 574 when he says, “No contracts are made in a vacuum: there is always a setting in which they have to be placed ...

In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.” (

d) At paragraph 48 it says, “[t]he meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement.” (

e) It quotes Lord Hoffmann [16] who said, “The meaning which a document … would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. ” (at p. 115) What are the Surrounding Circumstances? [ 31 ] It then dealt with the role of the surrounding circumstances in contractual

interpretation. It said: (a) “While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement ... The goal of examining such evidence is to deepen a decision-maker's understanding of the mutual and objective intentions of the parties as expressed in the words of the contract.” (at para. 57) (

b) It continued, “the

interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract …. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.” (at para. 57) (c) “The nature of the evidence that can be relied upon under the rubric of "surrounding circumstances" will necessarily vary from case to case. It does, however, have its limits.

It should consist only of objective evidence of the background facts at the time of the execution of the contract … that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.” (at para. 58 [emphasis added]) (

d) It continued: “this includes, in the words of Lord Hoffmann, ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man." [17] Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact (at para. 58 [emphasis added]). Application of the Parol Evidence Rule [ 32 ] The Court also considered the Parol Evidence Rule.

This rule governs what evidence I can consider when I interpret written contracts. [ 33 ] In paragraph 60, it said, “[t]he parol evidence rule does not apply to preclude evidence of the surrounding circumstances. Such evidence is consistent with the objectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words.

The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise.” [ 34 ] Thus, I am to consider the surrounding circumstances. I must not allow them to overwhelm the words of the agreement. I may consider facts known to the brothers when they signed the SPAs. I may consider what happened . I will do so to help me interpret “the intent of the parties and the scope of their understanding” when they agreed to have BDO undertake the Revaluation (at para. 47).

I will now discuss the scope of Jennings’ testimony. [ 35 ] Jennings is a business valuator with impressive professional qualifications. At the beginning of the trial, after a voir dire , I qualified him as an expert in business valuation and financial matters associated with business valuation. [ 36 ] I applied the guidance given to me by Supreme Court of Canada in White Burgess Langille Inman v. Abbott and Haliburton Co. , 2015 SCC 23 . I am satisfied that he was impartial, independent and nonbiased. He was not testifying about novel or contested science.

I find he satisfied the first step of the White Burgess framework. [ 37 ] I told counsel as part of my gatekeeper role in the second step of the White Burgess framework, I was satisfied that his testimony must be relevant, necessary reliable, and show an absence of bias. I found that his evidence would not increase the time needed for the trial. I found the evidence was not unnecessary or prejudicial to the Elliotts. I maintained my discretionary gatekeeper role throughout the proceedings. [ 38 ] Most of Jennings’ evidence is about what he did for the brothers and how BDO calculated fair market value.

He is entitled to testify about what he did. His

interpretations of fair market value in the context of the issues in court are within the scope of his qualification. I am also satisfied that his testimony was unbiased. His testimony was critical to resolution of the matters between the brothers. [ 39 ] While he provided evidence as to why he did what he did, he is not an expert on legal contractual

interpretation, and thus any legal opinion he holds is irrelevant. [ 40 ] I will now turn to the chronology of key events. Chronology of Key Events. Table 1 Key Events [18]

Date Event January 20, 2016 Rick and Rod sign the Initial Valuation Retention June 29, 2016 Initial Valuation Report August 29, 2016 Initial Representation Letter November 4, 2016 Memorandum of Understanding March 21, 2017 Share Purchase Agreements (SPAs) August 3, 2018 Closing Financials Statements provided September 2018 Rick and Rod engage sign the Revaluation Engagement November 1, 2018 First Draft of Revaluation Report (Version 1) March 7, 2019 Final Draft of Revaluation Report (Version 4s) March 30, 2019 Date of “Estimate Value comparison of Normalized EBITDA trends and EV conclusions” (original valuations and revaluations Versions 1-6) [19] May 2, 2019 Rick sign the Revaluation Representation Letter May 17, 2019 Dan Jennings informs Rick and Rod that Rod owes Rick $227,493 July 23, 2019 Confirmation by Rod Elliott’s counsel of a clerical error of $22,794 [ 41 ] The brothers retained BDO when they signed the Initial Valuation Retention on January 20, 2016.

Initial Valuation [ 42 ] Jennings testified that there are three types of valuations under the standards of the Canadian Institute of Chartered Business Valuators. The valuations depend on the scope of BDO’s review, the Elliotts’ disclosure, and the level of assurance provided by the conclusion. BDO’s fees range from the most expensive to least expensive. The Elliotts asked for the mid-range “estimate valuation report.” [ 43 ] The Elliotts asked BDO to decide the fair market value of the outstanding shares in the Elliott Group. They agreed the Initial Valuation Date would be November 30, 2015.

This is important because Jennings testified that fair market values are valid only at a specified time. [ 44 ] The Initial Valuation Retention defined fair market value as, “the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.” [20] [ 45 ] Significantly, BDO would not issue an Initial Valuation until the Elliotts confirmed, “in writing certain representations made to [them] during the course of the review including the general representation that [they] have reviewed [the] report, are satisfied with [BDO’s] explanation of the valuation approach adopted by [them], and have no knowledge or information of any facts not noted in [the] report which would reasonably be expected to affect the conclusions” [21] (Initial Representation Letter). [ 46 ] An important element of the Initial Evaluation Report is the value of the Elliott Group’s real estate.

The Elliotts hired Altus Group (Altus) to provide appraisals. To do so, Altus needed to make assumptions on rents associated with each property. Everyone decided to assume that these rents were at triple net market value. This assumption is important for two reasons. [ 47 ] The first is that it supports the real estate value because Altus uses an “income approach” as part of its appraisals. BDO uses these real estate appraisals as part of its Initial Valuation and the Revaluation reports. Altus never changed the rent assumptions or its appraisals.

No one takes issue with this. [ 48 ] The second is that BDO calculates the Elliott Group’s EBITDA (earnings before income tax, depreciation and amortization) as part of it EV calculations. Ranges of EBITDA over time affect the Elliotts’ share value. BDO used the Altus rent assumptions in the Initial Valuation Report and Version 1 of the EV Conclusion. I will describe this later. [ 49 ] Jennings was aware that this was not the rent.

On January 28, 2016, he wrote the Elliotts, “[w]e need the appraisals for other purposes in addition to the actual number (such as, to determine the market rent for your pharmacies where your group owns the location, when we’re using cash flow to value locations ).” [22] [emphasis added] [ 50 ] On February 16, 2016, he wrote Altus. He told them, “[i]n some cases, the properties include both an Elliott-owned pharmacy and a doctors’ clinic. The latter tends to drive traffic to the former, so having them side-by-side is desirable in the pharmacy industry.

Since in this industry it is also common for pharmacy landlords to give the doctors nominal (or free) rent in order to entice them to locate next to the pharmacy, how will your appraisal methodology capture this?” [23] [ 51 ] Thus as BDO began the Initial Valuation, Altus valued the real estate on a cash flow basis using triple net market rents, even though the doctors did not pay rents on that basis. [ 52 ] BDO completed the Initial Valuation at the end of June 2016. The valuation was effective November 30, 2015.

BDO dealt with the issue of rent in its assumptions at page 9, paragraph 3. [ 53 ] BDO said, “[w]e have valued the Companies assuming the Elliott Group-owned real estate is subject to lease in order to maximize overall shareholder value. We have replaced any existing actual rent with triple net market rent , consistent with the income approach employed in the Altus appraisal reports.” [24] [emphasis added] BDO used these triple net market rents when it calculated the companies’ EV. [ 54 ] As called for under the Initial Valuation Engagement, the Elliotts provided their Initial Representation Letter to BDO on

August 29, 2016. The Elliotts confirmed, “[w]e have reviewed the assumptions set out in your draft reports, and confirm their appropriateness, specifically including: … Notional adjustment for market rent at the triple-net rents opined by the Altus Group in their appraisals of the Companies’ various real estate holdings.” [25] Sale of Shares of the Elliott Group [ 55 ] The Elliotts used the Initial Valuation to separate from each other.

They agreed on the details in the MOU as I described earlier. [ 56 ] The brothers agreed, “after the separation there shall be no business relationship between them.” [26] They agreed that the MOU set out the major terms agreed by both brothers. They agree to include these terms in final agreements. [ 57 ] However, the MOU was non-binding because the brothers must approve the final agreements. In other words, they did not need to close but if they did, the agreements should be consistent with the MOU terms.

The brothers expected to close the transaction by January 1, 2017. [ 58 ] The Elliotts eventually closed this transaction on the Closing (March 21, 2017). The brothers executed the SPAs for each of the Elliott Group. After Closing, the brothers would have no ongoing business relationship. Rick paid Rod $8,924,000. [27] [ 59 ] The SPAs reflected the MOU provision that there could be a final adjustment of the purchase price once the Elliott Group finalized their Closing Financial Statements. The brothers provided for this adjustment or “revaluation” in Articles 10.2 and 10.3 of each SPA.

Everyone agrees the brothers inserted this clause to mitigate the CRA risk, as I will describe later. [ 60 ] The brothers allowed for three exceptions to this process. The first is that BDO would not recalculate the values of the Musgravetown and Pearl pharmacies. The second is that they agreed to add a premium of $500,000 to BDO’s Initial Valuation and to any Revaluation of the Elliott Drugs Inc. (owners of Valu, Pearl and Nucare pharmacies). [28] The third was that Altus would not change its real estate appraisals. [ 61 ]

Section 10.2 provides that BDO, while preparing the Closing Financial Statements, would do an “ analysis ” of each pharmacy’s prescription ( Rx) volume at Closing to ( Rx) volumes used by BDO in the Initial Valuation. If in BDO’s professional opinion, “the results of this analysis warrant an updated valuation process,” BDO would update the affected pharmacies’ EVs. I called this the Revaluation Trigger. Once triggered, BDO under

Article 10.03 would recalculate share prices. [ 62 ] There was no express definition of this “analysis.” However, the

Article 10.2 provides that BDO shall decide this EV “using the same analysis and methods as were employed” [29] by BDO in the Initial Valuation. [ 63 ] The Revaluation Engagement gives further guidance.

BDO said, “[y]ou have specifically instructed us to complete our valuation analysis as at the Valuation Date of March 21, 2017, without the benefit of hindsight or subsequent information. ” [30] [emphasis added] [ 64 ] The specific contract language is as follows: 10.2 In the course of preparing the Closing Financial Statements, the Accountants shall conduct an analysis of the Corporation’s prescription volumes to the Closing Date, comparing such prescription volume to the prescription volumes used by the Accountants in calculating the Enterprise Value (the “Volume Analysis”).

Should the Accountants conclude, in their professional opinion, that the results of the Volume Analysis warrant an updated valuation process be undertaken by the Accountants to determine an updated Enterprise Value as of the closing Date, the Accountants shall undertake such process. The updated Enterprise Value (the “updated EV”) shall be determined by the Accountants using the same analysis and methods as were employed by the Accountants to determine the Enterprise Value, and the Updated EV shall be delivered to the Parties with the Closing Financial Statements. 10.3 If an Updated EV is calculated pursuant to

Section 10.2, the Accountants shall use the Updated EV in calculating the Share Price and in determining the Adjustment Payment payable from the Vendor to the Purchaser, or the Purchaser to the Vendor, as the case may be, pursuant to

Section 2.5. [ 65 ] Importantly,

Article 10.2 does not allow BDO to alter the Altus real estate appraisals. The Elliotts agreed, as I describe earlier that Altus would value the properties on a cash-flow approach.

It would use triple net market rents to do so. [ 66 ] On December 19, 2016, Jennings, while discussing a request from Rick Elliott to revalue Karwood Retirement Retreat Ltd., said, “[m]y understanding of the agreement [MOU] is that we will assess the value of the pharmacies up to closing (in order to avoid a CRA risk of rising values since the valuation date of Nov/15), but this agreement did not cover any new appraisals of the real estate including KRR.” [31] [emphasis added] [ 67 ] BDO concluded that the Revaluation Trigger applied to seven of the nine pharmacies [32] (Trigger Report).

The Elliotts agreed to this Revaluation Trigger because Jennings told them on April 4, 2016, that a material increases in Rx volumes is a good proxy to determine if CRA would have a problem with valuations. He said that “[i]f BDO does not see material increases , then we agree there is little risk of CRA disputing the values, so no re-valuation will be done.” [33] [emphasis added] [ 68 ] This suggests that Jennings’

interpretation of BDO’s “analysis” of R x volumes meant it would decide if there was an increase in these volumes, not a decrease. This too would imply that he interpreted BDO’s mandate to protect against CRA risk if the share price increased during the stub period. However, no one argued that this was the correct

interpretation of

Article 10. [ 69 ] On July 27, 2018, the Elliott Group, Rick and Rod Elliott signed the Revaluation Engagement. They retained BDO, under

Article 10.2 of the SPAs to prepare an “Estimate Re-valuation report … setting forth the fair market value of the … outstanding shares of the [Elliott Group] as of March 21, 2017.” [34]

[ 70 ] The purpose was “in support of the Income Tax Act, [ 2000 , S.N.L. 2000, c. I-1.] requirement that transactions among related parties must occur at fair market value… and also to meet the terms of your [SPAs] .” [ 71 ] Fair market value is defined the same as in the original Initial Valuation Retention. BDO issued a number of draft versions of the EV Conclusions and Revaluation Report for the Elliotts’ comment. BDO would only issue a final version of the Revaluation Report after Rick and Rod Elliott signed a representation letter (Revaluation Representation Letter). Revaluation under

Article 10.2 [ 72 ] BDO did at least six draft versions of EV Conclusions in which they calculated revised EVs. In at least one version of the Revaluation Report, it also calculated share prices as I referred to in paragraphs [6] and [17]. [ 73 ] In EV Conclusions, Version 1, BDO continued to assume that rents were at triple net market value. However, it made three other changes now at issue in this litigation . [ 74 ] The first change is it reduced Nucare’s EV. BDO based the Initial Valuation (mid-point $255,000) on a calculation of the NPV of an amount due under a fixed term contract.

In Version 1, it reduced the NPV because of the passage of time from the Initial Valuation to the Closing. I described this issue earlier. I will deal with this revaluation beginning at paragraph [121]. [ 75 ] The second change is it adjusted some pharmacies’ EVs based on the HAPSET assessment. I described this issue earlier. I will deal with this revaluation beginning at paragraph [167]. [ 76 ] The third change is BDO adjusted six of the remaining pharmacies’ EVs Conclusions in Versions 2 through 6 because it changed rent assumptions. I described this issue earlier.

The affected pharmacies were Brookfield, Elizabeth, Southern Shore and Valu (all owned by Rick), and Clarenville and Campbell (owned by Rod). BDO made no other changes in these versions. [ 77 ] BDO now said that it, “replaced any existing actual rent with gross market rent, consistent with the income approach in the Altus appraisal reports. Triple net lease rates were not utilized as property expenses are incurred/expensed by the real estate holding companies.

In this industry, it is expected that the pharmacy will bear some (or all) of the cost of providing space to the next-door doctors’ clinic.” Thus in this and later versions, BDO now used the actual non-market rents. [35] [ 78 ] The Elliotts and BDO knew about these gross market rents before the Initial Valuation. BDO interpreted its mandate under

Section 10.2 of the SPAs to calculate revised EVs by making adjustments to reflect gross market rents. [ 79 ] These adjustments had the effect of reducing the EV of the affected pharmacies.

This would mean that the brother who acquired a particular pharmacy would pay less for that pharmacy than provided for in the Initial Valuation, the MOU and SPAs. [ 80 ] The final draft of the EV Conclusions and Revaluation Report, which include gross market rent adjustments, indicate that Rod Elliott owed Rick about $227,493 (plus the error amount I refer to in paragraph [18]). [ 81 ] Jennings presented this to the brothers in a futile attempt to encourage them to settle. This included a full calculation of share prices and the amounts due to each brother.

Jennings said that BDO did not issue a final report because Rod Elliott refused to sign the Revaluation Representation Letter, did not pay their bill, threatened to sue BDO, and disengaged from the process completely. Impact of Gross Market Rent Adjustment [ 82 ] Version 1 EV Conclusions does not include any adjustments for gross market rents. Versions 2 through 6 adjust only for gross market rent.

I will use the EV values in EV Conclusions Version 1 prepared for each of the six affected pharmacies. [36] I will recalculate the set-off using the same long-form methodology BDO used, as I will describe later. [ 83 ] This recalculation will show the revised offset amounts due between the brothers if BDO did not make the gross market rent adjustment.

This is so because the other inputs BDO used to calculate share value did not change. [37] [ 84 ] Everyone agrees that the EV mid-point is the value used in the calculations. [38] In Table 2, I calculate the mid-points for the six pharmacies for which BDO changed the rent assumptions. [39] I only calculate EVs for these pharmacies because the brothers agreed that they would not revalue Pearl or Musgravetown.

I will deal with the change in Nucare’s value later. [ 85 ] My source of this information is BDO’s “Estimate Valuation-comparison of Normalized EBITDA trends and EV Conclusions.” [40] As BDO rounded these source values to the nearest thousand dollars, I will do the same.

Table 2 Mid Point EV Conclusions Version 1 before rent adjustment but after other changes [41] EV-Low EV-High EV Mid-Point Store-owner 4,160,000 4,410,000 4,285,000 Brookfield-Rick 850,000 900,000 875,000 Elizabeth-Rick 360,000 380,000 370,000 Southern shore-Rick 3,870,000 4,160,000 4,015,000 Valu-Rick 3,100,000 3,340,000 3,220,000 Clarenville-Rod 2,760,000 2,940,000 2,850,000 Campbell-Rod [ 86 ] In Tables 3 and 5, I use these numbers to calculate share prices.

I used BDO’s methodology shown in “Share Prices by Companies and BDO Revaluation. [42] In Tables 4 and 6, I adjust to reflect the value at the shareholder levels. I used BDO’s methodology shown in the second half of that document.

[ 87 ] The results allow me to calculate revised share values by disregarding BDO’s gross market rent adjustment by using the EV’s for the affected pharmacies that BDO calculated in Version 1 of the EV Conclusions. Table 3 EV Conclusions Version 1 Rick’s Net Share Value [43] Rick’s Purchase Brookfield Elizabeth S.

Shore Valu EV Version 1 4,285,000 875,000 370,000 4,015,000 Agreed premium for Valu [44] 0 0 0 500,000 Less debt -90,000 -35,000 -17,000 -348,000 Add redundant real estate 0 0 730,000 0 Add cash net of bonuses payable 62,000 161,000 66,000 162,000 Add due (to)/from related companies 1,415,000 -82,000 -1,229,000 1,900,000 Less shareholder loans -1,310,000 -330,000 -3,000 -1,887,000 Less Trapped in taxes & costs 0 0 0 0 Net share value 4,362,000 589,000 -83,000 4,342,000 Rick Share Value [45] 2,181,000 295,000 -41,500 2,171,000 Table 4 EV Conclusions Version 1 Rick’s shareholder Value (Rick pays Rod) Rick’s Purchase Brookfield Elizabeth S.

Shore Valu Rick share value Version 1 2,181,000 295,000 -41,500 2,171,000 Bonus payable 185,000 11,000 0 178,000 Shareholder loans 621,000 165,000 2,000 945,000 Price owed to Rod [46] 2,987,000 471,000 -39,500 3,294,000 Table 5 [47] EV Conclusions Version 1 Rod’s Net Share Value [48] Rods Purchase Clarenville Campbell EV Version 1 3,220,000 2,850,000 Less debt -94,000 -83,000 Add redundant real estate 0 424,000 Add cash net of bonuses payable 242,000 273,000 Add due (to)/from related companies 999,000 1,602,000 Less shareholder loans -1,293,000 -898,000 Less Trapped in taxes & costs 0 0 Net share value 3,074,000 4,168,000 Rod’s Share values 1,537,000 2,084,000 Table 6 EV Conclusions Version 1 Rod’s shareholder Value (Rod pays Rick) Rod’s Purchase Clarenville Campbell Rod share value Version 1 1,537,000 2,084,000 Bonus payable 130,000 189,000 Shareholder loans 646,000 454,000 Less Trapped in taxes & costs 0 0 Price owed to Rick 2,313,000 2,727,000 [ 88 ] I now will then transpose these results into Table 7 and calculate the value of the shares the brothers acquired.

I use the same methodology BMO used on page 2 of its “Share Prices by Companies and BDO Revaluation.” Table 7 Amounts due between Rick to Rod for share purchase ( Italics are inputs I changed to from BDO versions to reverse Gross Rent Adjustment)

Rick’s Purchases Share price Brookfield 2,987,000 Elizabeth 471,000 Elliott Holdings Southern Shore [49] 1,000 Elliott Drugs – Valu 3,294,000 Elliott Drugs - Pearl [50] [51] 1,213,000 Elliott Drugs - Nucare 75,000 10452 Newfoundland Limited 219,000 10475 Newfoundland Limited 7,066,000 55296 NL Inc. (New World Fitness). 282,000 Karwood Retirement Retreat Limited 1,305,000 Elliott Group Inc. 0 Total Rick 16,913,000 Rod’s Purchases Share prices Clarenville 2,313,000 Campbell 2,727,000 Musgravetown 421,000 Clarenville RE 61,000 10475 Newfoundland Limited (differential) -11,000 Campbell Capital Limited 68,000 Total Rod 5,579,000 [88] I then use these results in Table 8 and calculate the set-off between Rick Elliott and Rod.

I use the same methodology BMO used on page 2 of its “Share Prices by Companies and BDO Revaluation.” Table 8 Promissory Note set off Purchaser Share prices Rick 16,913,000 Rod - 5,579,000 Owed Rick to Rod 11,334,000 11,334,000 Set offs Note issued by Rodco - condos agreed -3,675,000 Note issued to Rodco – condo debt (50%) 352,000 Note issues to Rodco Condo trapped in taxes (50%) 476,000 Owned Rick to Rod 8,487,000 8,487,000 Rick Paid Rick on Closing -8,924,000 Promissory Note set off Payable by Rod to Rick -437,000 -437,000 Related party balances - net Payable by Rick to Rod [52] 442,507 Net payable from Rick to Rod $ 5,507 [ 89 ] Table 8 illustrates that if BDO did not adjust for gross market rents, Rick Elliott would owe Rod $5,507, [53] less than 0.01% of the brothers’ net share value.

Did the Brothers Agree to the Gross Market Rent Adjustment? [ 90 ] I now turn to whether the brothers intended that BDO would make the gross market rent adjustment when it calculated EVs and thus share prices. [ 91 ] This question requires me to interpret the meaning of

Article 10.2 by reading the SPAs as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the brothers at the time of execution of the SPAs. [ 92 ] I am entitled to consider not only the SPAs but also the Initial Valuation Engagement, the Initial Representation Letter and the Revaluation Engagement. I am entitled to consider what the Elliotts knew about the rents when they signed the MOU and SPAs. [ 93 ] The brothers agreed on the fundamentals of the business deal in the MOU.

The MOU requires them to execute agreements consistent with the MOU if they chose to proceed. They retained BDO to do the Initial Valuation. They expressly instructed BDO to rely on the Altus real estate appraisals. [ 94 ] Altus valued the property based in part on triple net market rents. BDO used this assumption when it calculated EBITDA and thus the EVs. BDO confirmed this instruction in the Initial Valuation Retention letter. The Elliotts confirmed this in the Initial Representation Letter.

BDO expressly referred to this assumption in the Initial Valuation. [ 95 ] Thus, the Elliotts made their business deal on that basis even though they knew that this assumption was wrong.

[96] A business valuation is an estimate. The only thing we know is that the estimate is wrong. The hypothetical third-party buyermay or may not purchase the property for that price. [97] That would be the end of the matter but the brothers were concerned about any changes in fair market value during the stubperiod. CRA might challenge the Initial Valuation because the brothers were not at arm’s length. [98] The brothers dealt with the CRA risk when they agreed to the Revaluation Trigger.

Jennings told the Elliotts that, “BDO willreview with the Rx volumes up to closing and if in our view there are material increases that could imply individual store values haveincreased, we will undertake a re-valuation of the applicable store EV.” [emphasis added] [99] He continued, “If BDO does not see material increases then we agree there is little risk of CRA disputing the values, so no re-valuation will be done.”[54] [emphasis added] [100] Thus had there been no changes (and Jennings refers to “increases” not decreases) in Rx volumes, BDO would not have revalued,even though it based its Initial Valuation on an assumption of triple net market rents.

BDO could not have engaged the RevaluationTrigger if only the rent assumption was wrong. This suggests that the Elliotts agreed to take the risk that the share price might notrepresent fair market value because of overstated triple net rents. [101] Furthermore, the brothers agreed in the Revaluation Engagement that BDO would not prepare the Revaluation Report with thebenefit of hindsight.

Jennings said that this restriction would not apply to prevent him from using information that existed at the time ofthe Initial Valuation but was unknown to him. [102] Jennings mistakenly testified he did not know about the gross market rents when he prepared the Initial Valuation Report andRevaluation Report Version 1. [103] As I describe earlier that BDO, the Elliotts and Altus knew about the gross market rents from the beginning, yet BDO prepared,and the Elliotts signed off on, the Initial Valuation based on triple net market rent. The brothers agreed in

Article 10.2 to revalue basedon change in circumstances from the Initial Valuation. [104] I find it not reasonable that the Elliotts intended to revalue for any reason other than a change in Rx. The Rx indicator certainlyaffects revenue (less Rx = less revenue), but it may also have implications on expenses (less Rx = less employees and less cost of drugs). [105] I find that the brothers did not intend that BDO, by implementing the Revaluation Trigger, could ignore the provisions of theInitial Engagement, the Initial Representation Letter or the Revaluation Engagement.

Article 10.2 does not allow it to revalue pharmaciesbecause of changes in rent known by everyone from the beginning. [106] I find that the reasonable

interpretation of

Article 10.2 is that BDO would enact the Revaluation Trigger if Rx volumes changeand for no other reason. It can then revalue based on changes in revenue and expenses unknown at the Valuation Date. This is why thebrothers need the Closing Financial Statements. This is why BDO could not consider the Revaluation Trigger or start the Revaluationuntil BDO finished these statements. [107] BDO can then change the EV’s because of new information in the Closing Financial Statements but not based on assumptionsmade in the Initial Valuation made under the Elliotts direction, when everyone knew these assumptions were wrong.

This would allowBDO to conduct the Revaluations with the benefit of hindsight. This, it cannot do. [108] Rod Elliott’s counsel argued that BDO’s use of gross market rents also violated the requirement in

Article 10 that BDO shalldecide the Revaluation “using the same analysis and methods” used for the Initial Valuation. Jennings testified that the change to grossmarket rent was a change in assumption. BDO did not change its analysis or methods. This distinction, even if correct, does not changemy conclusion on this issue. [109] Therefore, I find the brothers did not intend to revalue the business based on the existence of gross market rents known to them atthe time they entered into the transaction.

I therefore disallow changes to the share value caused by BDO’s adjustments to account forsuch rents. [110] Therefore, Rick Elliott owes Rod $5,507 because of the improper gross market rent adjustment. I now turn to whether Rick Elliottwaived the right to ask that I strictly construe

Article 10.2. Rod Elliott Waiver on Gross Market Rent Adjustment [111] Rick Elliott says that even if I conclude that

Article 10.2 does not allow BDO to revalue EV for gross market rents, Rod Elliottwaived this

interpretation. I find that he has not. [112] This Court discussed waiver in K/S A/S Offshore Atlantic v. Marystown Shipyard Ltd. (1990), (NL CA), 271A.P.R. 324, 87 Nfld. & P.E.I.R. 324 (Nfld. C.A.) when it quoted Lord Denning in W J Alan & Co. v.

El Nasr Export & Import Co,[1972] 2 All E.R. 127, [1972] 1 Lloyd’s Rep. 313 (U.K.C.A.), when he said, “if one party, by his conduct, leads another to believe thatthe strict rights arising under the contract will not be insisted on, intending that the other should act on that belief, and he does act on it,then the first party will not afterwards be allowed to insist on the strict legal rights when it would be inequitable for him to do so.” [113] The New Brunswick Court of Appeal discussed the concept in Brown v.

Brown, 2010 NBCA 5, when it said at paragraph 36, “thelegal concept of ‘waiver’ … is premised on an actual intent, express or implied, to abandon or surrender a right.” [114] Rod Elliott, after he objected to BDO’s gross market rent adjustments for some of Rick’s pharmacies, asked BDO to make thesame adjustment for his Clarenville pharmacy. Rod Elliott’s counsel says by doing so he waived his rights to the strict

interpretation ofArticle 10.2.

[ 115 ] I find that Rod Elliott did not waive his contractual rights. Under

Article 10.2, BDO was obligated to decide whether to engage the Revaluation Trigger and, if so, to revalue. [ 116 ] If BDO properly interpreted its contractual mandate under

Article 10.2, neither brother had contractual right to reject any EV or share price adjustment. Rod Elliott cannot waive a contractual right he did not have. [ 117 ] Furthermore, when BDO invited comments on the versions of the EV Conclusions or the Revaluation Report, it did so for information purposes only. Neither brother could reject BDO’s final report. [ 118 ] Rod Elliott objected to the gross market rent adjustment as part of this process. He did not cause Rick Elliott to believe that he was no longer objecting to gross market rents. He did not induce Rick to do anything. Rick took no action nor gave up any of his contractual rights because of Rod’s request. [ 119 ] A more reasonable

interpretation is that Rod requested BDO revalue Clarenville to protect himself if his

interpretation of BDO’s mandate was wrong. [ 120 ] I now turn to whether BDO improperly applied the Revaluation Trigger and thus improperly revised Nucare’s EV. Did BDO improperly apply the Revaluation Trigger to Nucare and thus improperly revise Nucare’s EV ? [ 121 ] I find it did. BDO said Nucare shares were worth less on the Closing than on the Valuation Date. Its income mostly came from a fixed term contract with a retirement home.

The Elliotts knew this contract expired in February 2020, but the retirement home had an option to renew for two more years. [ 122 ] BDO based the valuation of Nucare on a “discounted cash flow method (given the limited contract period, which we can reasonably forecast).” [55] BDO values the income stream during the term of contract. It converts it to a net present value. In the Initial Valuation Report, BDO estimated Nucare’s mid-point EV at $255,000. As the contract term passed, the net present value dropped because the Elliott Group in affect earns the net present value reduction.

Rick and Rod Elliott shared this amount. [ 123 ] Thus, the Initial Valuation is not a good proxy for share value at Closing because as of March 21, 2017, no one can know if the retirement home will renew its contract. Thus, a possible outcome is that Nucare could be worth less after Closing. On the other hand, Nucare might be worth more if there is a renewal after Closing. In either case, BDO cannot consider the income for an un-exercised renewal as part of its EV Valuation. [ 124 ] Therefore, the issue is not whether BDO properly decided fair market value, but whether

Article 10.2 allows for BDO revaluation because of facts, everyone knew at the Initial Valuation. [ 125 ] The Elliotts agreed in

Article 10.2 of the SPAs, that an analysis of the Initial Valuation and Revaluation R x volumes is the only mechanism that would trigger a BDO Revaluation [56] . This only has meaning if there is a change in the volumes. There is no evidence there was any such change. BDO knows this because they did not do an analysis of change in Nucare’s R x volumes in the Trigger Report. [57] [ 126 ] BDO’s

interpretation is tantamount to saying that

Article 10.2 requires BDO to calculate a Closing EV even if there was no change in the R x. If Nucare’s counterparty renewed or extended its contract one day before Closing, BDO’s

interpretation would allow it to increase the EV to account for this renewal, even though there was no change in R x . [ 127 ] This approach is consistent with Jennings’ testimony that the Revaluation Retention letter as I describe earlier mandates BDO, once it invoked the Revaluation Trigger, to recalculate fair market value to protect the Elliotts from CRA risk. [ 128 ] There is little doubt that BDO’s calculated decreased EV would likely better reflect Nucare’s fair market value on Closing. However, had the brothers wanted a revaluation unconnected to changes in R x they could have said so. They could have drafted

Article 10.2 to allow BDO to recalculate share values on Closing without the need for the Trigger Report. [ 129 ] BDO’s

interpretation of its mandate caused it to not only change the NPV of the Nucare contract, but also to make the gross market rent adjustment because both affect fair market value of the Elliott Group shares. This

interpretation suggests that this mandate overrides the Elliotts’ other express directions. [ 130 ] If BDO believed its mandate was to calculate a new fair market value to protect the Elliotts from CRA risk in all circumstances, the Elliotts’ other directions prevented BDO from fulfilling this mandate. The Elliotts directed that BDO: (

a) not revalue the Pearl and Musgravetown pharmacies. These two enterprises had share values of over $3.3 million; [58] (

b) assume a $500,000 premium to Valu’s price; and (

c) accept the real estate valuations even though Altus used incorrect triple net rents, which may overstate the real estate value. The real estate is worth over $32 million. [59] [ 131 ] These directions have a larger impact on theoretical fair market value than any of the BDO’s Revaluation adjustments. [ 132 ] I find

Article 10.2 does not allow BDO to revalue Nucare. I find that the brothers allocated the risk of a reduction and the benefits of an increase in Nucare’s EV (and thus its share value) to Rick Elliott, as they did for the Pearl (to Rick) and Musgravetown (to Rod) pharmacies. [ 133 ] The mid-point EV was $255,000 in the Initial Valuation. The final Revaluation mid-point was $150,000. I have no evidence that BDO adjusted Nucare HAPSET in Version 1, but it appears it did not. Therefore, Rick Elliott owes Rob one-half of the difference or

$52,500 . I now turn to whether Rod Elliott waived his right to construe strictly the application of the Revaluation Trigger. Rod Elliott Waiver of BDO’s engagement of the Revaluation Trigger [ 134 ] Rick Elliott says that even if I conclude that BDO improperly applied

Article 10.2 and interpreted the Revaluation Trigger to require it to revalue Nucare’s EV, Rod waived this

interpretation. He testified that he agreed that BDO would revalue all seven pharmacies including Nucare. [60] [ 135 ] As I found for the gross market rent adjustment, I find that Rod Elliott did not waive his contractual rights. BDO decided in its “professional opinion” to invoke the Revaluation Trigger. Again, if BDO properly interpreted its contractual mandate to invoke the Revaluation Trigger under

Article 10.2, neither brother had a contractual right to reject that decision. Rod Elliott cannot waive a contractual right he did not have. [ 136 ] BDO asked the brothers to comment on its decision on the Revaluation Trigger on the Trigger Report. However, it did so for information purposes only. Neither brother could reject this decision. Thus, when Rod agreed, he did not induce Rick to do anything.

Rick did not act on any inducement nor did he give up any of his contractual rights. [ 137 ] I now turn to whether Rick Elliott improperly caused 10475 to incur $23,943 ($20,820 plus HST) in maintenance expenses for paving. Did Rick Elliott improperly cause 10475 to incur $23,943 in maintenance expenses for paving? [ 138 ] I find that he did not.

Rick Elliott arranged for 10475 to pave the parking lot of Cowan Heights Plaza in October 2016, about five months before Closing. 10475 owns the lot. 10475 became 100% owned by Rick Elliott on Closing. [ 139 ] He testified that the Elliott Group’s property manager recommended that 10475 do the work before winter. The written correspondence between Rick Elliott and the property manager is consistent with but does not expressly contain this advice. [ 140 ]

Article 12 of the MOU said that the Elliotts would not enter into “extraordinary ... business transactions … inconsistent with previous practice in the ordinary course of ... business … without prior notification given to either party.” They agreed that they would continue maintenance and capital spending as the companies normally incurred them.

Rick Elliott testified that he believed the MOU was binding. [ 141 ] However, they also agreed that, “If possible, the cost would be deferred until at the Closing Date, but if not possible and required, the companies shall incur such costs prior to the Closing Date and there shall be no adjustment to the respective prices of share interests to either Rick or Rod.” [ 142 ] Rick Elliott notified Rod, presumably pursuant to this Article, about the paving.

Rod told him he would expect Rick to compensate him for half of the cost if he proceeded. [ 143 ] Rod objected to this cost during his review of the draft Closing Financial Statements. He said 10475 should have deferred this expense. Rick disagreed. [ 144 ] However, I find that Rod Elliott gave no evidence to suggest the paving was not in the ordinary course of business. Rick’s evidence is consistent with the expenditure being necessary because of problems paving in winter. [ 145 ] I find that 10475 was “required” to incur the paving costs. Rick Elliott shall not compensate for this cost.

I therefore dismiss Rod Elliott’s claim with respect to this cost. [ 146 ] I now turn to whether Rick Elliott improperly caused 10475 to incur $27,456 ($23,875 plus HST) for air conditioning units. Did Rick Elliott improperly cause 10475 to incur $27,456 for air conditioning units ? [ 147 ] I find that he did. On March 8, 2017, less than two weeks before Closing, Rick Elliott received an invoice when 10475 installed three air conditioning units on the New World Fitness building.

After Closing, Rick owns 100% of 10475. [ 148 ] Rick Elliott did not explain why 10475 needed to replace the air conditioning units in the winter, He did not know if these units supply heat or just air conditioning. Unlike for the paving, he did not inform his brother. He did not have any evidence from his property manager that 10475 should have replaced the air conditioning units when it did. [ 149 ] Rick did not explain why 10475 did not defer this cost for a couple of weeks. I find there is no evidence that a two-week deferral would have made any difference to 10475’s operations.

This investment will benefit 10475 for years after Closing. It will provide almost no benefit to Rod Elliott. [ 150 ] No one gave me the Companies’ financial statements. However, Version 4(

a) of the Revaluation Report [61] includes a

summary of 10475 expenses. This shows 10475 spent about $107,000 in repairs and maintenance in the 2.67 months of 2017 at the end of the stub period. Extrapolated, this would represent a yearly expenditure of more than $481,000. 10475’s annual maintenance expenses ranged from about $60,000 to about $251,000 in 2010 to 2016. [ 151 ] Rick Elliott’s counsel argued that Rod’s only remedy was to object to the expense in his review of the Closing Financial Statements.

I find that Rod Elliott did object to this expense, yet BDO finalized the statements without making any change to the air- conditioning expense. [ 152 ] This is not surprising because the issue is not how BDO allocated the expense. It properly allocated the expenses in the year 10475 incurred them. It could do nothing else. However Rick Elliott caused 10475 to incur the expense and breached

Article 12 of the

MOU, an agreement he considered binding. [ 153 ] Therefore, I order that Rick Elliott pay Rod, his one-half share of this amount or $13,728 . [ 154 ] I now turn to whether Rick Elliott improperly caused 10475 to enter into a methadone contract with Eastern Health that should have been for the benefit of the Elliott Group.

Did Rick Elliott improperly cause Elliott Enterprises Ltd. to enter into a methadone contract with Eastern Health that should have been for the benefit of the Elliott Group? [ 155 ] I need not decide this because Rod Elliott suffered no damages. [ 156 ] During the stub period, Rick Elliott, through his company Elliott Enterprises Ltd., wanted to pursue a methadone contract with Eastern Health for his son Brad Elliott. He initially hoped Eastern Health would award the contract after Closing.

This did not happen because the Elliotts delayed Closing and Eastern Health accelerated the contract award. [ 157 ] Methadone was a new source of business for Rick Elliott and the Elliott Group. However, Rick Elliott was anxious to help his son to pursue this opportunity. His son Brad is a pharmacist. He has a business-related degree. [ 158 ] Brad Elliott led the effort on the methadone contract. He prepared the contract documents. He priced the work. He organized staff. After award, he managed the business. [ 159 ] Rod Elliott subpoenaed Brad. He was well spoken. He was honest and forthright.

He told me he appreciated the opportunities his father and uncle gave him. He acknowledged that Rod Elliott contributed to his career. [ 160 ] He testified that he led the effort on the methadone contract. He says that after the award, it became apparent that the contract volumes and thus revenue were insufficient to cover costs. [ 161 ] He said that Elliott Enterprises Ltd. hired the principal pharmacist directly. However, before Closing the company used services and premises of the Elliott Group.

He says the Elliott Group charged the costs of the services, premises and pharmacist back to Elliott Enterprises Ltd. [ 162 ] Everyone agrees the Elliott brothers had always used the services of the Elliott Group to support their solely owned businesses. The brothers did not think it necessary to get specific approval from each other. [ 163 ] Brad Elliott told the Court the methadone contract was not profitable. He confirmed the evidence given by his father that Elliott Enterprises Ltd. lost $5,273.36 on this contract from December 1, 2016, to Closing. [ 164 ] He says monthly losses after that were similar.

He said he maintained the unprofitable contract through a first renewal because he was using this contract to support his efforts with a more important Eastern Health contract. [ 165 ] I believe him when he says the contract is unprofitable. I find there was no profit in the methadone contract, and Rod Elliott suffered no loss even if Rick Elliott acted improperly. I therefore dismiss this claim. I will now turn to Rod Elliott’s other claims in his defence. Rod Elliott’s other Claims in his Defence [ 166 ] I dealt with two of these claims, the paving and the air conditioning earlier in this decision.

With two other exceptions, counsel did not present evidence or argument on the other claims. The first exception relates to donations to the Gathering Place. [ 167 ] In argument, his counsel abandoned this claim. The second exception relates to allocation of HAPSET liability. Although the tax accrued prior to Closing, there is no evidence that the Group knew which companies owed tax, and what amounts, until the taxing authority crystallized the tax after audit.

BDO made changes to the EV because of this liability in Version 1 of the EV Conclusions (see para. [75]). [ 168 ] Rod Elliott’s counsel made two submissions. First, the brothers knew about the HAPSET liability when they executed the MOU and the SPAs. Therefore, he argues that BDO should not have reduced share values because everyone knew this liability. [ 169 ] I disagree. No one contests that BDO properly applied the Revaluation Trigger to the affected pharmacies. [62] No one submitted evidence to show that the Elliott Group knew about the specific amount of the HAPSET liability.

It is one thing to know that various companies in the Elliott Group owe a yet un-crystallized amount. It is another to know, after audit, what companies in the Group owe what amounts. [ 170 ] Thus, the brothers did not direct BDO to ignore this fact. This does not violate their direction that BDO conduct the Revaluation without the benefit of hindsight or subsequent information. The brothers knew of the HAPSET liability, generally, but did not know the specifics at the time of the Initial Valuation. BDO did not know the specifics.

Thus, I find that BDO was entitled to account for HAPSET in its Revaluation. [ 171 ] Second, Rod Elliott’s counsel referred to a “Deduction Allocation Agreement Amendment.” This agreement shows the allocation of the Elliott Groups’ deductions to both Rick Elliott’s solely owned companies and the Elliott Group companies that he acquired on Closing. [ 172 ] Counsel suggests the Amendment shows that someone disproportionately allocated these deductions to Rick Elliott’s companies. Thus, counsel suggests that Rick Elliott improperly benefited from this because these deductions reduced his companies’ HAPSET.

[ 173 ] However, no one could testify on the source or date of this Deduction Allocation Agreement Amendment. [ 174 ] Rod Elliott’s counsel said BDO allocated additional HAPSET liability of $249,843 to Rick’s acquired companies, and $152,523 to Rod’s acquired companies. [63] [ 175 ] I note that BDO allocated about 62% of the total HAPSET liability to Rick Elliott’s companies. Rick Elliott also acquired pharmacies with about 63% of the total pharmacy EV.

I find that this is not consistent with Rick Elliott taking a disproportionate amount of the HAPSET deductions. [ 176 ] Furthermore, BDO spread the HAPSET over a number of years prior to Closing. This annual liability may translate dollar for dollar to a change in annual EBITDA but it may not change EV in the same proportion. Because of this, I find Rod Elliott failed to prove his damages. I therefore dismiss this claim. [ 177 ] I also dismiss the remainder of Rod Elliott’s counterclaim, as he presented neither argument nor evidence to support them.

I now turn to Rod Elliott’s attempts to file evidence after he finished examination-in-chief and cross–examination of witnesses. Late Filing of Evidence [ 178 ] Rick Elliott objected to Rod’s counsel’s attempts to enter transcripts of evidence given by Rick at discovery, and a copy of his affidavit provided to him by Rick’s counsel as part of a disclosure order. The evidence related to the air-conditioning issue. As I found in Rod Elliott’s favour, the issue may be moot. [ 179 ] I will not admit this evidence. No one filed the affidavit with the court prior to trial.

He did not attempt to do so until he completed his direct examination and cross-examination of witnesses. [ 180 ] I consider counsel’s attempt to enter this evidence a breach of trial fairness. Counsel did not want to enter it to impeach Rick Elliott. He wanted to shore up his evidence after he had finished with witnesses. It would have been a simple matter to put all of this evidence to Rick Elliott while he was in the witness box. I now turn to my conclusion on Damages. Conclusion on Damages [ 181 ] I find that Rick Elliott owes Rod $48,941 as described in Table 9.

Table 9 Amounts Due From Rod Elliott to Rod (-) from Rick Elliot to Rod (+) Head of Damage Amount Due Share price Revaluation without Gross Market Rent Adjustment $5,507 Payment Error -$22,794 Nucare NPV Adjustment $52,500 Air Conditioning Units Adjustment $13,728 Total Due from Rick Elliott to Rod Elliott $48,941 [ 182 ] I now turn to whether Rod Elliott released any of these claims because he signed a release as part of the Closing. I will also consider whether he is entitled to indemnification of his costs under

Article 9 of the SPAs. Release and Indemnity [ 183 ] I find that Rod Elliott has not released his claims. I find that Rick Elliott is not required to indemnify Rod for his costs. [ 184 ] Both brothers signed mutual releases for any claims up to the Closing, arising in relation to their shares in the Elliott Group, including in their capacity as a shareholder, director or employee. [ 185 ] However, the release does not apply to a breach of their obligations in the SPAs. Therefore, the release does not cover Rod Elliott’s successful pursuit for a correct

interpretation of

Article 10 of the SPAs. [ 186 ] Rod Elliott’s claim for compensation for the air conditioning units arises from Rick’s breach of the MOU. Rod Elliott could not have known about this breach until he received the Closing Financial Statements after Closing. The release is limited to any claims arising up to the Closing not afterward. [ 187 ] The brothers agreed in

Article 9 of the SPAs to indemnify each other from all losses arising from any breach of any SPA covenants. [ 188 ] However, neither brother breached any covenant. They all acted in response to BDO’s

interpretation of

Article 10. BDO’s

interpretation ultimately was incorrect but this does not mean that the brothers breached any covenant. I now turn to Rod Elliott’s entitlement to interest on his damages. Interest [ 189 ]

Article 2.10, 2.11 and 2.12 of the SPAs provide that the affected brother shall pay the revalued share price, [64] recalculation of “Profit,” [65] and revised shareholder debt thirty days after BDO provides the Elliotts with the Closing Financial Statements. [ 190 ] Interest on the revised share price is the Bank of Nova Scotia prime lending rate from time to time plus 3%. Interest on “Profit” and revised shareholder debt is the prime rate. Interest accrues from September 2, 2018, thirty days after BDO delivered Closing Financial Statements on August 3, 2018.

[ 191 ] In the absence of argument or evidence on the characterization of the amounts in the set-off calculation, I award interest on $48,941 from September 2, 2018, at the Bank of Nova Scotia prime lending rate from time to time. I now turn to costs. COSTS [ 192 ] Rod Elliott successfully defended Rick Elliott’s claim, and was partially successful in his counterclaim. He is entitled to his costs on a Column III basis. [ 193 ] In any practical sense, no one won anything in this trial. The final judgment is about 0.1% of the value of the transaction.

This represents an extraordinarily small variation of what is, in the end, only an estimate. DISPOSITION [ 194 ] I therefore order that Rick Elliott pay Rod Elliott: (a) $48,941 together with interest from September 2, 2018, at the Bank of Nova Scotia prime lending rate from time to time ; and (

b) Rod’s costs on a Column III basis ______________________________ Alexander MacDonald Justice [1] Tab 1 Plaintiff Book of Documents, Consent 1. Letter dated January 15, 2016. [2] Tab 52 Plaintiff Book of Documents, DJ6, at page 10. [3] Tab 52 Plaintiff Book of Documents, DJ6, at page 2. [4] Tab 4 Plaintiff Book of Documents, Consent 3. [5] Plaintiff Book of Documents, Tab 6, at paras. 8 & 9 [6] Plaintiff Trial Brief Tab B [7]

Article 2.14 of each Share Purchase Agreement I refer to in paragraph [10]. [8] Tab 32 Plaintiff Book of Documents, Consent 28. The brothers signed in mid September, 2018. [9] Brookfield Drugs

(1985) Ltd., 59797 NL Ltd. (Clarenville), 11205 Nfld.

Inc. (Elizabeth), Elliott Holdings 2011 Inc., (Southern Shore), R Two Holdings Limited (Campbell) and Elliott Drugs Inc. (Valu and Nucare) The parties agreed BDO would not revalue Pearl (Elliott Drugs Inc.) and Musgravetown (R Two Holdings Limited). [11] EVs used to calculate share values come from Tab 54 Plaintiff Book of Documents DJ8 Comparison of Normalized EBITDA trends and EV conclusions. [13] A fourth issue is that the Clarenville SPA had a specific R x adjustment mechanism which it not at issue here. [14] Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the Closing date.

Generally, the cash flows in net present value analysis are discounted to adjust for the risk of an investment opportunity, and to account for the time value of money. [15] BDO did not revalue Nucare (part of Elliott Drugs Inc.) because of this issue. [18] Plaintiff Trial Brief, page 4. [19] Tab 54 Plaintiff Book of Documents DJ8 Comparison of Normalized EBITDA trends and EV conclusions. [20] Tab 1 Plaintiff Book of Documents, para. 9. [21] Tab 1 Plaintiff Book of Documents, para. 14. [22] Tab 12 Defendant Book of Documents [23] Tab 16 Defendant Book of Documents [24] Tab 35 Plaintiff Book of Documents, Page 9, at para. 3 [25] Tab 3 Plaintiff Book of Documents at para. 5

[31] Tab 75 Defendant Book of Documents, Exhibit DJ38. [32] Tab 55 Plaintiff Book of Documents Exhibit DJ9. [33] Tab 59 Defendant Book of Documents Exhibit DJ31. [35] Tab 53 Plaintiff Book of Documents, page 9, paragraph 3. [36] Tab 54 Plaintiff Book of Documents DJ8. [37] Also, see paragraph [6] and Tab 57 Plaintiff Book of Documents page 3 DJ10. [38] Plus $500,000 premium the brothers agree to add to Elliott Drugs Inc. [39] The parties agreed not to revalue the Pearl and Musgravetown pharmacies. [40] From Tab 54 Plaintiff Book of Documents. [41] From Tab 54 Plaintiff Book of Documents. [42] Tab 57 Plaintiff Book of Documents, Revaluation draft final version, page 3. [43] For the pharmacies Rick Elliott acquired. [47] Tab 57 Plaintiff Book of Documents, page 2. [49] Southern Shore pharmacy has no change in value, as there is nothing in the SPAs to suggest that one of the brothers would pay the other to take this pharmacy on Closing.

This is consistent with BDO Initial Valuation and its revaluation. BDO’s share valuation only included shareholder loans. See Tab 57 Plaintiff Book of Documents at page 3. [50] I separately account for Pearl and Nucare because BDO did not adjust the values of either because of its gross market rent assumption. As the brothers agreed that they would not revalue, I used the original valuation and not Version 1 for both this and Musgravetown. [56]

Section 2.5 of the SPAs for the companies at issue in this case, provide for other ways revaluation might occur -

Article 2.7 Payment of Profit from June 1, 2016 to Closing; and

Article 10.1 By Court Order or Notice of Assessment of a Taxing Authority. The issue here is when BDO can revalue on its own initiative under

Article 10.2. [57] See Tab 55 Plaintiff Book of Documents, DJ9 [58] Estimate Valuation Report as of March 21, 2017 Tab 53 Plaintiff Book of Documents DJ7, page 36 and 38. [59] Estimate Valuation Report as of March 21, 2017 Tab 53 Plaintiff Book of Documents DJ7, page 37 and 39. [60] See Defendant Book of Documents, Tab 104 Letter from Jennings to Neil Jacobs on May 31, 2017, in which Jennings confirms “2 weeks ago, Rod did agree to allow us to proceed with updated valuations process.” [64] Share price Revaluation without Gross Market Rent Adjustment, the BDO payment error and Nucare NPV Adjustment. [65] Air conditioning units.