2015 QCCQ 6674, 2015 QCCQ 6674

Heisler c. Canaccord Wealth Management 2015 QCCQ 6674 JP 2262 COURT OF QUEBEC Small Claims Division CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL CIVIL DIVISION No: 500-32-140784-135 DATE: August 3, 2015 ______________________________________________________________________ IN THE PRESENCE OF: THE HONOURABLE VINCENZO PIAZZA, J.C.Q. ______________________________________________________________________ IRVING HEISLER Plaintiff v. CANACCORD WEALTH MANAGEMENT and STELMINE CANADA LTD.

Defendants ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Mr. Heisler purchased flow-through shares of Stelmine Canada Ltd. (“ Stelmine ”), a start-up mining company, through the intermediary of Canaccord Wealth Management (“ Canaccord ”), a securities broker, as a tax shelter. [ 2 ] Canaccord acted as underwriter for the initial public offering (“ IPO ”) of Stelmine’s shares. [ 3 ] Initially, Mr.

Heisler did get an income tax abatement from the federal and provincial governments, but he later was reassessed by the latter because pursuant to an audit of Stelmine, Revenue Canada established that the flow-through investment by shareholders such as Mr. Heisler had not been used by Stelmine to fund its mining operations. [ 4 ] Mr.

Heisler holds Canaccord and Stelmine solidarily liable for this reassessment. [ 5 ] He argues that Canaccord failed in its duty towards him as it did not monitor Stelmine’s management of the funds to ensure that they were spent in accordance with what was represented to the investors in the prospectus of the IPO [1] . He considers that Stelmine also is liable as it did not use the funds as it represented that it would in the prospectus. ANALYSIS AND DISCUSSION [ 6 ] Mr. Heisler invested $8,000.00 in Stelmine.

This gave him a tax deduction of $7,800.00 for federal tax purposes and $11,700.00 for Quebec tax purposes, for a net tax savings of $11,500.00 [2] . He was later reassessed for $4,013.65, which he considers his “loss” [3] . [ 7 ] The Court fails to see how this can even be called a “loss”. Mr. Heisler still saved over $7,000.00 in taxes, not to mention the slight profit he admits having made when he sold some of his shares in Stelmine. [ 8 ] This is sufficient to dispose of Mr. Heisler’s action, as he suffered no prejudice whatsoever. [ 9 ] Furthermore, for the reasons discussed below, even if Mr.

Heisler had suffered a prejudice, his action would still be dismissed, as Stelmine committed no fault and Canaccord breached no contractual undertaking towards him. Stelmine [ 10 ] Stelmine’s president, Michel Lemay, testifies that this company was formed to pursue a specific mining project situated at the Opinaca River, in the James Bay region of northern Québec. [ 11 ] The flow-through investment was intended to fund mining operations beginning in 2007. Mr.

Lemay explains that due to the severe weather conditions which prevail in the region, it is only possible to work from June through October. [ 12 ] Unfortunately, three months into the company’s first exploration season, the boat carrying the samples harvested by Stelmine’s geologists capsized. All samples were lost and the exploration campaign had to be taken over from the start. However, at that point, there was not enough time left to complete a satisfactory season.

[ 13 ] Mr. Lemay testifies that this unforeseen and unpredictable event put the company’s mere survival in serious jeopardy. To salvage the company and provide shareholders with value and a return on their investment, Stelmine’s directors had to look at other ventures. [ 14 ] The funds which were originally destined to be invested in the Opinaca project served instead to fund an unrelated acquisition. This led, according to Mr. Lemay, to an appreciation of Stelmine’s stock, which rose from an initial 0.15$ per share to a high of $1.35. Everyone, he says, made a profit on their investment.

However, this change of plans also meant that Stelmine’s shares no longer qualified as the tax shelter which they were initially expected to provide to investors such as Mr. Heisler. [ 15 ] Does this entail Stelmine’s liability? [ 16 ] There is no privity of contract between Mr. Heisler and Stelmine. The only legal basis for Mr. Heisler’s recourse herein is the extra-contractual liability regime of the Civil Code [4] . Mr. Heisler’s claim cannot be considered an action in oppression pursuant to

section 241 of the

Canada Business Corporations Act , since only the Superior Court has jurisdiction on such procedures [5] . [ 17 ] It was Mr. Heisler’s burden to demonstrate, on a balance of probabilities, that Stelmine committed a fault and that he suffered damages as a direct and immediate consequence of this fault [6] . [ 18 ] The Court has already determined that Mr. Heisler suffered no damages. By changing its business plan following the boat accident, does Stelmine commit a fault? In the Court’s opinion, no. [ 19 ] In the landmark case Peoples Department Stores Inc. (Trustee of) v.

Wise [7] , the Supreme Court of Canada writes: 43 The various shifts in interests that naturally occur as a corporation’s fortunes rise and fall do not, however, affect the content of the fiduciary duty under s. 122(1)(

a) of the CBCA. At all times, directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders. 44 The interests of shareholders, those of the creditors and those of the corporation may and will be consistent with each other if the corporation is profitable and well capitalized and has strong prospects. However, this can change if the corporation starts to struggle financially.

The residual rights of the shareholders will generally become worthless if a corporation is declared bankrupt. Upon bankruptcy, the directors of the corporation transfer control to a trustee, who administers the corporation’s assets for the benefit of creditors. 45 Short of bankruptcy, as the corporation approaches what has been described as the “vicinity of insolvency”, the residual claims of shareholders will be nearly exhausted.

While shareholders might well prefer that the directors pursue high-risk alternatives with a high potential payoff to maximize the shareholders’ expected residual claim, creditors in the same circumstances might prefer that the directors steer a safer course so as to maximize the value of their claims against the assets of the corporation. 46 The directors’ fiduciary duty does not change when a corporation is in the nebulous “vicinity of insolvency”. That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning.

What it is obviously intended to convey is a deterioration in the corporation’s financial stability. In assessing the actions of directors it is evident that any honest and good faith attempt to redress the corporation’s financial problems will, if successful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty. (Emphasis added by the Court.) [ 20 ] A corporation’s first and foremost duty to its shareholders is to produce value and a return on their investment. This is precisely what Stelmine did.

It committed no fault. Canaccord [ 21 ] Mr. Lemay is categorical: Stelmine would not have proceeded with the IPO if Canaccord had been given the right to monitor its activities as Mr. Heisler claims that it should have. [ 22 ] Canaccord played no role in, nor had it any control whatsoever over the change in Stelmine’s business plan. [ 23 ] Canaccord gave Mr. Heisler no guarantee that the flow-through shares he purchased would be recognized as a tax shelter by the governments.

On the contrary, the prospectus contains clear warnings that shareholders who use their investment as a tax shelter will be reassessed if the funds are not spent by Stelmine within the timeframe and for the purposes initially contemplated. [ 24 ] Mr. Heisler has not demonstrated on a balance of probabilities that Canaccord failed in any contractual undertaking towards him. FOR THE FOREGOING REASONS, THE COURT: DISMISSES the action; CONDEMNS Irving Heisler to pay the Court fees of $174.00 to Canaccord Wealth Management. __________________________________ VINCENZO PIAZZA, J.C.Q.

Hearing dates: July 16 and 30, 2015