QAi Quality Assurance Inc ., JA Fournell Professional Services Ltd., Jeffrey Fournell, v. Gary Toronchuk, 2023 ABKB 251

Court of King’s Bench of Alberta Citation: QAi Quality Assurance Inc v Tumblin Consulting Ltd, 2023 ABKB 251 Date: 20230426 Docket: 2201 08577 Registry: Calgary Between: QAi Quality Assurance Inc ., JA Fournell Professional Services Ltd., Jeffrey Fournell, and Gary Toronchuk Applicant/Cross Respondents - and - Tumblin Consulting Ltd. Respondent/Cross Applicant _______________________________________________________ Decision of the Honourable Justice B.B.

Johnston _______________________________________________________ [ 1 ] QAi Quality Assurance Inc. (“QAi”) applies to have the court appoint a valuator under the terms of a Shareholders Agreement to facilitate the buyout of a departing employee and shareholder based on a valuation date of January 19, 2022. [ 2 ] Tumblin Consulting Ltd. (“TCL”) opposes the application and cross applies to have a valuation done by Burant valuation and Business Advisory Inc.(“Burant”) recognized for the purposes of calculating the TCL share buyout. [ 3 ] Alternatively, TCL asks that a new valuator be appointed.

They further seek direction on the effective date of the valuation and how any subsequent valuation is to proceed.

[ 4 ] QAi opposes the use of the Burant valuation. [ 5 ] No relief is sought against Gary Toronchuk. Background [ 6 ] QAi is an Alberta corporation. It is a pipeline material consulting and quality surveillance provider primarily in the oil and gas industry. [ 7 ] TCL owns 25% of the shares of QAi. JA Fournell Professional Services Ltd. (“FPS”) owns the remaining 75% of the shares. [ 8 ] Jeffrey Fournell is the sole director and shareholder of FPS. He is the president and a director of QAi. [ 9 ] Mr. Ben Tumblin is the sole director and shareholder of TCL.

He was a director of QAi from March 1, 2013, until August 26, 2022. [ 10 ] Mr. Tumblin, TCL, FPS, Mr. Fournell and QAi are parties to the Shareholders Agreement that was signed effective March 1, 2013 (“Shareholders Agreement”). [ 11 ] Mr. Tumblin also entered into an Employment Agreement with QAi on March 1, 2013. [ 12 ] The Shareholders Agreement provides that QAi shall purchase the TCL shareholder interest if Mr.

Tumblin ceases to be an employee of QAi. [ 13 ] On July 23, 2020, QAi signed an engagement letter retaining Burant (the “Engagement Letter”) to conduct a calculation valuation of the issued and outstanding shares of QAi. The Burant valuation was completed February 4, 2021, based on a valuation dated as at August 31, 2020. [ 14 ] Gadowsky & Associates are the accountants of QAi for the purposes of the Shareholders Agreement. [ 15 ] The shareholders executed a shareholders resolution dispensing with the appointment of an auditor for both 2020 and 2021. [ 16 ] Mr.

Tumblin provided his written resignation as an employee on December 19, 2021, effective January 19, 2022. [ 17 ] QAi Quality Field Services Ltd (“FS”) was a wholly owned subsidiary of QAi that expanded QAi’s core services to include field inspection services. Mr. Fournell and Mr. Tumblin were the directors. FS was dissolved by directors’ resolution on March 1, 2022. [ 18 ] On March 1, 2022, QAi served TCL with a notice that it intended to cause the value of TCL’s shares to be determined by a valuator. In response, TCL selected Spencer Ord with Deloitte as the valuator under protest.

Issues [ 19 ] The issues include: 1) Should the Burant valuation be used for the purposes of valuing the TCL shares in QAi? 2) Should a new valuation be directed in accordance with the Shareholders Agreement? If so,

a) What valuation date should be used?

b) Who should conduct the valuation?

c) What process should be used for determining the valuation? The Shareholders Agreement [ 20 ] The Shareholders Agreement provides:

Article 1.01-

Definitions “Accountants” means that accountant or accounting firm designated by the Board from time to time; “Board” means the board of Directors of the Corporation; “Corporation” means QAi Quality Assurance Inc., a corporation incorporated pursuant to the Act; “Shareholder Interest” means all the Shares and Shareholder Advances owned by a Shareholder;

“Shareholders” means collectively FPS and TCL unless the context otherwise requires; “Termination Date” means that date upon which Ben Tumblin ceases to be an employee of the Corporation; “Valuator” has the meaning ascribed thereto in

Article 4.04; “Value” has the meaning ascribed thereto in

Article 4.03;

Article 4- Valuation of Shares 4.01 Except as otherwise provided in this Agreement, the purchase price to be paid for a Shareholder Interest pursuant to this Agreement shall be determined in accordance with the provisions of this

Article 4. 4.02 The Board shall appoint a Valuation Committee comprised of three persons which committee shall have one FPS nominee and one TCL nominee, it being noted that the nominees may be themselves directors of the Corporation. The third member shall be appointed by the FPS nominee and the TCL nominee and shall be a member of the Accountants.

Any Value determined by the Valuation Committee shall have the affirmative vote of the FPS nominee. 4.03 At any time and in any event within 60 days of the receipt by the Corporation of its year end financial statements from the Accountants, the Valuation Committee shall meet and establish the fair value of all of the Corporation’s issued Shares and Shareholder Advances (the “Value”) as at the most recent fiscal year end of the Corporation.

If an Extraordinary Event occurs, and upon the written request of an Officer, Director or Shareholder, the Valuation Committee shall, within 30 days meet to establish if an Extraordinary Event has occurred and the Value as of the date of the Extraordinary Event. 4.04 The Value shall be effective for a period of 18 months from the date upon which it is effective unless earlier changed in accordance with this Agreement. If the Valuation Committee fails to agree on the Value or fails to have such a meeting, the Value shall be determined by agreement between a purchasing party and a selling party .

If the purchasing party and a selling party fail to reach an agreement within thirty (30) days after the date of the event giving rise to the purchase and sale of a Shareholder Interest pursuant to the Agreement, either the selling party or the purchasing party may by notice to the other, and the Corporation if the Corporation is not the purchasing party, cause the Value to be determined by a valuator pursuant to this Agreement.

The notice shall be accompanied by a list containing the names of three accounting firms carrying on business in the City of Edmonton who have on staff a chartered Business Valuator (the “Valuator”). The said list shall not include any firms who act for the Corporation or the parties hereto.

Within 10 days from the date of receiving the notice, the party receiving the notice shall select a valuator from the said list and provide notice to the other party. 4.05 The Valuator shall accept the last Value as determined by the Valuation Committee as being fair value at its effective date and shall determine if there has been a change in the Value applying the same principles and methodology as applied by the Valuation Committee in determining the last Value.

For the purposes of determining the Value, the Valuator shall be entitled to receive from the Corporation, the Directors, and the Valuation Committee such financial records and other information as the Valuator may reasonably require.

If the purpose of the Valuation is to determine the fair value of a Shareholder Interest to be purchased and sold under this Agreement, the Valuator shall not take into account any Insurance Proceeds payable on the death or Disability of a Shareholder or Principal or that the Shares included in the Shareholder Interest to be purchased represent a minority interest in the Corporation, if such is the case. If the Valuator has been retained to determine if there was an Extraordinary Event the Valuator shall determine if the event so specified has caused the Value to increase or decrease by ten (10%) percent or more.

If the Value has changed by ten (10%) per cent or more the value determined by the Valuator, in accordance with the provisions hereof, shall be the Value failing which the last Value as determined by the Valuation Committee shall continue to be the Value. Regardless of the reason for the valuation, if the Value has changed by less than ten (10%) per cent, then the party or parties who disputed the Value or otherwise requested the valuation shall bear the costs of the valuation.

If the Value has changed by more than I 0% the Corporation shall bear the costs of the valuation. 4.06 The purchase price for a Shareholder Interest being transferred pursuant to the provisions of this Agreement shall be equal to the proportionate Value of the Shareholder Interest owned by such Shareholder, taking into account interest, if any, on any Shareholder Advances accruing to the time by which the purchase price must be paid.

Article 6- Purchase of TCL Shareholder Interest 6.01 Mandatory Purchase In the event [Ben Tumblin] ceases to be an Employee of the Corporation the Corporation shall purchase the TCL Shareholder Interest 6.02 Purchase Price The purchase price shall be the Value of the TCL Shareholder Interest as of the Termination Date. 6.03 Payment of Purchase Price

a) on the Closing Date, which date shall be determined by the Corporation and shall not less than sixty days nor more than ninety days following the Termination Date, the Corporation shall pay to TCL an amount equal to twenty five (25%) of the value of TCL Shares as determined pursuant to

Article 4 hereof.

b) the balance of the purchase price shall be paid in four (4) equal consecutive semi-annual installments, the first such installment to be made on the first day of the sixth month immediately following the Closing Date. The outstanding balance of the purchase price remaining unpaid after the Closing Date shall bear interest from the Closing Date until the date of payment at the rate of six (6%) percent per annum calculated and compounded annually, not in advance, and such interest shall be paid at the same time as installments of principal are due. All such amounts may be prepaid by the Purchasing Party in whole or in part at any time or times without notice or

bonus. 6.04 Terms of Sale The following provisions shall apply to a sale pursuant to this

Article 6: ...

b) the effective date of the purchase shall be the Termination Date.

Article 13 – General 13.08 -No Waiver No provision of this Agreement shall be deemed to be waived unless such waiver is in writing. Any waiver of any default committed by any of the parties hereto in the observance of the performance of any part of this Agreement shall not extend to or be taken in any manner to affect any other default. [ Emphasis added ]. Analysis [ 21 ] QAi argues the Shareholders Agreement dictates the process for determining the value to be used for the purposes of buying out TCL’s shares. Based on the Shareholders Agreement, the parties have selected Mr. Ord to conduct the valuation.

QAi asserts the Burant valuation was not intended to be used to calculate the buy out of TCL shares and the process was not compliant with the Shareholders Agreement. [ 22 ] TCL disagrees and argues the Burant valuation must be used to determine the value of TCL’s shares. Alternatively, a new valuator must be appointed given concerns with QAi’s unilateral communications with Mr. Ord. Principles of Contractual

Interpretation [ 23 ] The determination of the issues raised in this case comes down to the proper

interpretation of the Shareholders Agreement which both parties agree is operative. Such

interpretation must be approached objectively, reading the contract as a whole and 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: Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 , paras 46-50 . [ 24 ] Surrounding circumstances consist 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”: Sattva , para 58. [ 25 ] These principles of contractual

interpretation are to be applied to the words of the written contract, considered in light of the factual matrix: Sattva , paras 46-50; IFP Technologies (Canada) Inc v EnCana Midstream and Marketing , 2017 ABCA 157 , paras 79- 86 . [ 26 ] Commercial contracts should be interpreted in accordance with sound commercial principles and good business sense: John D McCamus, The Law of Contracts, 3rd ed (Toronto: Irwin Law, 2020), 822-825. Western Energy Services Corp v Savanna Energy Services Corp , 2023 ABCA 125 , para 36 .

Should the Burant Valuation be Used to Determine the Value of the Buyout of the TCL Shareholder Interest? [ 27 ] I find the Burant valuation was not intended to be used for the purposes of calculating the buyout of TCL’s interest under the Shareholders Agreement. I have concluded this for several reasons. [ 28 ] First, the Shareholders Agreement has a prescriptive process for determining the value of the TCL shares in the event Mr. Tumblin ceases to be an employee of QAi. [ 29 ]

Article 4.02 requires the appointment of a valuation committee by the board. The valuation committee is to be comprised of a FPS nominee, a TCL nominee, and a member of the Accountants.

Article 4.03 requires there to be a meeting where the valuation committee establishes the value. [ 30 ]

Article 4.04 sets out the process if the valuation committee does not agree on a value or fails to have such a meeting. This includes the ability on notice, to cause the value to be determined by a valuator. [ 31 ] If a valuator is to be appointed, notice with a list containing the names of three accounting firms must be served on the other party. [ 32 ] There is no evidence before me of any formal appointment of a valuation committee by the board, nor is there any evidence of

a meeting of any valuation committee or agreement on any value. [ 33 ] Mr. Dang of Gadowsy & Associates has been QAi’s accountant since 2013. Mr. Dang was contacted in May 2020 by Mr. Fournell and Mr. Tumblin to facilitate a business valuation of QAi. In email communications with Mr. Burant, Mr. Dang confirmed that the purpose of the valuation was for a potential sale of the business. Mr. Dang also confirmed he never participated in a valuation committee for QAi. I accept his evidence. [ 34 ] Although Mr. Tumblin states he believed that Mr. Dang, Mr.

Fournell, and he were acting as the valuation committee, in his cross examination, Mr. Tumblin agreed that a valuation committee was never appointed between 2013 and 2022. [ 35 ] I find that no valuation committee, as contemplated by the Shareholders Agreement, was appointed. [ 36 ] Second, the Burant Engagement Letter sets out the terms and conditions on which Burant provided the valuation. Mr. Tumblin and Mr.

Fournell both signed the Engagement Letter. [ 37 ] The Engagement Letter indicated that “QAi management is assessing strategic options including a potential divestiture” and “QAi has requested a calculation of the en bloc fair market value of all the issued and outstanding shares (the Subject Assets) of QAi as at a current valuation date.” [ 38 ]

Schedule B of the Engagement Letter confirms several limitations with the Burant valuation including that the report was prepared solely for the purposes stated and should not be used for any other purpose. Further, the conclusions are not “intended to represent the values of the Subject Assets at any time other than the effective date that is specifically stated in this report.” [ 39 ]

Schedule B also confirms that the “scope of review is limited by the nature of the valuation report being provided” and the conclusions may have been different “had a Comprehensive or Estimate Valuation Report been provided.” [ 40 ] Third, the Burant report suggests the valuation was prepared for a strategic sale of the business given:

a) The title page states: “En Bloc Fair Market Value of the Shares of QAi as at August 31, 2020”. “Reliance Restricted.” This confirms the valuation was for a specific and limited purpose.

b) The objective and purpose of the report is “to provide a recommendation of the FMV of the QAi shares to assist Management in assessing strategic options including a potential divestiture .”

c) The report confirms that the valuation is based on a Calculation Valuation. It further indicates that the scope of the report is limited by the nature of the report being provided and the conclusions may have been different had an Estimate or Comprehensive valuation report been provided.

d) The context of the report is essential to the value. As noted in the report: ...value is measured as “fair market value” (“FMV”), which is defined 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.

FMV is an estimate of the price which could be obtained in the market at a given point in time under an assumed set of conditions. Although the Shareholders Agreement specifies that any valuation should not be discounted based on the fact a minority interest is being purchased, in this case, there is a compulsion to buy the TCL shares due to the resignation of Mr. Tumblin from QAi. However, the definition of FMV in the report is based on there being no such compulsion.

e) The date of the valuation is as of August 31, 2020. Based on the Engagement Letter the report is not intended to represent values on any other date.

f) There is no mention in the report of the Shareholders Agreement, including the process outlined in Articles 4 or 6. [ 41 ] Therefore, I have determined that the Burant valuation was not conducted in accordance with

Article 4 of the Shareholders Agreement for the purpose of determining the value of the TCL shares. The Process for the New Valuation [ 42 ] Given I have determined the Burant valuation is not appropriate for the purposes of determining the value of the TCL Shares, I will address the process for conducting the valuation. What Date Should Be Used for the Valuation ? [ 43 ] TCL argues the valuation date should be February 28, 2021, in accordance with

Article 4.03 of the Shareholders Agreement. [ 44 ] QAi disagrees and argues the valuation date is January 19, 2022, based on a plain reading of the Shareholders Agreement and an examination of the surrounding circumstances. I agree. [ 45 ] I first start with an analysis of language of the Shareholders Agreement itself.

[ 46 ] Termination Date is defined as “the date upon which Ben Tumblin ceases to be an employee of QAi.” Therefore, January 19, 2022, is the Termination Date for the purposes of the Shareholders Agreement. [ 47 ] Pursuant to Articles 6.01 and 6.02 of the Shareholders Agreement, if Mr. Tumblin ceases to be an employee of QAi, QAi shall purchase TCLs shares and the purchase price shall be the value as of the Termination Date. [ 48 ]

Article 6.04 (

b) again states that the effective date of the purchase shall be the Termination Date, which in this case is January 19, 2022. [ 49 ] In accordance with the plain meaning of the words in the Shareholders Agreement, the purchase price shall be the value of the TCL interest as of January 19, 2022. [ 50 ] There were no written waivers as it relates to

Article 4 in this case as required under

Article 13.08. There is also nothing elsewhere in the Shareholders Agreement that purports to override the specific language relating to the value being the value as of Termination Date given the resignation of Mr. Tumblin. [ 51 ] Such

interpretation is also consistent with the surrounding circumstances including the contemporaneous execution of the Employment Agreement and the intention of the parties that TCL cease to be a shareholder when Mr. Tumblin ceased to be an employee. This

interpretation also makes commercial sense. [ 52 ] I therefore direct that the valuation shall be based on a January 19, 2022, valuation date. Who Should Conduct the Valuation? [ 53 ] QAi argues that Mr. Ord has been properly appointed as the Valuator under the Shareholders Agreement. QAi provided notice to TCL with the names of three qualified valuators. Notwithstanding TCL protested his appointment, TCL chose Mr. Ord from the list. [ 54 ] TCL raises concerns that QAi had discussions directly with Mr. Ord and Mr. Ord’s independence may therefore have been compromised. QAi does not dispute they contacted Mr.

Ord without including TCL in the discussion. [ 55 ] I have no doubt that Mr. Ord is a professional and would be able to conduct himself in a neutral and independent manner. However, given the high level of mistrust between the parties, I direct a new valuator be chosen. [ 56 ] The parties are to use the process set out in the Shareholders Agreement to appoint the new valuator. Specifically, QAi is to provide a list of the names of three accounting firms carrying on business in the City of Edmonton who have on staff a Chartered Business Valuator.

The list must be provided within 21 days of this decision. [ 57 ] Mr. Tumblin shall then have 10 days to choose one of the names on the list. If no response is received within 10 days, then QAi shall pick one of the names. [ 58 ] If either party wishes to speak to the proposed valuator, including to determine their experience, both parties or their counsel must be included in such call or meeting.

Directions on the Valuation [ 59 ] Given the valuation will be done for the purposes of a buyout of TCL’s shares, I direct that the valuation should be based on an estimate value, as contemplated by the Canadian Institute of Chartered Business Valuators. I have concluded this as I accept that a calculation valuation is the lowest level of assurance and may be appropriate for planning but not for a buyout of a shareholder’s interest.

Further, given the conflict and mistrust between the parties, I have determined some independent corroboration of facts is required, as is contemplated by an estimate valuation. [ 60 ] Both parties shall cooperate with the new valuator. [ 61 ] As contemplated in

Article 4.05, the new valuator shall be entitled to receive such financial records and other information as the valuator shall reasonably require. [ 62 ] All correspondence is to be copied to both parties and all communications with the new valuator must involve both parties. [ 63 ] If the new valuator requests a one-on-one meeting with either party, such meetings shall be recorded and made available to the other party or the other party or their counsel may attend such meeting in an observer only capacity. [ 64 ] The new valuator may, in their sole discretion, have regard to the Burant valuation.

I make no direction on how the Burant valuation is to be considered by the new valuator, if at all. I have concluded this to ensure the complete independence of the new valuator. [ 65 ] The valuation shall be paid for by QAi. Appointment of Auditor [ 66 ] TCL initially requested the appointment of an auditor. They now request that if a new valuator identifies any material flags that they believe require an audit, then the new valuator will stand down the valuation pending such audit.

[ 67 ] QAi does not oppose this request. This direction shall be included as part of the new valuator’s authority. [ 68 ] In the event the new valuator deems an audit appropriate, I direct the audit is to be initially paid for by QAi, subject to further determination following the audit. Dissolution of FS [ 69 ] TCL argues the dissolution of FS occurred to diminish the valuation. I make no decision regarding the reasons for dissolving FS. However, I do note that a valuation date of January 19, 2022, predates the dissolution of FS. Therefore, the dissolution of FS will not have an impact on the valuation.

Conclusion [ 70 ] I grant QAi’s application to have a new valuator appointed to determine the value of the TCL shares. [ 71 ] The value shall be determined as at January 19, 2022. The valuation is to be based on an estimate value, as contemplated by the Canadian Institute of Chartered Business Valuators. [ 72 ] The new valuator, may in their sole discretion, consider the Burant valuation.

However, I make no direction as to what, if any use, shall be made of the Burant valuation. [ 73 ] If the new valuator identifies any material flags that they, in their sole discretion believe should trigger an audit, they shall stand down from completing the valuation pending the conclusion of an audit by an independent and qualified auditor. [ 74 ] The valuation report from the new valuator shall form the basis to value the purchase of TCLs shares in QAi in accordance with

Article 6 of the Shareholders Agreement. [ 75 ] I otherwise dismiss the Amended Cross Application. [ 76 ] Given the mixed success of the parties, no costs are payable to either party. Heard on the 16 th day of March 2023. Dated at the City of Calgary, Alberta this 26 th day of April 2023. B.B. Johnston J.C.K.B.A. Appearances: Anthony Burden for the Applicant and Cross Respondents Darren Reed & Claire Himsl for the Respondent and Cross Applicant