2021 QCCA 628, 2021 QCCA 628

Stanton Assets Management Inc. c. Di Gregorio 2021 QCCA 628 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-028506-194 (500-17-094653-162) DATE: April 20, 2021 CORAM: THE HONOURABLE MARIE-FRANCE BICH, J.A. ROBERT M. MAINVILLE, J.A. STEPHEN W. HAMILTON, J.A. STANTON ASSETS MANAGEMENT INC. O’LEARY FUNDS MANAGEMENT LP O’LEARY FUNDS MANAGEMENT INC. APPELLANTS – Defendants v.

STEVE DI GREGORIO RESPONDENT – Plaintiff JUDGMENT [ 1 ] The Appellants appeal from the judgment rendered by the Superior Court, District of Montreal (the honourable Robert Mongeon) on July 4, 2019. [1] *** [ 2 ] The Respondent Di Gregorio was a portfolio manager employed by the Appellant Stanton Asset Management Inc. (“Stanton”), to manage funds held by the Appellant O’Leary Funds Management LP (“O’Leary LP”). The other Appellant, O’Leary Funds Management Inc. (“O’Leary Inc.”) is the general partner of O’Leary LP.

Stanton, O’Leary LP and O’Leary Inc. are owned by the same people. [ 3 ] In addition to his salary, Di Gregorio received an annual bonus and a 3% participation in O’Leary LP’s Long-Term Incentive Plan (“LTIP”). The LTIP essentially gave him a 3% phantom interest in O’Leary LP - he was entitled to a 3% participation in all partnership distributions and, in the event of a Triggering Event (defined as an initial public offering or a change in ownership control of more than 50% of O’Leary LP), he was entitled to 3% of the amount distributed to or received by the partners.

He is only entitled to receive payments under the LTIP if he is employed by Stanton at the time of the payment, and his units in the LTIP are forfeited upon termination of his employment with Stanton. [ 4 ] On October 14, 2015, O’Leary LP concluded an agreement to sell its funds to a competitor, Canoe Financial LP (“Canoe”).

The deal with Canoe provided for a cash payment at closing of $12 million, a holdback of $1.7 million for one year, and an earn-out of up to $8 million depending on the performance of the O’Leary funds after closing. [ 5 ] There was a conference call with the employees holding LTIP units on October 15, 2015 to explain the deal and to reassure them that they would participate in the proceeds of the Canoe transaction. The call was recorded by an employee in Toronto, although he appears not to have recorded the beginning or the end of the call.

During the call, there is mention of an initial distribution of the $12 million shortly after closing. [ 6 ] Because the funds he was managing were being transferred to Canoe, Di Gregorio was to be terminated by Stanton at the date of closing and offered employment by Canoe on substantially the same terms and conditions.

It was in the interest of all parties that he accept employment with Canoe and attempt to grow the funds he was managing, in order to maximize the earn-out for the benefit of O’Leary LP and the LTIP unitholders, himself included. [ 7 ] Accordingly, on January 14, 2016, he received a termination letter from Stanton effective April 15, 2016.

The termination letter raises an issue with respect to his 2015 bonus and the deferred portion of his 2014 bonus, namely that under the company’s policy he would not be entitled to payment of those amounts if he was no longer employed by Stanton on the payment date, but it offers to waive that policy on condition that he sign the termination letter and the attached release before January 12, 2016.

The release constitutes a “full, final and definitive release” for “any remuneration, notice or indemnities”. [ 8 ] He was also given a letter from O’Leary LP dated January 14, 2016 “meant to clarify” certain aspects of the LTIP. The letter

mentions that the transaction with Canoe does not constitute a Triggering Event under the LTIP, but adds that O’Leary LP “has decided to allow the Eligible Participants to benefit from proceeds of the Transaction”, provided that they meet a number of conditions. Di Gregorio met those conditions by remaining with Stanton until the closing and then transitioning to Canoe.

The letter mentions an initial distribution in mid-April 2016 in an estimated amount of $10 million. [ 9 ] Di Gregorio had not yet received his bonus calculation for 2015 and did not know how much he would receive under the LTIP as clarified or how the release affected his rights under the LTIP as clarified.

Some emails were exchanged to try to clarify these issues, but Di Gregorio did not sign the termination letter or the release. [ 10 ] The closing occurred on February 17, 2016 and Di Gregorio transitioned to Canoe. [ 11 ] On March 29 and 30, 2016, Stanton and O’Leary LP sent two letters to Di Gregorio, which mirror the two January letters.

In the first letter, Stanton fixes his 2015 bonus at $54,000 and offers to waive its policy and pay the bonus notwithstanding the fact that Di Gregorio is now at Canoe, in exchange for him accepting the terms and condition of the letter and the attached release no later than March 31, 2016. In the second letter, O’Leary LP repeats what it said in January about clarifying the LTIP but adds as a condition to benefitting from the proceeds that he sign the termination letter and release. This letter also required acceptance by April 5, 2016.

The initial distribution in mid-April 2016 is now estimated to be $8 million. [ 12 ] Di Gregorio is not satisfied with the calculation of his 2015 bonus and is concerned about the shrinking distribution under the LTIP as clarified. There are some emails back and forth on these issues, but Di Gregorio does not accept the letters and the release by the deadlines. He is the only unitholder not to have accepted. On April 7, 2016, he receives the following email: Steve, Our offer to broaden the scope of the LTIP to allow you to benefit from it lapsed ipso facto on April 5, 2016.

Our offer to waive our bonus policy in consideration for a release lapsed ipso facto March 31, 2016. Those offers are therefore off the table. No sums are owed to you with regard to the LTIP or to the 2015 Bonus. [ 13 ] Di Gregorio sent a demand letter on April 13, 2016 and sued on July 8, 2016. He claimed a total of $2,149,589, including $1,338,000 under the LTIP, $255,375 as his 2015 bonus, and $1,431 as the balance due on his 2014 bonus. [ 14 ] Meanwhile, distributions of sale proceeds were made in April 2016, May 2016 and June 2017 in the total amount of $11,000,000.

There are ongoing arbitration proceedings between the Appellants and Canoe as to Appellants’ entitlement to further amounts under the holdback and the earn-out. *** [ 15 ] The trial judge ordered O’Leary LP and O’Leary Inc. to pay Di Gregorio $330,000 under the LTIP (3% of the $11,000,000 proceeds distributed) and reserved Di Gregorio’s right to 3% of future distributions, and ordered Stanton to pay $54,000 as his 2015 bonus (the amount calculated by Stanton) and $1,431 as the balance due on his 2014 bonus. [2] [ 16 ] O’Leary LP and O’Leary Inc. appeal from the order to pay $330,000 and Stanton appeals from the order to pay $1,431.

The 2015 bonus has been paid and is not an issue in appeal. [ 17 ] They submit four grounds of appeal: 1. Did the trial judge err in law when admitting into evidence the audio recording of an October 15, 2015 conference call and partial unofficial transcript (Exhibit P-16) without requiring that the authenticity and integrality of the recording be proven in accordance with the relevant criteria? 2.

Did the trial judge err in law by failing to identify an ambiguity in the text of the original LTIP prior to interpreting the contract by referring to the parties' intentions, in order to support his conclusions that proceeds from the Canoe Transaction were owed to the Respondent? 3. Did the trial judge commit a mixed error of facts and law when deciding that the Letters (Exhibits P-10 and D-35) did not constitute a new offer subject to the principles of

Article 1392 CCQ? 4. Did the trial judge make a palpable and overriding error of fact when he concluded that the Canoe Transaction had closed on March 31, 2016 and, therefore, that the Respondent was entitled to a bonus adjustment of $1,431 for his 2014 deferred bonus? *** [ 18 ] Dealing with the last issue first, Stanton is appealing from an order to pay $1,431. Because the value of the subject matter of the dispute in appeal is determined for each appellant separately, [3] Stanton needed leave to appeal and did not ask for it.

If it had asked for leave, it would have been refused: that appeal does not raise any question that merits the attention of the Court. [ 19 ] On the first issue, O’Leary LP and O’Leary Inc. argue that the recording of the October 15, 2015 conference call should have been excluded because there was little or no evidence as to who made the recording and how it was made, how the recording was transferred to Di Gregorio and how it was handled by Di Gregorio.

However, four witnesses at trial, including three representatives of the Appellants, participated in the call and all of them reviewed the transcript and confirmed the main elements of the call. The only issues that they raised were that the recording started part way through the call and may have ended before the end of the call, but nothing turns on that. If the judge made an error in admitting the recording, it had no impact on the outcome of the trial. [ 20 ] The main issue is Di Gregorio’s entitlement to the LTIP benefits, whether under the LTIP or the January 14 and March 30, 2016

letters. [ 21 ] There are two potential difficulties with Di Gregorio’s entitlement under the LTIP. First, the parties approached the issue on the basis that the Canoe transaction was not a “Triggering Event” and did not result in a “Distribution”, such that the unitholders were not entitled to share in the proceeds under the LITP. With respect, this position appears not to be supported by the terms of the LTIP itself . The basic principle of the LTIP is that the unitholders are treated as if they are partners.

They are therefore entitled to share in all distributions to the partners. [4] In addition, there are transactions where the proceeds are received directly by the partners, such that there will be no distribution. The notion of Triggering Event gives the unitholders the right to share in those proceeds as well. [5] The Canoe transaction is an asset sale in which O’Leary LP receives the proceeds. This is not a Triggering Event as defined in the LTIP.

However, when O’Leary LP distributes the net proceeds to the partners, the unitholders should be entitled to their share, as with any other distribution to the partners. [ 22 ] A second potential difficulty flowed from the eligibility requirements of the LTIP, which provided that participation was conditional upon continued employment with “the Company”, a condition which may be difficult to fulfil in case where all assets are sold. [6] This requirement was moreover at odds with the terms of the Canoe transaction itself, which required the transfer of the unitholders’ employment contracts to Canoe. [ 23 ] The judge found that O’Leary LP clarified the LTIP as early as the initial discussion with the employees on October 15, 2015, by (1) extending the LTIP to include the proceeds of the Canoe transaction, and (2) removing the requirement that the unitholders be employees at the time of distribution.

The judge concluded that this was not a new offer or program which required any form of formal acceptance by Di Gregorio. [7] He also found that ending Di Gregorio’s participation in the LTIP as clarified on the ground that he did not comply with the added requirement to sign the release was abusive. [8] As a result, he concluded that O’Leary LP was bound to pay Di Gregorio the amounts due under the LTIP as clarified. [ 24 ] The Appellants do not convince the Court that there is any manifest and overriding error in this reasoning.

O’Leary LP clarified the LTIP at the latest on January 14, 2016 to better reflect the originally intended scope of that program and to take into account the particularities of the Canoe transaction. It had the right to clarify the LTIP without the consent of the unitholders, and these changes were reasonable and consistent with the intention underlying the LTIP.

When O’Leary LP sought to further amend the LTIP in March by adding the requirement that the unitholders sign a release, the judge was entitled to conclude that it was acting unreasonably by making the payment of amounts which it already owed conditional on Di Gregorio renouncing to other rights. [ 25 ] As a result, the judge was right to order O’Leary LP and O’Leary Inc. to pay Di Gregorio the amounts due to him under the LTIP as clarified. FOR THESE REASONS, THE COURT: [ 26 ] DISMISSES the appeal, with legal costs. MARIE-FRANCE BICH, J.A. ROBERT M. MAINVILLE, J.A. STEPHEN W. HAMILTON, J.A.

Mtre François Longpré BORDEN LADNER GERVAIS For the Appellants Mtre Marie-Claude Jarry DUNTON RAINVILLE For the Respondent Date of hearing: April 15, 2021 Upon the occurrence of a Triggering Event, each Participation will represent a percentage of the aggregate proceeds from a Triggering Event, payable in cash, stock, debt or other forms, as determined by the Owners, in their sole discretion. In general, the goal is to make payment in the same form and on the same timing as payment is made to the Owners provided that the Owners reserve the right to modify the form and timing if they deem it required.

Payment will be made to the Participants only when the Company or the Owners receive payment resulting from the Triggering Event.