2024 QCCA 68, 2024 QCCA 68

Neopharm Labs Inc. c. Mainville 2024 QCCA 68 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-030229-223 (500-11-049463-157) DATE: JANUARY 18, 2024 CORAM: THE HONOURABLE MARIE-FRANCE BICH, J.A. GENEVIÈVE COTNAM, J.A. PETER KALICHMAN, J.A. NEOPHARM LABS INC. MORRIS ADLER APPELLANTS – Defendants v. LUC MAINVILLE 8480095 CANADA INC. RESPONDENTS – Plaintiffs JUDGMENT [ 1 ] This is an appeal from a judgment of the Superior Court (Commercial Division), in the District of Montreal (the Honourable Babak Barin), granting in part the respondents’ Introductory Motion for Oppression under the

Canada Business Corporations Act and Damages, Re-Purchase of Equity and for Unpaid Remuneration and Bonus. [1] [ 2 ] The primary question at issue in first instance and on appeal is whether two businessmen, the appellant Morris Adler ( Adler ) and the respondent Luc Mainville ( Mainville ), finalized the essential terms of an agreement whereby Mainville was to become a shareholder of appellant, Neopharm Labs Inc. ( Neopharm ). The judge concluded that they had indeed reached such an agreement by the time Adler terminated Mainville’s relationship with Neopharm on July 29, 2015. I.

Background [ 3 ] In April of 2012, Neopharm, a testing laboratory serving the pharmaceutical industry, acquired the assets of Warnex Analytical Services Inc. In the months following the acquisition, Neopharm’s sales dropped, and it began to lose clients and staff. [ 4 ] Adler, who was the beneficial owner and sole director of Neopharm, sought out someone to restructure the business and make it profitable.

It is in this context that he met Mainville, who had experience in restructuring insolvent and under-performing companies, including those in the pharmaceutical industry. [ 5 ] In July 2012, the parties began exchanging draft agreements, term sheets and correspondence on the terms and conditions under which Mainville would take on a role with Neopharm. It is undisputed that one of the conditions that Mainville insisted upon was that he be made a shareholder. [ 6 ] On July 27, 2012, Mainville became Neopharm’s President and Chief Executive Officer.

He was compensated via his consulting company, 8480095 Canada Inc. ( Luma ). For the following three years, the parties and their lawyers continued to exchange positions on several issues, including the terms and conditions of Mainville’s equity participation in Neopharm, the conclusion of a shareholder agreement and the value of the shares in the event the relationship was to end.

Over that same period, Neopharm’s sales more than doubled and it became profitable for the first time. [ 7 ] On July 29, 2015, Adler abruptly terminated Mainville’s relationship with Neopharm. [ 8 ] In September 2015, Mainville and Luma sued Neopharm and Adler claiming that the parties had concluded the essential terms of their agreement and that they were thus entitled, among other things: 1) to be recognized as holding 25% of the common shares of Neopharm; 2) to a declaration that Adler and Neopharm had acted in an oppressive and unjust manner; 3) to receive the value of their shares as well as consulting fees, bonuses, unpaid expenses, management fees, dividends; and 4) to judicial and extra-judicial costs. [ 9 ] Adler and Neopharm denied that an agreement on the essential terms of the deal had ever been reached.

In particular, they argued that Mainville never agreed to work exclusively for Neopharm and that this was an essential condition for them. They maintained

that Mainville, through Luma, had merely worked as a consultant on a month-to-month basis for Neopharm. Furthermore, they argued, even if an agreement had existed, it should be declared null. According to them, Mainville had failed to work exclusively for Neopharm and for Adler’s real estate company, the TOV Group ( TOV ) and had, in fact, solicited Neopharm’s clients for his own benefit. On that basis, Neopharm brought a cross-demand for non-performance, seeking full reimbursement of the consulting fees paid over the course of the three-year relationship.

They eventually, reduced this claim to 50% of the fees paid. II. The judgment [ 10 ] The judge begins his analysis by examining the respondents’ claim to 25% of the common shares of Neopharm and the valuation of those shares in the event that their relationship with the corporation were to be terminated. To this end, he considers, among other things, the various draft agreements and correspondence that the parties exchanged, as well as the testimony of the protagonists, Adler and Mainville.

He concludes that the parties had indeed come to terms on the essential elements of an agreement. [ 11 ] In reaching this conclusion, the judge focuses on several elements of evidence that he determines to be key. The first is the October 2012 Expansion and Development Plan (the Expansion and Development Plan ) which was attached, along with other materials, to a “Certificat de Réclamation”, filed by Neopharm with Canada Economic Development for Quebec Regions for the purpose of securing financing, which identifies Mainville as a shareholder.

The second key document is an agreement signed by the parties in March 2013, entitled “Codicil to a shareholder’s certificate pertaining to Jewish Sabbath and Holidays” (the Codicil ), which, in the judge’s view, contains the essential terms of the agreement between the parties. The judge considers that these documents, both of which were signed by Adler, confirm that Mainville was a shareholder of Neopharm, either directly or through Luma.

In addition, the judge points to several emails exchanged between the parties or their lawyers that, in his view, support this conclusion. [2] He also indicates that between the conflicting accounts of Adler and Mainville, he finds the latter to be more credible. He describes his version of events as “less embellished, less self-serving and better supported by the documentary evidence filed.” [3] [ 12 ] The judge then considers whether Mainville and Luma are entitled to relief under s. 241 of the

Canada Business Corporations Act [4] (the CBCA ). In this regard, he concludes: (

i) that they are complainants within the meaning of the CBCA , notably because they are shareholders of Neopharm; (ii) that they had a reasonable expectation to benefit from their 25% stake in Neopharm and to be compensated for their shares if the relationship between the parties was terminated; and (iii) that their reasonable expectation was violated by the appellants, notably by terminating Mainville’s relationship with Neopharm in an unreasonable manner and by refusing to buy back the shares. [ 13 ] In light of his findings, the judge determines that it is appropriate to issue an order under the CBCA declaring Mainville to be a shareholder of 25% of the common shares of Neopharm and ordering that he receive the equivalent of the value of those shares based on an agreed-upon price of 4.5 times EBITDA [5] for the year preceding the termination, which he then adjusts to take account of several amounts. [ 14 ] The judge examines several other claims made by the respondents, most of which he accepts.

Accordingly, he awards Luma $250,000 in consulting fees for the year following the termination, $25,000 representing a bonus for the year 2014, and $22,724, representing consulting fees that were unpaid as of the termination date. He also awards $100,000 in professional fees to both Luma and Mainville, and $25,000 to Mainville as punitive damages for the appellants’ abusive business practices. [ 15 ] The judge then considers whether Adler should be held personally responsible along with Neopharm for the amounts owing.

He determines that such a conclusion is appropriate under the circumstances because Adler was in bad faith, acted for his own personal benefit and was directly implicated in the oppressive conduct at issue. He thus orders him to pay the amounts owing to the respondents on a solidary basis with Neopharm. [ 16 ] Finally, the judge dismisses the appellants’ cross-demand based on the non-performance of the respondents, finding that it is “not only absurd but abusive.” [6] III.

The issues in appeal [ 17 ] The appellants take issue with virtually all of the judge’s conclusions. [7] [ 18 ] In regard to the principal issue – whether or not the parties had reached an agreement on the essential terms of Manville’s participation in Neopharm – the appellants raise numerous arguments, including the following: (

i) the judge failed to recognize that the parties’ negotiations were ongoing when the relationship ended, thus making it clear that no agreement had been reached; (ii) the judge erred in failing to consider Mainville’s admissions that none of the draft shareholder agreements exchanged between the parties had been substantially agreed to; (iii) the judge erred in failing to consider Mainville’s admissions that the issuance of shares was subject to various conditions, notably that he work exclusively for Neopharm and TOV and that he abandon all consulting activities for third parties; (iv) the judge erred in failing to consider that the parties had agreed to subject their agreement to a formal condition; namely, the conclusion of a written shareholder agreement; (

v) the judge erred in considering the Codicil as setting out the essential elements of the agreement between the parties; (vi) the judge erred in concluding that the provisions of the CBCA allowed him to bypass the rules set out in the Civil Code of Quebec ( CCQ ) governing the formation of contracts; and (vii) the judge erred in dismissing their subsidiary argument that any agreement the parties may have reached should have been set aside as a result of Mainville’s lack of loyalty, which amounted to fraud. [ 19 ] In the Court’s view, all the arguments raised by the appellants that deal with the conclusion of the agreement can be addressed in answering the following question: Did the judge commit mixed errors of fact and law in concluding that the parties reached an agreement to issue shares in Neopharm to Mainville? [ 20 ] The appellants raise numerous secondary issues that impact on the quantum of the award.

More specifically, they argue that the judge committed the following errors: (

i) holding that the calculation of Neopharm’s EBITDA should include Adler’s salary and Luma’s consulting fees; (ii) concluding that Luma was entitled to a termination indemnity; (iii) ruling that Mainville was entitled to a bonus for 2014; (iv) awarding punitive damages to Mainville; (

v) holding Adler personally responsible for the amounts owing by Neopharm; and

(vi) ordering them to pay extra-judicial fees. [ 21 ] Each of these arguments will be addressed in the context of the following question: Did the judge commit mixed errors of fact and law in granting numerous financial claims made by the respondents? [ 22 ] A motion to dismiss the appeal was dismissed by the Court, but the subsidiary conclusion was granted, and the appellants were thus ordered to furnish a suretyship of $250,000. [8] IV. Analysis (

i) Did the judge commit mixed errors of fact and law in concluding that the parties reached an agreement to issue shares in Neopharm to the Mainville ? [ 23 ] As mentioned at the outset, this is the heart of the appeal. The appellants advanced numerous arguments to convince the Court that the judgment must be overturned. At the hearing, they added that the judge was so one-sided in his analysis of the evidence, that his impartiality should be called into question.

Referring only to the testimony of Mainville, and to the exhibits ( i.e. , without referring to Adler’s testimony, which the judge had discounted), they argued that no agreement had been reached on two essential conditions: the exclusivity of Mainville’s services, and the redemption value of his shares in Neopharm. [ 24 ] The issue to be decided is not whether the judge could have come to a different result as the appellants suggest, but rather whether the result he did come to is tainted by a palpable and overriding error in his analysis. [ 25 ] In the Court’s view, it is not. [ 26 ] The question of whether an agreement had been reached is essentially one of fact.

It is therefore subject to the trial judge’s appreciation of the evidence which commands deference on appeal. [9] In this context, it is important to emphasize that the judge’s review of the evidence regarding the conclusion of an agreement covers over 30 pages in the judgment. It is extremely thorough and addresses both the written and the oral evidence.

It is sufficient to highlight certain of the judge’s key findings to dispose of this ground of appeal. [ 27 ] As stated above, in concluding that the parties had come to an agreement on the essential terms of their deal, the judge focused on the Expansion and Development Plan and the Codicil. Each of these documents not only contains clear statements confirming that Mainville was a shareholder in Neopharm, but they are signed by Adler himself.

The appellants contend that the judge erred in relying on these documents. [ 28 ] As far as the Expansion and Development Plan goes, they argue – as they did in first instance –, that Adler did not understand it, as it was drafted in French, and mistakenly relied on Mainville in signing it. The judge rejected that explanation.

In his view, Adler “knew well what he was signing” and could not dissociate himself from the document on the basis of “selective memory.” [10] The appellants identify no reviewable error in that conclusion, which is clearly tied to the judge’s negative assessment of Adler’s credibility. [ 29 ] With respect to the Codicil, the appellants maintain that the sole purpose of this document was to ensure that Adler – an observant Jew – would not be in violation of the prohibition against working on the Sabbath. They point out that a similar document had been signed previously with another of Neopharm’s employees.

The judge rejected this explanation as well, noting that Adler’s testimony as well as the terms of the Codicil itself undercut his position.

The judge highlighted the incongruity of Adler’s explanation by asking the following: “Why does a religious document contain a buy-back clause with a specific 4.5 times EBITDA calculation […]?” [11] On appeal, the appellants merely reiterate the arguments they raised in first instance without identifying a reviewable error in the judge’s reasoning. [ 30 ] Whether or not the Codicil contained “all of the essential elements necessary to make a legally binding agreement” [12] , as the judge concluded, it is, at the very least, confirmation that such an agreement had been reached.

The same can be said of the Expansion and Development Plan as well as numerous letters sent by Adler’s attorney. [13] The judge’s reliance on these documents is not only free of any reviewable error but is perfectly justified. [ 31 ] The judge’s conclusion that an agreement had been reached is equally supported by the actions of the parties themselves. Mainville insisted from the outset that if he was to join Neopharm, he would require an equity position and there is no evidence that he ever waived that condition.

The fact that he became the President and CEO of Neopharm in July of 2012 further supports the view that the essential terms of the agreement had been reached, as the judge correctly noted. [ 32 ] Finally, there is the issue of credibility. As was indicated above, the judge clearly favoured Mainville in that regard and the appellants fail to invoke – much less establish – any error in this regard. [ 33 ] The key pieces of evidence to which the judge refers amply support his conclusion that the parties had agreed on the essential terms of a deal to issue shares in Neopharm to Mainville.

Although this is sufficient to answer the first question in appeal, the Court will nonetheless review the arguments raised by the appellants. [ 34 ] First, contrary to what the appellants contend, the judge was not bound to consider only the last positions exchanged by the parties in the months preceding Mainville’s termination in July 2015, to determine if an agreement had been reached.

The judge considered those exchanges as part of his overall appreciation of the evidence, which led him to conclude that the parties continued to attempt to improve their positions even after the essential terms of the deal had been reached. In the Court’s view, there is no error in the judge’s approach. [ 35 ] Second, the judge did not fail to deal with “admissions” made by Mainville that the essential conditions of the agreement had not been met.

He addressed these assertions and concluded that the passages referred to by the appellants were taken out of context and were not in fact admissions at all, but rather expressions of frustration over the negotiations. His determination was, at least in part, a function

of his appreciation of the testimony of Mainville, whom, as was noted earlier, he found to be credible. The appellants have identified no error in this determination. [ 36 ] Third, the judge did not err in concluding that the parties had never determined that their agreement was subject to the formality of a written shareholder agreement.

There is nothing unreasonable in the judge’s conclusion that the mere reference to the need to prepare such a document is not proof that it was an essential condition to the conclusion of an agreement. [14] [ 37 ] Fourth, the appellants argue that the judge erred in law in concluding that the provisions of the CBCA allowed him to bypass the rules governing the formation of contracts.

Since the reasonable expectations advanced by the respondents were predicated on the existence of an agreement, they argue that it was essential that the judge consider the rules on the formation of contracts set out in the CCQ. [ 38 ] The judge did not bypass the rules of the CCQ on the formation of contracts; he applied those rules within the context of his analysis of the respondents’ claim of oppression under the CBCA , which closely followed the framework set out by the Supreme Court of Canada in BCE . [15] In fact, the question of whether the parties had concluded an agreement constitutes the bulk of the judge’s analysis. [ 39 ] Fifth, contrary to what the appellants argue, for each of the conditions that they contend were not agreed to – share redemption value and exclusivity –, the judge’s findings of fact are supported by the evidence. [ 40 ] With respect to the formula for share redemption, the appellants point to various emails and draft agreements where the formula for calculating share value was different than the 4.5 times EBITDA that the judge concluded had been agreed to.

However, they fail to identify any reviewable error in his conclusion which, it should be noted, had not only been set out in various drafts, but is precisely what Adler himself had proposed in January of 2015. [16] [ 41 ] As far as exclusivity is concerned, there is no palpable and overriding error in the judge’s determination that it was not an essential consideration. It is quite clear from the progression of the draft agreements and the correspondence, that the concept of an exclusive arrangement had been abandoned by Adler.

The drafts produced by his lawyer [17] were explicit in this regard and the Codicil contains no reference to exclusivity. The concept that the parties appear to have embraced was simply that Mainville would not enter into agreements with third parties without Adler’s consent and would phase out existing employment or consulting arrangements.

Furthermore, contrary to what the appellants argue, it is by no means obvious that Adler was seeking to impose exclusivity in early 2015 when he insisted that Mainville no longer be treated as a consultant. [18] At any rate, when Mainville stated his opposition to this proposal [19] , Adler indicated his openness to discussing the issue, which undermines his contention that this was an essential condition for him. [20] [ 42 ] Finally, it should be pointed out that the lack of a reviewable error regarding exclusivity is fatal to the appellants’ subsidiary argument that any agreement on the issuance of shares should be annulled for reasons of fraud.

If Mainville was not obliged to work exclusively for Neopharm or to put an end to his involvement in all other endeavours that did not include Adler, then he could not have breached the agreement between the parties by exploring other opportunities, which is what the proof reveals he did. Furthermore, as the judge noted, the evidence showed that Mainville had worked “full-time” at Neopharm and that up until July 15, 2015, Adler had only praise for the results he had obtained.

In this context, Adler’s subsidiary argument is not only incompatible with the judge’s findings of fact, but it would also appear to be self-serving and disingenuous. (ii) Did the judge commit mixed errors of fact and law in granting numerous financial claims made by the respondents ? [ 43 ] The appellants maintain that the judge committed mixed errors of fact and law in granting numerous financial claims made by the respondents. Each argument will be examined in turn. a.

The calculation of EBITDA [ 44 ] The appellants maintain that the judge erred in concluding that Neopharm’s net revenue – which was used in the determination of share redemption value – should be calculated without Adler’s salary and without Luma’s consulting fees. According to them, the judge drew an improper inference from Adler’s failure to produce Neopharm’s monthly revenue statements even though it was perfectly understandable that such statements were not kept.

In their view, the failure to produce the statements could not give rise to a presumption that Adler’s salary was ordinarily excluded from the corporation’s calculation of net revenue. Furthermore, they argue, despite maintaining the appellants’ objection to Mainville testifying as an expert, the judge nonetheless allowed him to do just that. [ 45 ] The appellants have failed to demonstrate an error in the calculation of EBITDA. The judge believed Mainville’s testimony that the parties had agreed to leave both Adler’s salary and Luma’s consulting fees out of this calculation.

Absent a palpable and overriding error, this alone is enough to support the judge’s conclusion. Furthermore, contrary to what the appellants argue, the judge did not treat Mainville as an expert. The issue in first instance was not how salary and consulting fees are typically dealt with in the calculation of EBITDA – a question that might require expert evidence – but rather how the parties in this case elected to use them. This was the essence of Mainville’s testimony.

In that context, it should be added that there is no error in the judge drawing a negative inference from Adler’s failure to produce the monthly financial statements that – according to him – would have contradicted Mainville. b. The awarding of termination consulting fees [ 46 ] According to the appellants, the judge committed a mixed error of fact and law in awarding Luma’s future consulting fees as a result of the termination.

They maintain that they were perfectly within their rights to terminate the agreement with the respondents without cause but, at any rate, had ample reason to do so, notably because of Mainville’s abusive attitude with Neopharm’s employees as well as his disloyal conduct. Furthermore, they argue that the judge erred in concluding that the parties had tacitly renounced to the application of art. 2125 CCQ when, in fact, the evidence confirmed the opposite; that the respondents had renounced to any claim for termination consulting fees.

[ 47 ] The Court does not agree. [ 48 ] The judge determines that there is “ample” evidence that the parties intended for a termination indemnity to be paid in the event that the relationship with Mainville was to be terminated.

He refers to several draft agreements and an email that confirm this finding before concluding that “the parties tacitly renounced to the application of articles 2125 and 2129 C.C.Q.” [21] The appellants are correct that not all drafts exchanged by the parties contained such language, but that is insufficient to demonstrate a palpable and overriding error in the judge’s conclusion that the respondents not only had a reasonable expectation of receiving of such an indemnity but a right to receive it. [ 49 ] The appellants’ subsidiary argument – that they had sufficient cause to terminate their relationship with Mainville and should, therefore, not be required to pay any indemnity – must also be dismissed.

It is clear from the judge’s analysis that Adler’s explanations for Mainville’s termination were constantly shifting and were, to say the least, contradictory. In fact, the decision to terminate was made and a replacement hired before reasons were ever identified. The judge concluded that the termination “was done in an unreasonable, high-handed and abusive manner” and the appellants have failed to identify a reviewable error in that conclusion. c.

The awarding of a bonus payment to Mainville [ 50 ] The appellants contend that the judge erred in concluding that the parties had agreed on the payment of a bonus to Mainville for 2014. [ 51 ] The judge committed no such error. His decision was consistent with past practices of Neopharm and was based on a clear representation made to him by Gerald Bernstein, Adler’s accountant, and a representative of Neopharm. [22] d.

The awarding of punitive damages [ 52 ] The appellants argue that the judge erred in awarding punitive damages to Mainville by failing to consider the context in which the appellants terminated the relationship with the respondents. According to them, they had sent a conciliatory proposal to finalize the agreement in January of 2015 (P-10), which the respondents refused (D-9) because Mainville was unwilling to commit to exclusivity. It was thus the respondents who provoked the termination, and not the appellants.

Furthermore, as far as Mainville’s personal emails are concerned, the appellants contend that he had no expectation of privacy regarding his Neopharm e-mail account and blatantly violated his duties of loyalty and confidentiality, which the judge failed to consider. Appellants do not take issue with the amount awarded. [ 53 ] Without endorsing the entirety of the judge’s reasoning on this issue, the Court does not agree that intervention is warranted.

It is apparent that, under the circumstances, Adler’s decision to read emails between Mainville and both his attorney and his fiscal advisor constituted an intentional breach of his right to privacy, as protected by s. 5 of the Charter of Human Rights and Freedoms . [23] In this context, it is important to keep in mind that Adler, with full knowledge of what he was doing, reviewed these emails in an effort to uncover information that might substantiate his decision to terminate Mainville’s position with Neopharm.

In so doing, Adler demonstrated a total lack of regard not only for Mainville’s privacy, but his right to professional secrecy, protected by s. 9 of the Charter , which supports the judge’s decision to award punitive damages in the amount of $25,000 pursuant to s. 49 of the Charter . e. Adler’s personal liability [ 54 ] Referring exclusively to their arguments on punitive damages, the appellants maintain that the judge erred in holding Adler personally liable for the amounts awarded to the respondents. [ 55 ] The appellants have identified no reviewable error in the judge’s conclusion.

The judge finds that Adler was not only “directly implicated” in the oppressive conduct, but that he acted in bad faith and for reasons of personal gain. He thus exercised his considerable discretion under s. 241(3) CBCA and did not do so unreasonably. f.

The awarding of extrajudicial fees [ 56 ] According to the appellants, the judge erred in ordering them to pay extrajudicial fees to the respondents for having to answer their cross-demand, since it dealt with the exact same arguments as those presented in the context of their subsidiary conclusion that any agreement should be annulled. [ 57 ] Here again, the appellants fail to identify a reviewable error. The judge qualified the cross-demand as “absurd and abusive”.

Given that, until trial, the appellants were attempting to recover 100% of the amounts paid to respondents for three years of successful work, it is difficult – if not impossible – to disagree with that assessment, even if certain of the arguments raised in the cross-demand would still have had to be addressed by the judge. FOR THESE REASONS, THE COURT: [ 58 ] DISMISSES the appeal, with judicial costs.

MARIE-FRANCE BICH, J.A. GENEVIÈVE COTNAM, J.A. PETER KALICHMAN, J.A. Mtre. Alain Chevrier Mtre. Alexandre Fournier DUNTON, RAINVILLE For the Appellants Mtre. Jean-François Carpentier Mtre. Stuart Kugler KUGLER, KANDESTIN For the Respondents Date of hearing: December 5, 2023