2017 NLCA 43, 2017 NLCA 43

David Rees (appellant/applicant) v. David J. Fong (respondent) (17/59) Indexed As: Rees v. Fong 2017 NLCA 43 2 C.A.N.L.R. 95 Court of Appeal of Newfoundland and Labrador Welsh J.A. July 4, 2017

Summary: Two shareholders applied for a declaration of oppression against each other under

section 371 of the Corporations Act , RSNL 1990, c. C- 36 . The application of the appellant was dismissed, while the respondent’s was allowed in part. The trial judge ordered a “shotgun buyout arrangement”, with the first offer to be made by the appellant within fourteen days after the formal order was filed. The appellant appealed and applied for a stay of an order of the Supreme Court Trial Division pending his appeal. Held: Application dismissed, directions given. Welsh J.A.: Enforcement of an order under appeal may be stayed in accordance with rule 42 of the Court of Appeal Rules .

The applicable test has three parts: whether there is a serious issue to be argued on appeal; whether the applicant for the stay will suffer irreparable harm if the stay is not granted; whether an assessment of the balance of inconvenience favours the applicant. In the circumstances of this case, the second and third prongs of the test are determinative. The Court assumed that there is a serious issue to be argued. There was a gap in the order of the Trial Division as it did not address the situation where the party ordered to make the first offer fails to do so.

As a result until the applicant made an offer, the net effect is to stay any proceedings notwithstanding the fourteen day limitation set out in the order. This situation may be addressed by an application to the judge who reserved the right to amend the order. Alternatively, the respondent may await either the disposition of the appeal in this Court or an offer by the applicant. It cannot be said that the applicant will suffer irreparable harm if the stay is not granted, nor does the balance of convenience favour the granting of a stay by this Court. The stay application was therefore dismissed.

The Court also set a

schedule for the appeal. Cases cited: Weir’s Construction Limited v. Warford Estate , 2016 NLCA 65 , 1 C.A.N.L.R. 282 Counsel: Ernest Gittens and Michael Cabot, for the appellant/applicant; Jerome Kennedy Q.C., for the respondent. This application was heard on June 27, 2017 before Welsh J.A.

The following judgment was delivered on July 4, 2017 by Welsh J.A. ______________________________________________________________ Welsh J.A.: [ 1 ] David Rees and David Fong are the sole shareholders and directors of Quidi Vidi Brewing Company. Each filed an application alleging oppression against the other under

section 371 of the Corporations Act , RSNL 1990, c. C-36 . Mr. Rees’ application was dismissed, Mr. Fong’s was allowed in part. By decision dated March 1, 2017, the judge ordered a “shotgun buyout arrangement”, with the first offer to be made by Mr. Rees within fourteen days after the formal order was filed, which occurred on June 12, 2017. Mr. Rees filed a notice of appeal on June 20, 2017. He applies for a stay of the order pending determination of the appeal. BACKGROUND [ 2 ] Quidi Vidi Brewing Company was started by Mr. Rees and Mr. Fong in 1995.

The business relationship between the parties deteriorated and by 2013, had completely broken down. On February 7, 2014, Mr. Fong filed an originating application under

section 371 of the Corporations Act , alleging oppression by Mr. Rees and requesting a forensic audit, which was ordered by the applications judge on February 27, 2014. On August 26, 2015, Mr. Rees filed an application alleging oppression by Mr. Fong. Fifty days in court were devoted to submissions and evidence, including testimony of five chartered accountants. The judge filed a lengthy, detailed decision in which Mr. Rees’ application was dismissed and Mr. Fong’s was allowed in part. [ 3 ] Following that decision, at the judge’s request, the parties filed submissions regarding an appropriate remedy.

Both requested a “shotgun buyout” arrangement with the other party being required to make the first offer. Also, after seeking counsels’ submissions, the judge included in the order the requirement for a letter of guarantee to ensure that, if the offer was accepted, the transaction would be completed. [ 4 ] In the notice of appeal, Mr. Rees requests: (1) that the finding that he oppressed Mr. Fong be set aside; (2) a determination that Mr. Fong oppressed him; (3) that Mr. Fong be required to pay the costs of the forensic audit; and (4) costs of the proceeding.

The “shotgun buyout” is not mentioned, though that was the remedy sought by both parties in the Court appealed from.

ANALYSIS The Order Under Appeal [ 5 ] The order filed June 12, 2017, provides, in relevant parts: IT IS HEREBY ORDERED THAT the amendment sought by David Rees in his Originating Application dated August 26, 2015 to include relief pursuant to s. 343 of the Corporations Act is granted and the stay of liquidation and dissolution is also granted; IT IS FURTHER ORDERED THAT a mandatory shotgun buyout arrangement shall be imposed upon the parties with the following terms and conditions: 1) David Rees shall make the first offer to purchase David Fong’s shares, which offer shall be supported by a letter of guarantee which shall be provided at the time of offer; 2) David Fong shall be provided with the opportunity to accept David Rees’ offer.

If Fong refuses Rees’ offer then he shall purchase Rees’ shares for the amount offered by Rees.

Fong’s offer must also be supported by a letter of guarantee which shall be provided at the time of the refusal of Rees’ offer; 3) David Rees shall have 14 days from the filing of the formal Order to make the first offer; David Fong will then have 14 days to accept or reject the offer; and the parties shall have 4 weeks to close the sale; … AND IT IS FURTHER ORDERED THAT amendments can be made to this Order by consent or by order of the Court. … AND IT IS FURTHER ORDERED THAT the following general terms and conditions shall also apply: … 8) … The business status quo of the corporation shall not be impeded by the directors and that the business prior to the execution of the shotgun clause up to and including the date of the sale shall be carried on in the ordinary course of business unless otherwise agreed by both parties. … AND IT IS FURTHER ORDERED THAT the costs of the forensic audit conducted by KPMG shall be paid by [Quidi Vidi Brewing Company], as outlined in the Order of this Honourable Court dated February 27, 2014.

… The Test to be Applied [6] Enforcement of an order under appeal may be stayed in accordance with rule 42 of the Court of Appeal Rules, which provides, inrelevant parts:

(1) Filing a notice of appeal shall not operate to stay enforcement of the order under appeal.

(2) Upon application, the Court may stay the enforcement of an order under appeal pending disposition of the appeal, provided that anapplication to stay the order under appeal has not been made in the Supreme Court, Trial Division. In this case, no application has been made in the Trial Division. [7] The test to be applied in determining whether to grant an application for a stay is discussed in Weir’s Construction Limited v.Warford Estate, 2016 NLCA 65 : [16] The first prong of the test is whether there is a serious issue to be argued on appeal.

This requires a preliminary, but not a detailedor extensive, investigation of the merits of the appeal to ascertain whether the appeal is frivolous or vexatious. … [17] The second prong of the test is whether the applicant for the stay will suffer irreparable harm if the stay is not granted. It is thenature of the harm, rather than its magnitude, that must be considered. … [18] The third prong of the test is an assessment of the balance of inconvenience. … Application of the Test [8] In the circumstances of this case, the second and third prongs of the test are determinative.

For convenience, applying the lowthreshold set out above, I will assume that the first prong of the test is satisfied, that is, that there is a serious issue to be argued. [9] I begin by reiterating that both parties asked the judge to order a “shotgun buyout” arrangement, with the other party beingrequired to make the first offer. At the hearing of this application, counsel for Mr. Rees submitted that the problem with the judge’sorder is that Mr. Rees was required to make the first offer to purchase. This, he submits, gave a tactical advantage to Mr. Fong whocould reject Mr. Rees’ offer to purchase, giving Mr.

Fong the opportunity to purchase Mr. Rees’ shares for the same price. [10] The judge explained his reasons for ordering a shotgun buyout (2017 NLTD(G) 37): [318] It is clear from day one of these proceedings, that the likely ultimate resolution of the continuing warfare between Rees and Fongwould be an order creating a “shot-gun” buyout arrangement whereby one party is given the opportunity to buyout the shares of theother.

If the offer of the party granted the first opportunity to buy the other shares is not accepted, then the party first making such offerto buy is compelled to sell his/its shares at the same price to the other party. [319] Unusually, neither party was prepared to enter such an arrangement voluntarily at the commencement of these proceedings. Thisreluctance was probably motivated by a belief on the part of the parties that he/it would be given the opportunity to make the first offer. I believe that the parties sense that the ability to make the first offer constituted some form of tactical advantage.

As well, both Fong andRees testified that they wanted to retain their shares and purchase the shares of the other. [320] Mutual hatred, the desire to obtain tactical advantage, and a gross mis-appreciation of the likely expenses and costs of thislitigation led to this protracted struggle. If more realistic considerations had been applied, the “who goes first” issue would have beendecided by the toss of a coin. … [11] The order clearly states, and the parties accept, that amendments may be made to the order either by consent or by order of theCourt. If Mr.

Rees requires further time to prepare his offer to purchase Mr. Fong’s shares, he may make an application to the judge foran appropriate amendment. It must be noted that the order does not address the situation where Mr. Rees fails to make an offer. Thismay occur, for example, if he is unable to obtain the required letter of guarantee, or if he simply takes the position that he should not berequired to, and will not, make the first offer. [12] The failure to address the situation where the party ordered to make the first offer fails to do so is a significant gap. In fact, untilMr.

Rees makes an offer, the net effect is to stay any proceedings notwithstanding the fourteen day limitation set out in the order. Thissituation may be addressed by an application to the judge who reserved the right to amend the order. Alternatively, Mr. Fong may awaiteither the disposition of the appeal in this Court, or an offer from Mr. Rees should that occur. [13] In the current circumstances, applying the second and third prongs of the analysis, it cannot be said that the applicant, Mr. Rees,will suffer irreparable harm if the stay is not granted.

Further, pending a possible amendment to the order upon application to the judge,the balance of convenience does not favour the granting of a stay by this Court. [14] In the result, the application for a stay is dismissed.

Schedule for the Appeal [15] Finally, at the hearing, I sought information from counsel regarding the timing of the appeal. Counsel for Mr. Rees stated that hewould be able to file the relevant parts of the transcript, the appeal book and his factum, in accordance with rule 56, by the end of July2017. Mr. Fong would then have thirty days after receipt of the documents to file his factum. Both counsel indicated that the appealcould be set to be heard in September. With that in mind, I would make the following order:

1. Mr. Rees shall file his materials under rule 56 no later than August 7, 2017; 2. Mr. Fong shall file his factum no later than September 11, 2017; 3. The hearing of the appeal is set for September 18, 2017 at 10:00 a.m. [ 16 ] Counsel for Mr. Rees indicated that he will be able to provide a transcript by mid-July. Rule 47 addresses the filing of the relevant portions of the transcript by the appellant and, if necessary, by the respondent. If, for purposes of arguing the appeal, Mr. Fong requires portions of the transcript that have not been filed by Mr. Rees, he shall make the request in writing to Mr.

Rees who shall provide the requested transcript without delay. Both parties are required to take all steps necessary to ensure that the appeal will be heard in accordance with the above schedule. DISPOSITION [ 17 ] The application to stay the enforcement of the order under appeal is dismissed. The appeal is set to be heard on Monday, September 18, 2017 at 10:00 a.m. In preparation for the appeal, the parties are required to comply with the

schedule set out above. Costs of this application shall be costs in the cause of the appeal. Application dismissed .