2012 NBCA 89, 2012 NBCA 89

COURT OF APPEAL OF NEW BRUNSWICK 148-11-CA CINDY LIZOTTE (Applicant) APPELLANT CINDY LIZOTTE (Requérante) APPELANTE - and - - et - DARIE ARSENEAULT, KURT BIRD, PATRICIA LEBLANC, 051536 N.B. LTD., ELMWOOD VETERINARY HOSPITAL LTD. and KIM MAILLET (Respondents) RESPONDENTS DARIE ARSENEAULT, KURT BIRD, PATRICIA LEBLANC, 051536 N.B. LTD., HÔPITAL VÉTÉRINAIRE ELMWOOD LTÉE et KIM MAILLET (Intimé

s) INTIMÉS Lizotte v. Arseneault, Bird, LeBlanc et al, 2012 NBCA 89 Lizotte c.

Arseneault, Bird, LeBlanc et autres, 2012 NBCA 89 CORAM: The Honourable Justice Larlee The Honourable Justice Robertson The Honourable Justice Green CORAM : L’honorable juge Larlee L’honorable juge Robertson L’honorable juge Green Appeal from a decision of the Court of Queen’s Bench: September 28, 2011 Appel d’une décision de la Cour du Banc de la Reine : Le 28 septembre 2011 History of Case: Historique de la cause : Decision under appeal: Unreported Décision frappée d’appel : Inédite Preliminary or incidental proceedings: Court of Appeal: 2010 NBCA 18 Court of Queen’s Bench: 2009 NBQB 69 Procédures préliminaires ou accessoires : Cour d’appel : 2010 NBCA 18 Cour du Banc de la Reine 2009 NBBR 69

Appeal heard: June 21, 2012 Appel entendu : Le 21 juin 2012 Judgment rendered: October 18, 2012 Jugement rendu : Le 18 octobre 2012 Counsel at hearing: For the appellant: G. Robert Basque, Q.C. For the respondents: Edwin G. Ehrhardt, Q.C. Avocats à l’audience : Pour l’appelante : G. Robert Basque, c.r. Pour les intimés : Edwin G. Ehrhardt, c.r. THE COURT The appeal is allowed in part. The appellant is entitled to the order sought under s. 166(2) of the Business Corporations Act . No costs are awarded on either the application or appeal. LA COUR Accueille l’appel en partie. L’appelante a droit à l’ordonnance sollicitée en vertu du par. 166(2) de la

Loi sur les corporations commerciales . Aucuns dépens ne sont attribués à la fois pour ce qui concerne la requête et l’appel. The following is the judgment delivered by THE COURT I. Introduction [ 1 ] The appellant, Dr. Lizotte, and the respondents, Dr. Arseneault and Dr. Maillet, operate a veterinary practice in the City of Moncton under the corporate name Elmwood Veterinary Hospital Ltd., also a respondent in these proceedings. The respondents, Kurt Bird and Patricia LeBlanc, are veterinary technicians employed by Elmwood and, at one point, minority shareholders. At all relevant times, Dr.

Lizotte has been a minority shareholder and Dr. Arseneault the majority shareholder. This remains true even if one were to ignore the shares issued to the respondent numbered company which Dr. Arseneault controls. Pursuant to the provisions of a unanimous shareholders agreement, all Elmwood shareholders are voted directors of that company. [ 2 ] Since 2007, the parties have been litigating their differences with respect to the

interpretation of the unanimous shareholders agreement and yet the veterinary practice remains intact. It all started with Dr. Lizotte’s purchase of seven shares from a veterinarian (Dr. Beaulieu) who no longer works in the practice. The sale price was $68,000. The present appeal is but one of several adjudicative proceedings that have been pursued over the years, including a private arbitration which had set aside the sale as being in contravention of the agreement. The arbitration proceedings were followed by the respondent shareholders’ attempt to force Dr.

Lizotte to relinquish her shares and remove her as a director, on the ground she was now in default under the agreement. Dr. Lizotte obtained a court order declaring otherwise. That order was subsequently affirmed on appeal to this Court. At about the same time, the majority shareholders/directors adopted a resolution calling for the issuance of shares to Dr. Maillet, a veterinarian who had joined the practice. It was also resolved that Elmwood would reimburse the respondent shareholders for the legal fees and disbursements incurred in the litigation surrounding the “default” proceedings. This in turn led Dr.

Lizotte to file a Notice of Application seeking various forms of relief. The application was dismissed, in its entirety, with costs of $1,800.

[ 3 ] This appeal involves only two of the four issues that were placed before the application judge. The first is whether he erred in refusing to declare the purported share issuance to Dr. Maillet invalid. The second is whether the application judge erred in refusing to order the respondent shareholders to reimburse Elmwood for the legal costs surrounding the default proceedings. This claim for relief was anchored to the “oppression remedy” outlined in s. 166(2) of the Business Corporations Act , S.N.B. 1981, c. B-9.1.

Specifically that provision authorizes the court to grant relief to a shareholder in circumstances where the business of the corporation or the powers of its directors have been exercised in manner that is oppressive, unfairly prejudicial or unfairly disregards the interests of that shareholder. [ 4 ] We conclude the application judge did not err in refusing to grant the declaratory order sought in regard to the purported share issuance to Dr. Maillet. However, we find error in the refusal to grant Dr. Lizotte the relief sought under s. 166(2) of the Business Corporations Act .

The analytical framework which the Supreme Court prescribed in BCE Inc. v. 1976 Debentureholders , 2008 SCC 69 , [2008] 3 S.C.R. 560, requires a finding of a breach of a reasonable expectation held by the claimant and a finding the impugned conduct was either oppressive, unfairly prejudicial or unfairly disregarded the interests of the claimant. We conclude the minority shareholder, Dr. Lizotte, held the reasonable expectation the majority would not exercise their dominant position by having the corporation pay only the majority’s legal expenses surrounding the default proceedings.

As this expectation was breached the only question is whether the impugned conduct falls within one of the descriptive phrases outlined in s. 166(2). The application judge provided a negative response, apparently on the basis Dr. Lizotte had engaged in bad faith conduct while the respondent shareholders had acted reasonably or in good faith. In our respectful view, the finding of bad faith on the part of Dr.

Lizotte is infused with palpable and overriding error and, as a matter of law, the finding of good faith on the part of the respondent shareholders is not sufficient to oust the application of the oppression remedy. Ultimately, we conclude Dr. Lizotte was unfairly prejudiced and, therefore, is entitled to the order sought under s. 166(2). [ 5 ] We acknowledge these reasons for decision flow from what can best be described as a de novo hearing before this Court. Citing “workload” exigencies, the application judge expressly declined the opportunity to provide a “structured analysis”.

Instead, he sheltered behind the mistaken belief that his judicial obligation to provide sufficient reasons could be cured by delivering oral reasons, six weeks after the application hearing. This deviation from conventional judgment writing is addressed below. II. Background [ 6 ] The Elmwood Veterinary Hospital Ltd. was incorporated in 1980. In 1992, Dr. Darie Arseneault acquired one-third of the shares in the corporation. In 2003, the then majority shareholder retired and a series of share transactions took place which resulted in the following holdings: Dr. Darie Arseneault 20 shares 051536 N.B.

Ltd. 20 shares Dr. Suzanne Beaulieu 7 shares Dr. Cindy Lizotte 7 shares Kurt Bird 3 shares Patricia LeBlanc 3 shares The numbered company is controlled by Dr. Arseneault, solidifying her position as the majority shareholder. At the time the above share structure was established, the shareholders and Elmwood entered into a unanimous shareholders agreement. The year was 2003. [ 7 ] Dr. Beaulieu, who is not a party to theses proceedings, made the decision that she would be leaving the Elmwood practice.

She accepted a position with the federal Government as of May 22, 2007, but continued to work in the practice on evenings and weekends. In June of 2007, Dr. Beaulieu agreed to sell her seven shares to Dr. Lizotte for $68,000. Prior to finalizing that transaction, both vendor and purchaser obtained legal advice which led them to believe the transaction would be valid under the terms of the unanimous shareholders agreement. Parenthetically, this statement of fact remains contentious. The respondents Arseneault, 051536 N.B. Ltd., Bird and LeBlanc challenged the transaction, alleging Dr.

Beaulieu’s shares should have been offered to all the shareholders, and not just Dr. Lizotte. Within this time frame, Dr. Lizotte approached her profession’s governing body, the New Brunswick Veterinary Medical Association, and requested the Association enforce one of its by-laws. The by-law in question prohibited non-veterinarians from holding shares in veterinary professional corporations. The result of enforcement would mean the respondents Bird and LeBlanc, veterinary technicians and long-standing employees of Elmwood, would no longer be entitled to hold shares in Elmwood.

[ 8 ] The dispute over the share transfer from Dr. Beaulieu to Dr. Lizotte proceeded to arbitration. In a decision dated December 2 3 , 2008, the arbitrator agreed with the respondents and ordered the share transfer be set aside. In his reasons, the arbitrator observed that neither of the two veterinarians had acted in good faith. Based on this decision, the respondents Arseneault, 051536 N.B. Ltd., Bird and LeBlanc took the position the appellant was in default of the unanimous shareholders agreement, and in January 2009, initiated steps, under the terms of that agreement, to purchase Dr.

Lizotte’s shares in Elmwood and, consequently, to remove her as a director. [ 9 ] Dr. Lizotte filed a Notice of Application with the Court of Queen’s Bench on February 24, 2009, seeking a determination she was not in default under the unanimous shareholders agreement. The shareholders and directors of Elmwood met on February 27, 2009, to consider how best to respond to the Application. At that meeting, it was resolved that Elmwood would pay the respondents’ legal fees incurred in defending the Application. In a decision dated March 26, 2009, the application judge ruled in favour of Dr.

Lizotte by holding that she was not in default under the agreement. Therefore, the application judge did not have to deal with the issue of whether Dr. Lizotte was compelled to dispose of her shares ( 2009 NBQB 69 ). The application judge’s decision was upheld on the appeal to this Court: Arseneault, Bird, LeBlanc and 051536 N.B. Ltd. v. Lizotte , 2010 NBCA 18 , 356 N.B.R. (2d) 332 . [ 10 ] Subsequent to the Court of Appeal decision, Dr. Beaulieu’s shares were divided on a pro rata basis between Dr. Lizotte, Dr. Arseneault, and Dr. Arseneault’s numbered company.

The shares held by the respondents Bird and LeBlanc were surrendered, as required by the NBVMA’s by-laws. The respective share holdings in Elmwood are as follows: Dr. Darie Arseneault 22.975 shares 051536 N.B. Ltd. 22.975 shares Dr. Cindy Lizotte 8.05 shares [ 11 ] On August 14, 2010, Dr. Arseneault issued a notice of shareholder’s/directors’ meeting. The meeting was held on September 8, 2010. During that meeting it was resolved to issue shares to Dr. Maillet. No resolution was passed to issue shares to Dr. Lizotte, thereby preserving her relative percentage of shares in Elmwood. Dr.

Lizotte would later assert a pre-emptive right to such under the Business Corporations Act and the unanimous shareholders agreement. [ 12 ] On February 8 , 2011, Dr. Lizotte filed a Notice of Application in which she sought the following relief: (1) the respondents reimburse Elmwood for legal fees paid by Elmwood on their behalf in regard to the litigation surrounding the issue of Dr. Lizotte’s “default”;

(2) Elmwood be prohibited from issuing shares to the respondent, Dr. Maillet; (3) a declaration that Dr. Lizotte has been a director of Elmwood since 2003; and (4) a declaration Dr. Maillet is not a director of Elmwood. III. The Application Judge’s Oral Decision [ 13 ] The underlying application was heard over a period of nine hours on August 9, 2011. Approximately six weeks later, on September 28, 2011, counsel for the respective parties were summoned to court for the rendering of what has been labelled an “oral decision”.

The so-called reasons were delivered from the Bench, recorded and subsequently transcribed. The application was dismissed in its entirety with costs of $1,800. The application judge began his reasons with an admission that he was unable to find the time to write a “well-structured decision” that could have been filed in the same manner as a written decision. Citing his inability to “keep up with the workload” and the need to produce timely judgments for the parties, the application judge concluded that what was important was that he be “comfortable” with his conclusions.

While the transcript of the September 28 proceeding covers 35 pages, it does not reveal a conventional legal analysis, but one infused with observations or findings that arguably informed the application judge’s decision to dismiss the application in its entirety. [ 14 ] Aside from the matter of costs, only two of the four issues raised before the application judge are pursued on this appeal. They were dealt with by the application judge as follows.

With respect to the relief sought under the Business Corporations Act , the application judge stated that he: “…prefers and accepts the argument and the law as they are found from Paragraph 1 to 3, 5, 7 to 22, 24 to 28 and 30 of the Respondents’ Brief”. With respect to the validity of the share issuance to Dr.

Maillet, the application judge ruled in favour of the respondents by accepting: “…the argument and the law and principles as found from paragraph 32 to 43 of the respondent’s Brief, and accordingly prefers these arguments over those found between Paragraph 34 to 46 in the Applicant’s Brief.” To exacerbate matters, the application judge failed to read aloud the paragraphs cited from the respective pre- hearing briefs.

Not knowing whether this Court had access to the submissions, counsel for the respondents prepared a submission on appeal that contains the relevant paragraphs in an effort to clarify what had been argued and accepted below.

[15] Bluntly stated, the adumbrated approach to judgment writing which the application judgeapplied is not an acceptable model for judicial decision making. Factually, this is not a difficult case. The entire application record is inwritten form, there being no cross-examination on the affidavits. The parties expected the application judge would have clearly set outthe positions of the two parties, cited the appropriate jurisprudence, made any necessary findings of fact, drawn any necessary inferencesand applied these findings in arriving at a determination on each issue.

In that regard, see The Minister of Social Development v. G.B.,F.H. and R.O., 2012 NBCA 62, [2012] N.B.J. No. 263 (QL) where it was held that the reasons in that case to support the decision were“grossly lacking any type of coherent analysis” (para. 32).

Equally disquieting is the unstated premise that the application judge wasdelivering an oral decision within the meaning of Rule 60.02(1) of the Rules of Court and, therefore, not subject to the same minimumstandards of judgment articulation expected of the conventional “written” decision. [16] No one would quibble with the general proposition that a structured or analytical approach tojudgment writing is required irrespective of whether the decision is delivered orally from the Bench or filed as formal reasons fordecision.

Moreover, there is a judicial obligation to provide sufficient reasons based on the following policy rationales: (1) reasonsensure that judges turn their minds to complex issues and consider relevant points (“fair and accurate decision making”); (2) reasonsallow the parties to understand why the dispute was decided in particular way and, correlatively, whether an appeal is warranted; (3)reasons not only ensure that justice is done, but that the parties and the general public are made to see that justice has been done (publicaccountability and societal confidence in the judicial system); and (4) reasons are essential to a legal system that relies on earlierprecedents when applying, interpreting or developing the law.

Of course, those policy objectives remain valid irrespective of whether thedecision falls within the “oral” or “written” category (see generally: F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41, at paras. 98-99; MacDonald v. The Queen, (SCC), [1977] 2 S.C.R. 665, [1976] S.C.J. No. 90 (QL); discussed fully in R. v.Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869; R. v. R.E.M. 2008 SCC 51, [2008] 3 S.C.R. 3; Baker v. Canada (Minister of Immigration), (SCC), [1999] 2 S.C.R. 817, [1999] S.C.J. No. 39 (QL); R. v. S.S., 2011 NBCA 75, 376 N.B.R. (2d) 146; Blanchard v.Légère, 2009 NBCA 2, 339 N.B.R. (2d) 357; P.R.H. v.

M.E.L., 2009 NBCA 18, 343 N.B.R. (2d) 100; and Chapelstone DevelopmentsInc. v. Canada, 2004 NBCA 96, 277 N.B.R. (2d) 350, leave to appeal refused, [2005] S.C.C.A. No. 38 (QL)). [17] In its purest form, the oral decision is delivered at the conclusion of a hearing or trial or as soonas practicable thereafter (see Rule 60.02(1) and compare with Rule 60.02(2) of the Rules of Court). More often than not the oral decisionis delivered in circumstances where the case is factually driven and the case is of little or no precedential significance (e.g. “best interestsof the child”).

The irony is that most oral decisions are read aloud in open court from a prepared text that usually lacks the level ofsophistication or detail expected of a reserved decision. However, regardless of the method chosen for delivering the reasons fordecision, it is assumed those reasons will allow for meaningful appellate review. Context, however, is always important. For example,less is expected when it comes to rendering motion decisions as the record itself may provide a sufficient context to explain why themotion judge decided accordingly. This view is supported by Rule 60.01(1)(

a) which contemplates simple “endorsements”. But certainlyin cases brought by Notice of Application under Rule 16 of the Rules of Court, there is a general expectation that the reasons for decisionwill address questions of law and mixed fact and law and, therefore, the application judge will offer an analysis that provides a cogentresponse to issues intelligently raised.

Otherwise, the Court of Appeal simply becomes the de facto court of first instance, as happenedhere. [18] Above all, the judicial obligation to provide sufficient and structured reasons cannot be avoidedby sheltering behind the option of delivering an oral decision, well after the closing of arguments, in the expectation the transcript ofthose reasons will be provided only to the parties and, therefore, not subject to public scrutiny as is true of reserved decisions which areand must be distributed to all interested publishers.

Public accountability and societal confidence in the judicial system are the objectivesunderscoring the general public’s right of access. This is not to suggest that oral decisions in New Brunswick never make it to the publicarena.

Without exception all decisions of the Court of Appeal are available for publication in both official languages and there are judgesof the Court of Queen’s Bench who regularly edit, reformat and file oral decisions for publication in the conventional forum, when thedecision is perceived to be of precedential significance or public importance. [19] Parenthetically, we do not wish these reasons to be read as ignoring the daily workload judges inthis Province must balance. Correlatively, however, the obligations to provide timely and appropriate reasons for decision are paramountrealities.

Sections 7.2, 12.01(1) and (2)(

b) of the Judicature Act, R.S.N.B. 1973, c. J-2, speak of the need to provide timely judgments(six months) and of the responsibility of the Chief Justice of the Court of Queen’s Bench to ensure that obligation is honoured. It is triteto note that if the workload of any judge exceeds the boundaries of reasonableness the matter must be addressed internally, lest theobligation to provide sufficient reasons for decision be forgotten. IV. Analysis A. Payment of Legal Fees and the Oppression Remedy

[ 20 ] Of the two issues raised on this appeal, the one that is truly problematic pertains to the relief sought under s. 166(2) of the Business Corporations Act . As stated at the outset, that provision authorizes the court to grant relief to a shareholder in circumstances where the business of the corporation or the powers of its directors have been exercised in manner that is oppressive, unfairly prejudicial or unfairly disregards the interests of the shareholder. The application judge rejected Dr.

Lizotte’s argument that the decision of Elmwood to pay the legal fees of the respondent shareholders, incurred as a result of earlier legal proceedings, in which Dr. Lizotte was the successful party, falls within the ambit of that provision. Of course, s. 166(2) is by no means unique. For example, s. 241 of the

Canada Business Corporations Act , R.S.C. 1985, c. C-44, reads substantively the same. This takes us to the lead decision of the Supreme Court and the analytical framework outlined in that case: BCE Inc. v. 1976 Debentureholders . That framework is conveniently summarized in this Court’s decision Doucet and Dauphinee v. Spielo Manufacturing Incorporated and Manship , 2011 NBCA 44 , 372 N.B.R. (2d) 1 (hereinafter “ Spielo ”). For purposes of deciding this appeal, it is sufficient to reproduce the

summary which this Court prepared in Spielo in regard to the Supreme Court precedent: Section 241(2) of the

Canada Business Corporations Act provides that a court may grant appropriate relief in circumstances where a shareholder or corporate officer can establish that the corporation engaged in conduct that was “oppressive”, “unfairly prejudicial” or that “unfairly disregarded” the interests of the applicant. The matter complained of must fall within one of three categories:

(1) an act or omission of the corporation; (2) the business of the corporation; or (3) the exercise of power by the corporation’s directors. The lead decision is from the Supreme Court of Canada: BCE Inc. v. 1976 Debentureholders , 2008 SCC 69 , [2008] 3 S.C.R. 560. In that case, the Supreme Court outlined an analytical framework prefaced with the following observations: (1) oppression is an equitable remedy that seeks to ensure fairness and, therefore, courts should look at business realities, not merely narrow legalities; and (2) like many equitable remedies, oppression is fact-specific.

The Supreme Court goes on to explain that the conduct complained of is the conduct of the corporation or its directors who may make decisions in a way that unfairly maximizes a particular group’s interest at the expense of other stakeholders. However, the Supreme Court goes on to acknowledge that the conduct of other actors, such as shareholders, may support a claim for oppression. The Supreme Court’s analytical framework is two-pronged. The court must first ascertain the reasonable expectations of the stakeholders. The concept of reasonable expectations is objective and contextual.

The actual expectation of a particular stakeholder is not conclusive. The question is whether the expectation is reasonable having regard to the facts, the relationships at issue, and the entire context of the case, in light of conflicting claims and expectations.

From the existing jurisprudence, the Supreme Court was able to identify several useful factors in determining whether a reasonable expectation exists: general commercial practice, the nature of the corporation, the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate shareholders.

The second prong of the analytical framework requires the court to decide whether the reasonable expectation was violated by conduct falling within the meaning of the terms oppression, unfair prejudice or unfair disregard of a relevant interest. In brief, the claimant must show that the failure to meet a reasonable expectation involved unfair conduct and prejudicial consequences. [paras. 41-42] [ 21 ] In brief, the Supreme Court outlined a two-pronged analytical framework.

The court must first ascertain the reasonable expectations of the stakeholders and, second, the court must decide whether that reasonable expectation was breached by conduct that was either: (1) oppressive; (2) unfairly prejudicial; or (3) unfairly disregarded the interests of a stakeholder such as a shareholder. It is important to emphasize the obvious. The three descriptive phrases used in the legislation import the understanding that different meanings must be attributed to each. In other words, conduct that falls short of “oppression” may still fall within the ambit of the other categories.

This general understanding goes back to the 1980s and is still valid today: see Stanley M. Beck, “Minority Shareholders’ Rights in the 1980s”,

(1982) L.S.U.C. 311 and Dennis H. Peterson & Matthew J. Cumming, Shareholder Remedies in Canada, 2d ed., looseleaf (Markham, Ont.: LexisNexis, 2009), at 17.56, et seq . [ 22 ] In Spielo, the plea of oppression and the relief sought under s. 241 of the

Canada Business Corporations Act was raised in circumstances where the corporation was accused of “opportunistic behaviour” or, alternatively expressed, having acted in “bad faith” in relying on a contractual right set out in a contract. A brief recitation of the essential facts of that case bears upon its precedential significance.

All employees of Spielo who acquired shares in that corporation because of their employment entered into a contract whereby they agreed to reconvey their shares to Spielo in the event of their dismissal, with or without cause, at a price determined according to the formula outlined in the contract. Eventually, two employees were dismissed without cause and compensated for the employer’s failure to give proper notice. They were also compensated for their shares. One employee received $250,000 for shares costing $44,117. The other received $83,000 for shares costing $6,500.

However, twelve months after their dismissal Spielo was sold at a price that had the two employees remained shareholders they would have collectively received an additional $5 million. [ 23 ] The two former employees sued claiming relief from oppression, under the federal legislation, arguing their dismissals were motivated by Spielo’s desire to acquire their shares at the lower contract price. Spielo responded that it had a contractual right to reacquire the shares at the formula price and, therefore, the employees could not claim that they had been oppressed or unfairly treated.

The employer simply did what it was entitled to do under the relevant contracts. This Court was prepared to accept that the employees, in their capacity as shareholders, held the reasonable expectation they would not be forced to reconvey their shares, through the insidious exercise of the employer’s contractual right to terminate their employment, with or without cause, for the singular

purpose of reaping the realizable profit from the forced redemption of the shares. However, on the facts, there was no evidence tosupport the employees’ contention they were dismissed for the purpose of Spielo reacquiring their shares at the lower contract price.Specifically, there was no evidence of a pending sale of Spielo to a third party at the time of their dismissal. According to the trial judge,their employment was terminated because of performance issues. It followed that Spielo could not be held accountable for havingengaged in oppressive conduct.

That being so, Spielo’s right to reacquire the shares according to the underlying contract could not beregarded as “unfairly prejudicial” or having “unfairly disregarded” the interests of the two former employees. [24] In Spielo, this Court also examined the relationship between the concept of oppression under thelegislation and the good faith doctrine as it has developed under the law of contract. As the good faith/bad faith dichotomy factors intothis appeal, it is worth restating what was decided in Spielo.

In part, the oppression remedy available under provincial and federallegislation was a legislative response to the failure of the common law to develop principles that would effectively regulate unacceptablecommercial behaviour within the corporate world. The common law was generally limited to addressing problems through theapplication of contractual principles of

interpretation and to examine the exercise of contractual power in terms of isolating the intentionof the parties. A further development was the modern doctrine of good faith performance which focused on the presumed expectations ofthe parties. Regrettably, the good faith performance doctrine remains in a state of gestation as the case law has been unable to settle on ameaningful and practical working definition of bad faith.

This is why the oppression remedy remains attractive to shareholders.However, Spielo did hold at para. 56: “If an employer terminates an employee for reasons not tied to a valid corporate objective (e.g.,employee effectiveness) but rather for the purpose of acquiring and realizing the fair market value shares that were issued as an incentiveto ensure employee loyalty and productivity, surely the employer is guilty of bad faith when it comes to insisting on the contractual rightto reacquire the shares without offering proper compensation.” The Court went on to describe such a scenario as “opportunisticbehaviour”.

Bad faith and oppression were also defined in terms of those majority shareholders who act out a sense of “vindictiveness”or for purposes of “retribution” toward a minority shareholder (often a family member).

In BCE, the Supreme Court spoke of oppressiveconduct as “burdensome, harsh and wrongful”, a “visible departure from standards of fair dealing” and an “abuse of power”. [25] While a finding of bad faith on the part of the alleged oppressor falls within the meaning of theword “oppression”, it bears repeating that such a finding is not a condition precedent to a claim for relief under the oppression provisionsof either the federal or provincial legislation.

The impugned conduct may still be found to be unfairly prejudicial or to have unfairlydisregarded the interests of a shareholder or other stakeholder, even though the alleged oppressor acted in good faith: Brant InvestmentsLtd. v. KeepRite Inc., (ON CA), [1991] O.J. No. 683 (C.A.) (QL). [26] Returning to the analytical framework established in BCE, our first task is to apply an objectivestandard when identifying the reasonable expectation held by the applicant, Dr. Lizotte. In that regard, the Supreme Court identifiedseveral factors that may assist a court.

Those factors are identified in the above quoted passages from Spielo. In the present case, onlytwo appear to be of assistance: “general commercial practice” and “the fair resolution of conflicting interests between corporatestakeholders”. While there is no evidence of general commercial practice, we assume commercial practice will also reflect and conformto any judicial pronouncements on the subject. Hence, we look to the jurisprudence involving a challenge to a corporate decision to paythe costs of one or more parties to a shareholder dispute.

Although the decisions discussed below predate BCE, they remain relevantbecause the reasonable expectations component of the analytical framework adopted by the Supreme Court is but a reflection of theearlier jurisprudence: see 820099 Ontario Inc. v. Harold E. Ballard Ltd, [1991] O.J. No. 266 (Ont. Gen. Div.) (QL), Farley J., quoted inNaneff v. Con-Crete Holdings Ltd., [1993] O.J. No. 1756 (Ont. Gen. Div.) (QL), appeal allowed in part, on another point, (ON SC), [1994] O.J. No. 1811 (QL). [27] Discovery Enterprises Inc. v. Ebco Industries Ltd., 2002 BCSC 1236, [2002] B.C.J.

No. 1957(QL) was a case in which Ebco Industries had become “deadlocked” due to a dispute between two brothers who shared equal votingcontrol of the company. The brothers decided to submit their dispute to arbitration and Ebco subsequently reimbursed the brothers withrespect to the arbitration costs. The action against the other brother was apparently settled. Discovery Enterprises, a shareholder, filed apetition to commence a derivative action in the name of and on behalf of Ebco in respect of its alleged wrongful payment of thearbitration costs ($2 million).

In comprehensive reasons, Pitfield J. concluded it was not improper for Ebco to pay the arbitration costsas that procedure was the “reasonable means chosen to avoid the wind-up of Echo in the face of a deadlock between the brothers whoshared voting control of the company”. [28] It has not escaped our attention that in their pre-hearing brief submitted to the application judge,the respondents argued that Elmwood’s payment of legal fees relating to the “default” proceedings constituted a diversion of profits and,therefore, such allegations are derivative actions requiring leave of the court which was not sought.

There are two immediate flaws inthat submission. First, at no time was Elmwood Veterinary Hospital Ltd. a party to the litigation surrounding the issue of whether Dr.Lizotte was in default under the unanimous shareholders agreement. Contrary to what is contained in the respondents’ pre-hearing briefand what was argued in this Court, Elmwood was never called on to “defend” actions which it had taken under the agreement.Furthermore, Elmwood was not a party to the arbitration proceedings.

Second, the following jurisprudence would support thecounterargument that the oppression remedy is not ousted by the right of a shareholder to pursue a derivative action, or, in other words,the two remedies are not mutually exclusive.

[ 29 ] In Gibbons v. Medical Carriers Ltd. , 2001 MBQB 310 , [2001] M.J. No. 512 (QL) , the court was faced with an earlier court decision in which it was found the majority shareholders had acted without regard for the legitimate interests of the minority. The corporation had paid the legal fees for the majority’s defence of the action. Relying on two earlier precedents, the application judge ordered the majority to reimburse the corporation for the legal fees on the ground the payment to the majority was “inequitable”.

The first of the two precedents is the decision of Blair J. (now of the Court of Appeal) in Naneff v. Con-Crete Holdings Ltd . In that case there was an inter-shareholder dispute between family members in which the corporation was an added and necessary party. It was held the unsuccessful litigants should bear the costs of the oppression proceedings and that any amounts the corporation had already paid in regard to legal fees and disbursements of the unsuccessful shareholders, properly belonged, in the circumstances of the case, to the corporation.

The fact the corporation was a party to the proceeding did not impact on this determination as the corporation was merely the instrument through which the successful party sought to exclude a family member from the corporate relationship. The other precedent relied on in Gibbons was Safarik v. Ocean Fisheries Ltd. , [1996] B.C.J. No. 76 (C.A.) (QL) .

In obiter dicta, it was held that: “The expenditure of company funds to defend proceedings such as this has the ironic result that a petitioning shareholder is, in effect, paying part of the legal bills of his adversary, which does not seem quite right when the petitioner ultimately obtains a remedy” (para. 44).

In other words, the court found it ironic that the corporation would pay for the legal fees and disbursements of the losing shareholder. [ 30 ] Broadly formulated, it could be declared that all shareholders hold the reasonable expectation that the corporation will remain neutral in any dispute between two or more shareholders with respect to the proper

interpretation of a unanimous shareholders agreement. Accordingly, it would be reasonable to expect that the corporation would refrain from reimbursing any party with respect to legal fees and disbursements incurred in resolving that dispute. Alternatively, if the corporation were to reimburse one party it would be expected to reimburse all, subject to one caveat.

A corporation that pays the legal costs of both shareholders to a shareholder dispute is immune from challenge by other shareholders if the expenditure can be defended on the ground it was in the corporation’s best interests to have the underlying dispute resolved in an efficient and timely manner ( e.g., arbitration). However, the facts of the present case do not fall within this framework. Had Elmwood paid the costs of both sides to the underlying litigation, it is highly improbable the parties would have pursued the present litigation. In that regard, it has not escaped our attention that Dr.

Lizotte did not seek an order for relief in which Elmwood would reimburse her for the legal fees and disbursements she had paid out. In our view, that omission should not impact on the outcome of this case. The underlying assumption that neither shareholder should be reimbursed is just as reasonable as the assumption that if you reimburse one you should reimburse the other. [ 31 ] The reasonable expectation can be narrowly framed if regard is given to other salient facts.

Here we have the majority shareholder of a closely held corporation that, together with two other minority shareholders, represent the majority of the corporation’s directors. Tak ing these additional facts into consideration, it could have been argued that Dr. Lizotte held the reasonable expectation that the majority would not exercise its dominant position to direct the corporation to use its income or retained earnings to reimburse the majority for expenses incurred in pursuing litigation with the minority over the

interpretation of a unanimous shareholders agreement. [ 32 ] Whether the reasonable expectation held by Dr. Lizotte is framed broadly or narrowly, there can be no doubt the expectation was breached. Thus, we must next decide whether the conduct of the majority of shareholders/directors was either: (1) oppressive: (2) unfairly prejudicial; or (3) unfairly disregarded the interests of the minority, Dr. Lizotte. [ 33 ] Is this a true “oppression” case? In other words, did the impugned conduct of the majority amount to an abuse of power in the sense it marks a visible deviation from standards of fair dealing?

Alternatively stated, did the majority act in bad faith in the sense of having acted out of a sense of spite, vindictiveness or retribution? Most likely the application judge would have answered that question in the negative.

In his oral reasons, he commented: “these Respondents were nevertheless pursuing what they genuinely felt to be in the best interest of the corporation, Elmwood Veterinary Hospital Limited.” Accepting this statement as being true, the fact remains that evidence of bad faith or want of probity on the part of the alleged oppressor is not essential to relief being granted to a claimant seeking relief under s. 166(2) of the Business Corporations Act . [ 34 ] Accepting the proposition this is not a true case of oppression, it remains to be determined whether the minority shareholder was unfairly prejudiced or her interests were unfairly disregarded because of the breach of the reasonable expectation.

For the sake of brevity, we focus our attention on the question of whether Dr. Lizotte was “unfairly prejudiced”. The application judge appears to have made two findings that were fatal to Dr. Lizotte’s position. First, there is a statement in his oral reasons that supports the understanding that Dr. Lizotte was not prejudiced by the payment. Second, there is a clear finding that Dr. Lizotte had acted in bad faith. That finding alone would support the argument that nothing the majority did was unfair so far as Dr. Lizotte was concerned.

Without expressly stating as much, the corporation (Elmwood) takes the position that the party whose expenses were not paid (Dr. Lizotte) had acted in bad faith while the parties whose expenses were paid (respondent shareholders) had acted reasonably or in good faith. [ 35 ] As to the issue of whether Dr. Lizotte was prejudiced by the payment made to the majority, we note the application judge observed that, as Dr. Arseneault held 85% of the outstanding shares, she would have absorbed 85% of the monies that Elmwood had paid out on her behalf and that of the technicians who worked for Elmwood and, therefore, Dr.

Lizotte was only contributing a “small proportion” to the expenses of her adversaries. With great respect, at this point the application judge is

engaging in speculation. There is almost no evidence with respect to the actual financial impact which the impugned payment would have on Dr. Lizotte. From the appeal record, it would appear the Elmwood practice remunerates the veterinarians on the basis of a salary, but it is not clear whether that remuneration is tied to the amount of income generated by each veterinarian. However, Dr. Arseneault’s affidavit deposes that for a period of twenty years the majority shareholder (Dr.

Arseneault we presume) would decide annually on the amount of the dividends each shareholder would receive and the directors would sign a resolution to that effect. The record leaves the impression that dividends are the corporate way for distributing yearend bonuses. It also appears this practice stopped, in 2008, after the parties had taken their differences to litigation. In the circumstances, not only has the presumption of prejudice not been rebutted, the record supports the finding that Dr.

Lizotte was further prejudiced by the payment of legal fees and disbursements to the respondents. [ 36 ] The next stage in the analysis is to decide whether Dr. Lizotte was “unfairly” treated. The application judge effectively held that there was nothing unfair about what the majority did as it was Dr. Lizotte who had acted in bad faith. Most certainly, the application judge accepted the respondent shareholders’ argument that Dr. Lizotte had acted in bad faith. Specifically, early on in his oral remarks, the application judge stated that Dr.

Lizotte had not acted in good faith when she struck a deal to purchase Dr. Beaulieu’s shares in a manner that contravened the unanimous shareholders agreement. The application judge also noted that so too had the arbitrator characterized Dr. Lizotte’s share purchase from Dr. Beaulieu, in the same manner, before setting aside the transfer and directing that any sale of the latter’s shares be made in accordance with the agreement (offered to all shareholders and not just one).

Towards the end of his remarks, the application judge comments: “Final conclusion: The Applicant, Cindy Lizotte, has shown an attitude that is contrary to the general interest and spirit of the Unanimous Shareholders Agreement she has signed in 2003 with the Respondents.” A few sentences later, the application judge refers to the attempted purchase of shares from Dr.

Beaulieu as “a further instance of Cindy Lizotte showing she was not a good team worker and was putting her personal interest against the corporation’s interest…” [ 37 ] There are at least two fatal flaws in the application judge’s decision to characterize Dr. Lizotte as having acted in bad faith. Recall that Elmwood reimbursed the respondents for the legal fees and disbursements incurred in regard to the application brought by Dr.

Lizotte for a declaration that she was not in default under the unanimous shareholders agreement, thereby preventing the respondents from removing her as a shareholder and director of Elmwood. Dr. Lizotte was the successful party on that application and the respondents’ subsequent appeal to this Court was dismissed. There is simply no evidence of bad faith on the part of Dr. Lizotte with respect to the events surrounding that litigation. Instead, the respondents and the application judge focused on the earlier dispute which dealt with the validity of the share sale from Dr. Beaulieu to Dr. Lizotte.

Admittedly, the arbitrator found the sale to have been in violation of the unanimous shareholders agreement and both the arbitrator and application judge declared the breach as evidence of bad faith on the part of Dr. Lizotte. But even if the declaration of misconduct on her part were valid, that conduct has nothing to do with the litigation for which Elmwood had reimbursed the respondent shareholders. Furthermore, the finding of bad faith with respect to the earlier proceeding that culminated in the arbitration decision is fundamentally flawed.

This finding requires elaboration. [ 38 ] Both the application judge and arbitrator viewed the sale of Dr. Beaulieu’s shares to Dr. Lizotte as an egregious or flagrant breach of the unanimous shareholders agreement. In short, the agreement admitted of no ambiguity. It was clear that such sales were prohibited. Any offer to sell shares had to be to all shareholders and not just one. But for the fact that Drs.

Lizotte and Beaulieu sought and obtained legal advice with respect to the validity of their proposed share transfer, prior to completing their agreement, and but for the fact they were advised that the proposed sale did not breach the agreement, the allegation of bad faith advanced before the application judge might have been sustainable. The fact that Drs. Beaulieu and Lizotte agreed to the purchase and sale prior to obtaining the advice is of no moment. What is relevant is that the advice was sought prior to completing the share transfer.

In the circumstances, the plea of bad faith must fail, even if one could ignore the fact the allegation is directed at proceedings unrelated to the one for which Elmwood had reimbursed the unsuccessful shareholders. [ 39 ] To some, our finding of palpable and overriding error, with respect to the application judge’s finding of bad faith on the part of Dr. Lizotte, might be unconvincing. This is because of the arbitrator’s earlier finding that Drs. Lizotte and Beaulieu had acted in bad faith in regard to their failed attempt to effect a share transfer. There is a short rebuttal to this potential argument.

Neither the application judge nor this Court is bound by that finding as it falls within the category of “obiter”. There was only one issue before the arbitrator: whether as a matter of contractual

interpretation the share sale contravened the provisions of the unanimous shareholders agreement. [ 40 ] We pause here to acknowledge that the arbitrator seemed unimpressed by the fact the two veterinarians had obtained a legal opinion as to the validity of the share transfer, an opinion that was affirmed in a letter from the law firm and dated June 13, 2007, and addressed to the solicitors of Dr. Arseneault.

Here is what the arbitrator had to say: “The actions of both Lizotte and Beaulieu after June 6 were designed merely to cloak the deal in legitimacy under the provisions of the Agreement.” This damning comment was based, in part, on the affidavit evidence of Bird and LeBlanc who deposed that the same law firm had “verbally” advised them, at the time the unanimous shareholders agreement was signed (2003), that any sale of shares had to involve an offer to all shareholders and not just one. Certainly, the application judge in this case was not bound by the arbitrator’s obiter finding.

What the application judge had to consider was the more recent letter from the law firm whose credibility had been undermined by the arbitrator’s finding. The letter was offered in defence to the allegation of misconduct on its part and explains the circumstances surrounding the giving of the opinion regarding the validity of the share transfer: see Affidavit of Dr. Arseneault and the letter, attached as Exhibit “A”, and dated August 19, 2009. While one might question the wisdom of the legal opinion, the fact that two lay persons sought out and then

relied on it is not evidence of bad faith on their part. [ 41 ] In the respondents’ pre-hearing brief submitted to the application judge, there are allegations of bad faith on the part of Dr. Lizotte because of her persistence in ensuring that a by-law of the NBMVA, prohibiting non-veterinarians from holding shares in a professional organization, was enforced. In her affidavit, Dr. Arseneault states that prior to Dr.

Lizotte seeking the by-law’s enforcement, she had indicated that Kurt Bird and Patricia LeBlanc could keep their shares provided the two non- veterinarians refrained from voting on the issuance of new shares in Elmwood. In fact, the offer is found in a letter prepared by Dr. Lizotte’s counsel from another law firm; a letter which outlines possible terms of settlement of the underlying dispute. Once again, the allegation of bad faith cannot be sustained. The same holds true in regard to the allegations of unprofessionalism leveled at Dr. Lizotte.

Those allegations pertain to her treatment, for example, of staff and clients (pet owners). The affidavit evidence of the respondents is riddled with such accusations. These accusations do not pertain to the corporate issues identified in the Notice of Application. Rather they are matters properly dealt with under the principles of employment law. [ 42 ] In conclusion, we are of the view that the application judge erred in denying Dr. Lizotte the relief sought under s. 166(2) of the Act .

Applying an objective standard, she held the reasonable expectation that Elmwood would not pay the legal fees and disbursements incurred by the respondents in unsuccessfully defending the application for a declaration that she was not in default under the unanimous shareholders agreement. That expectation was breached and Dr. Lizotte was prejudiced and unfairly so. B. The Issuance of Shares to Kim Maillet [ 43 ] The remaining issue is whether the application judge erred in rejecting Dr. Lizotte’s contention that the purported issuance of shares to Dr.

Maillet on September 8, 2011 was invalid on one or more of three grounds. This issue is problematic for the following reason. According to the record before us, no shares have actually issued to Dr. Maillet. At the September 8 meeting of shareholders/directors, a resolution was passed authorizing the issuance of shares to that veterinarian. However, the number of shares to be issued to her was not specified. That said, we are aware the record discloses that at a directors’ meeting held on January 15, 2009, Elmwood resolved to purchase Dr. Lizotte’s shares and assign the right to purchase to Dr.

Maillet, on the basis Dr. Lizotte was in default under the unanimous shareholders agreement. Of course, this meeting led to the Notice of Application in which Dr. Lizotte was ultimately successful. This leaves us with the three grounds of invalidity tied to the September 8, 2011, resolution. [ 44 ] First, Dr. Lizotte argued that according to s. 23(1) of the Business Corporations Act only directors can issue shares. That

section provides that, subject to s. 27, the articles or bylaws of the corporation or a unanimous shareholder agreement, shares may be issued at such times and to such persons or class of persons as the directors may determine. Dr. Lizotte maintains that there is nothing in the articles or bylaws of Elmwood to take away the directors’ power to determine when shares are issued. While the record before us does not include the articles or bylaws of Elmwood, there is a short answer to this argument.

As each shareholder is a director of Elmwood the fact that the resolution was passed at a meeting of shareholders is one of form and not substance. [ 45 ] The second and third grounds of invalidity can be collapsed into one. Dr. Lizotte argues that the proposed issuance of shares to Dr. Maillet is oppressive because it will dilute her percentage interest as a minority shareholder, contrary to s. 27 of the Business Corporations Act .

Loosely stated, s. 27 states that, subject to what is provided for in the articles of incorporation, in cases where the corporation proposes to issue equity shares so as to adversely affect the “unlimited dividend rights” of equity shareholders then those shareholders have a pre-emptive right to purchase such shares in such proportions that would preserve their relative unlimited dividend rights.

Section 27 also applies to the issuance of new voting shares that would adversely affect the voting rights of such holders in the same way the issuance of new equity shares is dealt with in the section. [ 46 ] The simplest way of dispensing with this issue is to hold that as no shares have issued to Dr. Maillet any determination by this Court with respect to the validity of the resolution is premature. But there is another compelling reason for refusing to grant an order declaring the resolution invalid. Dr. Lizotte’s argument is a bald one in that it is not supported, for example, by case law involving the

interpretation of s. 27 or an equivalent provision. Moreover, we have not been told anything with respect to the issuance of shares in Elmwood. The record is silent as to equity and voting shares and what is found in the articles of incorporation. We do not know whether any shareholder has unlimited dividend rights (the record would suggest otherwise). Finally, how can one say that a shareholder will be adversely affected by the issuance of new shares when you do not even know how many shares will issue? In these circumstances, the Court has no option but to uphold the application judge’s decision to dismiss this aspect of the application. V. Disposition

[ 47 ] We allow the appeal, in part, and set aside the order of the application judge denying the appellant relief under s. 166(2) of the Act . The appellant is entitled to an order for the relief sought under that provision. We also set aside the order for costs made below. In the special circumstances of this case, and having regard to the divided success on this appeal, there will be no costs awarded on the application or this appeal. ____________________________________ M.E.L. LARLEE, J.A. _____________________________________ J.T. ROBERTSON, J.A. ______________________________________ BRADLEY V. GREEN, J.A.