2015 QCCA 1350, 2015 QCCA 1350

Unofficial English Translation Black c. Alharayeri 2015 QCCA 1350 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-024260-143 (500-11-039230-103) DATE: August 19, 2015 CORAM: THE HONOURABLE YVES-MARIE MORISSETTE, J.C.A. JACQUES DUFRESNE, J.C.A. CLAUDE C. GAGNON, J.C.A. HANS PETER BLACK and ANDRUS WILSON APPELLANTS / INCIDENTAL RESPONDENTS – Defendants v. RAMZI MAHMOUD ALHARAYERI RESPONDENT / INCIDENTAL APPELLANT – Plaintiff JUDGMENT [ 1 ] The appellants and the respondent appeal from a judgment of the Superior Court, District of Montreal (the Honourable Mr. Justice Stephen W.

Hamilton), rendered on January 28, 2014, which ordered them solidarily to pay to the respondent compensation of $648,310 with interest and the additional indemnity. The respondent cross-appeals, asking that the amount of the order be set at $1,932,698.66; [ 2 ] For the attached reasons of Morissette, J.A., with which Dufresne and Gagnon, JJ.A., agree, THE COURT : [ 3 ] DISMISSES the main appeal with costs against the appellants/incidental respondents; [ 4 ] DISMISSES the cross-appeal with costs against the respondent/incidental appellant. YVES-MARIE MORISSETTE, J.C.A. JACQUES DUFRESNE, J.C.A. CLAUDE C.

GAGNON, J.C.A. Mtre Eric Christian Lefebvre Mtre Chrystal Ashby Norton Rose Fulbright Canada For the appellants/incidental respondents Mtre Douglas Mitchell Mtre Emma Lambert Irving Mitchell Kalichman For the respondent/incidental appellant

Date of hearing: May 27, 2015 REASONS OF MORISSETTE, J.A. [ 5 ] In a proceeding under

section 241 of the

Canada Business Corporations Act [1] (“ CBCA ”), the Superior Court, District of Montreal (the Honourable Mr. Justice Stephen W. Hamilton), ordered the appellants solidarily to pay the respondent compensation of $648,310 with interest and the additional indemnity. [2] They appeal from the judgment. As for the respondent, he cross-appeals, asking that the amount of the order be set at $1,932,698.66. - I - [ 6 ] The period most relevant to the dispute is the year 2007.

The respondent (identified as “Ramzi” in the trial judgment) had been a shareholder of the impleaded party Wi2Wi Corporation (the “impleaded party” or “Wi2Wi”) since its creation in 2005. [3] He was also President and Chief Executive Officer, a position from which he resigned on June 1, 2007. The appellants Wilson and Black were shareholders of the impleaded party and had been members of its Board of Directors since July 2005 and May 2006, respectively. After the respondent resigned, Wilson became the impleaded party’s acting President and Chief Executive Officer.

In addition, the appellant Black was Chairman of the impleaded party’s Audit Committee, which consisted of two members of the Board of Directors, in this case the two appellants. [ 7 ] The circumstances that gave rise to the dispute and on which the trial judge based his ruling can be summarized here briefly. For a better understanding of the issues raised by the appeal, I shall provide various details of the circumstances in my discussion of each issue in the reasons that follow. [ 8 ] The respondent is an experienced executive in the electronics and computer hardware industry.

From 2005 to June 2007, he was the directing mind of the impleaded party, which had been created to develop and market a new product (a microchip card) based on a design by the respondent. Early in 2007, the respondent, who was seeking cash for himself personally, began talks with Mitec Telecom Inc. (“Mitec”), a telecommunications company that was interested in acquiring his shares of the impleaded party.

Negotiations began, during which Mitec made several offers from April 10 until October 14, 2007, to purchase blocks of or all of the common shares held by the respondent. [ 9 ] From mid-April until mid-October 2007, all of Mitec’s offers, with one exception , [4] failed to come to fruition, either because the parties could not agree on the terms of a firm agreement or because the impleaded party’s Board of Directors prevented such agreement.

It must be noted that, under a provision of the impleaded party’s articles, “[n]o share in the share capital of the Corporation shall be transferred nor ( sic ) assigned without the approval of the directors certified by a resolution of the Board of Directors”.

Among the other points raised against the defendants at trial, the respondent accused them of having oppressively prevented the transfer of his common shares to Mitec. [ 10 ] Moreover, apart from his common shares, the respondent also held Class A preferred shares and Class B preferred shares in the impleaded party, all of which shares were convertible into common shares on certain terms.

At trial, the respondent alleged, inter alia , that the defendants had failed to make such conversions even though, according to him, the conditions to do so had been met and he was entitled to receive common shares in exchange for his preferred shares. He also alleged that they had considerably diluted the relative weight of the common shares that he was entitled to receive by carrying out a private placement approved by the impleaded party’s Board of Directors at a meeting held on September 28, 2007. - II- [ 11 ] First, I shall reproduce the most relevant excerpts from

section 241 of the CBCA . They read as follows: 241.

(1) A complainant may apply to a court for an order under this section. 241.

(1) Tout plaignant peut demander au tribunal de rendre les ordonnances visées au présent article.

(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates (

a) any act or omission of the corporation or any of its affiliates effects a result, (

b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or (

c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of. ( 2) Le tribunal saisi d’une demande visée au paragraphe (1) peut, par ordonnance, redresser la situation provoquée par la société ou l’une des personnes morales de son groupe qui, à son avis, abuse des droits des détenteurs de valeurs mobilières, créanciers, administrateurs ou dirigeants, ou, se montre injuste à leur égard en leur portant préjudice ou en ne tenant pas compte de leurs intérêts :

a) soit en raison de son comportement;

b) soit par la façon dont elle conduit ses activités commerciales ou ses affaires internes;

c) soit par la façon dont ses administrateurs exercent ou ont exercé leurs pouvoirs.

(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing, (

a) an order restraining the conduct complained of; (

b) an order appointing a receiver or receiver-manager; (

c) an order to regulate a corporation’s affairs by amending the articles or by- laws or creating or amending a unanimous shareholder agreement; (

d) an order directing an issue or exchange of securities; (

e) an order appointing directors in place of or in addition to all or any of the directors then in office; (

f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder; (

g) an order directing a corporation, subject to subsection (6), or any other person, to pay a security holder any part of the monies that the security holder paid for securities; (

h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract; (

i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by

section 155 or an accounting in such other form as the court may determine; (

j) an order compensating an aggrieved person; (

k) an order directing rectification of the registers or other records of a corporation under

section 243; (

l) an order liquidating and dissolving the corporation; (

m) an order directing an investigation under

Part XIX to be made; and (

n) an order requiring the trial of any issue.

(3) Le tribunal peut, en donnant suite aux demandes visées au présent article, rendre les ordonnances provisoires ou définitives qu’il estime pertinentes pour, notamment :

a) empêcher le comportement contesté;

b) nommer un séquestre ou un séquestre- gérant;

c) réglementer les affaires internes de la société en modifiant les statuts ou les règlements administratifs ou en établissant ou en modifiant une convention unanime des actionnaires;

d) prescrire l’émission ou l’échange de valeurs mobilières;

e) faire des nominations au conseil d’administration, soit pour remplacer tous les administrateurs en fonctions ou certains d’entre eux, soit pour en augmenter le nombre;

f) enjoindre à la société, sous réserve du paragraphe (6), ou à toute autre personne, d’acheter des valeurs mobilières d’un détenteur;

g) enjoindre à la société, sous réserve du paragraphe (6), ou à toute autre personne, de rembourser aux détenteurs une

partie des fonds qu’ils ont versés pour leurs valeurs mobilières;

h) modifier les clauses d’une opération ou d’un contrat auxquels la société est

partie ou de les résilier, avec indemnisation de la société ou des autres parties;

i) enjoindre à la société de lui fournir, ainsi qu’à tout intéressé, dans le délai prescrit, ses états financiers en la forme exigée à l’article 155, ou de rendre compte en telle autre forme qu’il peut fixer;

j) indemniser les personnes qui ont subi un préjudice;

k) prescrire la rectification des registres ou autres livres de la société, conformément à l’article 243;

l) prononcer la liquidation et la dissolution de la société;

m) prescrire la tenue d’une enquête conformément à la

partie XIX;

n) soumettre en justice toute question litigieuse. [ 12 ] Commenting on this provision of the Act in BCE Inc. v. 1976 Debentureholders [5] (“ BCE ”), the Supreme Court of Canada highlighted several general considerations that I believe should be reiterated here. Although I will not reproduce the citations in the excerpt, I shall cite side by side the French and English versions of the judgment to dispel any ambiguity that could result from the use of the words “fair” and “ équité ” in the passage in question: [6]

[58] First, oppression is an equitable remedy. It seeks to ensure fairness – what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair…. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities…. [58] Premièrement, la demande de redressement pour abus est un recours en equity. Elle vise à rétablir la justice – ce qui est « juste et équitable ». Elle confère au tribunal un vaste pouvoir, en equity, d’imposer le respect non seulement du droit, mais de l’équité….

Par conséquent, les tribunaux saisis d’une demande de redressement pour abus doivent tenir compte de la réalité commerciale, et pas seulement de considérations strictement juridiques…. [59] Second, like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another. [59] Deuxièmement, comme beau​coup de recours en equity, le sort d’une demande de redressement pour abus dépend des faits en cause.

On détermine ce qui est juste et équitable selon les [page 591] attentes raison​nables des parties intéressées en tenant compte du contexte et des rapports en jeu. Un comportement abusif dans une situation donnée ne sera pas nécessairement abusif dans une situation différente. [ 13 ] Another leading case on the scope of this provision is worthy of note, namely, the judgment of the Court of Appeal of Ontario in Budd v.

Gentra . [7] Doherty, J.A., on behalf of a unanimous Court, wrote: [47] In deciding whether an oppression action claiming a monetary order reveals a reasonable cause of action against directors or officers personally, the court must decide: Are there acts pleaded against specific directors or officers which, taken in the context of the entirety of the pleadings, could provide the basis for finding that the corporation acted oppressively within the meaning of s. 241 of the C.B.C.A. ?

Is there a reasonable basis in the pleadings on which a court could decide that the oppression alleged could be properly rectified by a monetary order against a director or officer personally? [48] The first requirement seems self-evident. No person should have to defend a lawsuit absent allegations which identify the conduct of that person said to render him or her liable to the plaintiff. This statement of claim utterly fails to deal with the director defendants or management defendants on an individual basis.

Rather, they are treated as a single entity, each indistinguishable from the other, and all serving as the cat’s paw of the controlling shareholders. Nowhere does the appellant allege that any named director or officer did or failed to do any specified act or participated in any identified way in any of the decisions or manoeuvres which the appellant relies on in support of his claim. The claim does no more than identify the individuals as directors or officers of Royal Trustco at some unspecified time.

There is no attempt to connect any individual director or officer to the alleged corporate oppression. … [52] …To maintain an action for a monetary order against a director or officer personally, a plaintiff must plead facts which would justify that kind of order. The plaintiff must allege a basis upon which it would be “fit” to order rectification of the oppression by requiring the directors or officers to reach into their own pockets to compensate aggrieved persons. The case law provides examples of various situations in which personal orders are appropriate.

These include cases in which it is alleged that the directors or officers personally benefitted from the oppressive conduct, or furthered their control over the company through the oppressive conduct. Oppression applications involving closely held corporations where a director or officer has virtually total control over the corporation provide another example of a situation in which a director or officer may be held personally liable to rectify corporate oppression.

The same passages appear at paragraph [166] of the judgment a quo , immediately before certain conclusions of fact that the appellants challenge in their appeal. [ 14 ] Budd v. Gentra set out several useful guideposts for analyzing the oppression remedy under

section 241 of the CBCA . This is particularly true in the case of a hypothetical personal order against the directors of a corporation. Relying on this judgment, which reviewed the case law then in existence, one author provides the following description of situations that lend themselves to this hypothesis : [8] 14.1.1.1. Where directors obtain a personal benefit financial benefit from their conduct. 14.1.1.2. Where directors have increased their control of the corporation by the oppressive conduct. 14.1.1.3. Where directors have breached a personal duty they as directors.

14.1.1.4. Where directors have misused a corporate power. 14.1.1.5. Where a remedy against the corporation would prejudice other security holders. [ 15 ] I would like to cite one last principle. Gascon, J.A., as he then was, recently wrote in a unanimous decision that an appellate court hearing a dispute based on

section 241 of the CBCA should interfere sparingly and show deference, given the discretionary nature of the power conferred by this provision: [9] [36] As a result, appellate courts owe a high degree of deference to judgments rendered on oppression remedies. They should interfere sparingly with the exercise of that discretion, that is, merely in circumstances where it is established that it was exercised in an abusive, unreasonable or non judicial manner. [10] The Court should avoid substituting its opinion for that of the trial judge.

It should intervene only when faced with errors of law or decisions rendered on the basis of erroneous principles or irrelevant considerations, or where the judgment is so clearly wrong as to amount to an injustice. On questions of fact, the standard of review of palpable and overriding error must be strictly applied. - III - [ 16 ] At this stage, it appears appropriate to summarize the debate at trial. [ 17 ] The respondent raised seven distinct arguments in Superior Court, which he had set out in the first version of his motion to institute proceedings. He worded them as follows: 15.

The Defendant Directors have violated the Plaintiff’s reasonable expectation to be treated fairly and the cumulative effects of their conduct has been oppressive to the Plaintiff for the following reasons: (

a) The Directors refusal to finalize the conversion of the Plaintiff’s Series A shares; (

b) The Directors refusal to finalise [sic] the conversion of the Plaintiff’s Series B shares; (

c) The Directors unreasonable refusal to allow the Plaintiff’s sale of 300,000 common shares in 2007; (

d) The Directors frustration of Mitec Telecom Inc. (“ Mitec ”)’s offers to purchase the Corporation’s shares; (

e) The Directors efforts to dilute the Plaintiff’s shares in the Corporation; (

f) The Directors refusal to call shareholder meetings; and (

g) The Directors refusal to disclose Wi2Wi’s financial information. These arguments reappear in identical form in each of the subsequent amended versions of the motion to institute proceedings. [ 18 ] Although the judgment a quo allowed the respondent’s remedy, it disregarded most of the arguments referred to directly above. It ruled in the respondent’s favour on the first and second arguments; in relation to the fifth, which it disregarded, it briefly reviewed the rights that the respondent enjoyed as a result of his Class A and Class B preferred shares.

On this specific point, the judge faulted the appellants for not having taken any measures to preserve the rights in question when, in September 2007, the impleaded party’s Board of Directors (including, of course, the appellants) resolved to refinance it by means of a private placement in which only the impleaded party’s shareholders were invited to take part. The details of the analysis are as follows. [ 19 ] First, the judge reiterated the general principles that should guide the court when it applies

section 241 of the CBCA . In particular, he referred to the two-pronged inquiry that the Supreme Court set out in these terms in BCE : [11] 56 In our view, the best approach to the

interpretation of s. 241(2) is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in s. 241(2) of the CBCA .

Having adopted this formula, the judge proceeded to analyze the circumstances of the matter from each of these standpoints. [ 20 ] In accordance with the articles of the impleaded party in effect at the relevant time, the respondent’s Class A preferred shares were governed by the terms and conditions set forth in

article 5.1: 5. CONVERSION RIGHTS 5.1 The holders of the Class A Convertible Preferred Shares may, at their option, by written notice (the “ Class A Shareholder Notice ”) as hereinafter provided, convert all, but not less than all, of their Class A Convertible Preferred Shares into Common Shares of the Corporation upon the following terms and conditions: (

a) the Class A Convertible Preferred Shares will be convertible into a like number of Common Shares only in the event the Corporation achieves gross margins of $3,500,000 for its 2006 financial year, the whole as determined by the auditors of the Corporation whose determination shall be binding upon the Corporation and the holders of the Class A Convertible Preferred Shares; As for his Class B preferred shares, they were subject to the following rules: 5.2 The holders of the Class B Convertible Preferred Shares may, at their option, by written notice (the “ Class B Shareholder Notice ”) as hereinafter provided, convert all, but not less than all, of their Class B Convertible Preferred Shares into Common Shares of the Corporation upon the following terms and conditions: (

a) Class B Convertible Preferred Shares will be convertible into a like number of Common Shares only in the event the Corporation achieves gross margins of $11,000,000 for its 2007 financial year, the whole as determined by the auditors of the Corporation whose determination shall be binding upon the Corporation and the holders of the Class B Convertible Preferred Shares; … (

g) in the event that the Corporation’s sales and/or gross margin targets set forth in paragraph 5.2(

a) above are not met, then the number of Common Shares into which the Class B Convertible Preferred Shares may be converted shall be reduced on a pro rata basis, the number of Common Shares issuable to be determined by the auditor of the Corporation and to be provided for in the Corporation’s Class B Notice which shall be binding on the holders of the Class B Convertible Preferred Shares. [ 21 ] Concerning the Class A shares, the judge concluded that the respondent could legitimately expect that they be replaced by common shares in accordance with the formula provided because the objective set out in clause 5.1 (

a) had been achieved for the fiscal year ended September 30, 2006. The appellant Wilson testified that the board members had doubts about the validity of the 2006 financial statements and that the board had never approved them. But, as the judge pointed out, the same note that specified in the 2006 financial statements that the Class A shares were henceforth convertible into one million common shares also appeared in the financial statements for 2007, 2008 and 2009.

And the figures in the 2006 financial statements also appeared for comparison purposes in the 2007 financial statements, which were approved by the Board of Directors and submitted “as is” to the shareholders. [ 22 ] The judge also rejected the argument that in 2007 the impleaded party had reasons to expect that it would claim compensation from the respondent: this potential claim could not justify the alleged compensation when the respondent insisted in 2007 that his preferred shares be converted into common shares.

[ 23 ] As for the Class B shares, the judge was aware that the financial objective set by clause 5.2 (

a) was not reached during the reference period; according to the 2007 financial statements, available February 25, 2008, the real gross earnings were $1,637,000 and therefore far below the stipulated target of $11 million. But clause 5.2 (

g) also provides that, in such an event, “the number of Common Shares into which the Class B Convertible Preferred Shares may be converted shall be reduced on a pro rata basis”.

It follows that, for the 1.5 million class B shares held by the respondent, conversion on a pro rata basis entitled him to 223,227 common shares. [ 24 ] The judge’s conclusions after applying the test referred to at paragraph [19], above, are found in the following passages of his reasons: [44] Ramzi’s reasonable expectation would be that his A Shares would be converted into common shares if [the test of clause 5.1 (a)] is met. … [58] In my view, Ramzi had a second reasonable expectation in relation to the A Shares, which is that the Board would consider his rights as holder of the A Shares in any transaction involving the shares of Wi2Wi and ensure that any such transaction did not unfairly prejudice him as the holder of the A Shares. … [63] As with respect to the A Shares, Ramzi’s reasonable expectations would be that (1) the B Shares would be converted into common shares if the condition in the articles is met; and (2) the Board would ensure that, prior to their conversion, the B Shares would not be prejudiced by any corporate transaction.

The judge concluded that these reasonable expectations were breached in a manner that unfairly prejudiced the respondent. [ 25 ] As I have already stated, the judge then rejected the respondent’s arguments concerning what he considered the directors’ oppressive refusal to approve the various offers made by Mitec to purchase his shares of the impleaded party.

These arguments are no longer in dispute and they need not be considered further. [ 26 ] Then, continuing his analysis, the judge rejected the respondent’s fifth argument as formulated (“The Directors efforts to dilute the Plaintiff’s shares in the Corporation”). Given that this aspect of the file is related to the fate of the Class A and Class B shares, it deserves clarification.

The judge emphasized that the impleaded party’s financial position in 2007 showed why, on September 28 of that year, the Board of Directors used a radical measure to provide a rapid and substantial injection of capital into the business. The means chosen was a private placement: any holder of common shares was given the opportunity to make an investment in consideration for a note that would involve conversion of each $1,000 so advanced into 50,000 common shares of the impleaded party (in other words, the shares so acquired would be purchased for $0.02 each).

As the judge explained, this strategy made it possible to resolve the impleaded party’s serious liquidity problem [12] because it rapidly provided $1,922,000 of new money, but it also involved the issuance of 96,100,000 more common shares. The respondent, who was short of funds at the time and could not take

part in the private placement, saw his share of the impleaded party’s common share capital fall from 25.8% to 1.5%, hence the dilution of his share capital referred to in his application for oppression remedy. At paragraphs [115] to [141] of his reasons, the judge explained why, in his view, the private placement was a business decision that was justified in the circumstances.

This was a finding of fact that the respondent wisely did not question in his cross-appeal. [ 27 ] Lastly, the judge used just a few paragraphs to rule on the respondent’s final two arguments concerning the refusal to call a shareholders’ meeting in 2007 and the failure to approve the audited financial statements for 2006.

Although the evidence shows some irregularities of this type, the judge believed that the situations were in no way oppressive and that they alone did not justify the respondent’s bringing an action. [ 28 ] As can be seen, the judgment is finely shaded, especially the distinct handling of the respondent’s first, second, and fifth arguments. - IV - [ 29 ] The main appeal raises four questions. Before setting them out, I believe it advisable to cite a short excerpt from the appellants’ factum to place the discussion properly in context: 3.

In his ruling, the first instance judge found that the treatment of the Plaintiff’s preferential shares amounted to oppression. As such, he granted in part the action against the Appellants … and ordered them solidarily to pay to Plaintiff a sum of $648,310 with interest and the additional indemnity from the date of service.… 5.

Although they do not agree with the characterization of the events that transpired as oppression, the Appellants do not specifically challenge the first judge’s findings in this regard, but rather that nothing warranted their personal condemnation to a monetary award. [ 30 ] The first two questions raised by the appellants concern their personal liability: (

i) Did the trial judge err by concluding at paragraph [167] of his reasons that the appellants’ “lead roles in the discussions at the Board level” justified that they be held personally liable as directors of the impleaded party? (ii) Did the trial judge violate the audi alteram partem rule in concluding that the appellants had obtained a personal benefit from the failure to convert the respondent’s preferred shares by relying on facts that had not been alleged and arguments that had not been raised? [ 31 ] The two other questions concern the assessment of the prejudice: (iii) Did the trial judge err by not taking into account the

dilution caused by the private placement when he assessed the existence of a causal connection between the failure to convert the respondent’s preferred shares into common shares on the one hand and the monetary loss alleged by the respondent on the other?

And (iv) Did the trial judge err in his determination of the value of the common shares that would have been substituted for the respondent’s preferred shares, and did he err by failing to estimate the residuary value of the preferred shares? [ 32 ] In this part of the appeal, the appellants argue that the file as heard at first instance did not demonstrate that they had personally committed oppressive or wrongful acts toward the respondent.

They argue that the allegations in the action were general and covered only the impleaded party’s Board of Directors or the defendants collectively, or in other words the two appellants and the defendants Roy and Tahmassebi, who were both exonerated at trial. Thus, was the trial judge mistaken when he attributed the actions referred to at paragraph [167] of his reasons to the appellants? The paragraph reads as follows: [167] In my view, each of the Defendants was involved in the oppressive conduct, although it is Black and Wilson who play the lead roles in the discussions at the Board level.

Moreover, although all of the Defendants benefitted from the changes to the stock option plan, it is the Defendants Black and Wilson who participated in the Private Placement and benefitted from the dilution of Ramzi’s A and B Shares. Wilson also benefitted from the conversion of his C Shares into the full number of common shares notwithstanding issues as to whether the test had been met.

In the circumstances, I consider that it is “fit” to order the Defendants Black and Wilson personally to pay the damages to Ramzi. [ 33 ] Two central ideas emerge from this passage: first, the appellants were the main instigators of the decisions that prejudiced the respondent, and second, they both obtained a personal benefit from the private placement and the dilution of the respondent’s shares. (

i) The role played by the appellants [ 34 ] Concerning the first idea, namely the lead roles played by the appellants, they challenge the basis of it. In their view, the mere fact that, according to the minutes of the Board of Directors’ meetings, they were allegedly more actively involved than the other board members in discussions likely to affect the respondent’s interests did not justify their being held personally liable for the board’s unanimous decisions. They argue that to endorse such reasoning would hinder the frank and open discussions that should be encouraged within a board of directors.

On the contrary, the raison d’être of such deliberations is to “salute rather than shun directors willing to forcefully voice their concerns with regard to the management of the corporation”. [ 35 ] In response to this argument, the respondent cited Wood Estate v . Arius3D Corp. , [13] a judgment of the Ontario Superior Court of Justice in which the plaintiff claimed compensation under

section 241 of the CBCA from a company, four of its board members, and one of its officers (its chief financial officer). After analyzing the circumstances of the matter, D. M. Brown, J., allowed the action and individualized the order against the officer and two of the directors in their capacity as “key decision-makers” [14] who caused the oppression suffered by the plaintiff. [ 36 ] In my view, to the extent that an issue of principle can be identified in this case, the respondent’s argument must be upheld. [ 37 ] First, the possibility of a personal order against one or more directors seems well recognized.

The author Markus Koehnen wrote on this matter: [15] Directors and officers can be held personally liable for corporate oppression. Their liability in this regard does not depend on the breach of a specific statutory duty or common law tort but is substantially broader. Personal liability for directors and officers does not implicate corporate veil principles but involves the proper

interpretation of the oppression remedy. Although the oppression remedy creates a broader personal basis of personal liability for directors than either the common law or specific provisions of statutory liability, not all oppression claims justify orders against directors. The plaintiff must make specific allegations against directors to found a claim against them; otherwise directors’ liability would be engaged each time the oppression remedy was invoked.

JurisClasseur Québec reflects these observations. [16] The authors of the fascicle entitled “ Redressement en cas d’abus ou d’iniquité ”, commented: [17] [ translation ] An oppression remedy may directly concern the directors of a corporation if they were involved in the inequitable treatment of the plaintiff. … Generally speaking, it is necessary to prove that they committed oppressive or unfair acts justifying a monetary penalty to compensate for the loss.

According to the case law, such payment should be ordered when the board members have derived a personal benefit from the alleged act or when they have increased their control over the business. [ 38 ] Moreover, the appellants’ argument is accepted, it would be more difficult if not impossible to individualize the directors’ liability so as to distinguish those whose actions have been oppressive (within the meaning of subsection 241(2) of the CBCA ) from those whose actions have not.

When the directors are not all equally compromised by their actions, it would risk creating a form of immunity benefiting directors at fault. Such an outcome appears to be incompatible with the broad discretionary power conferred on the Court under the CBCA (“to enforce not just what is legal but what is fair”, as the Supreme Court wrote) as well as with the remedial purpose of the remedy governed by

section 241 of the CBCA . [ 39 ] Once these details are spelled out, this aspect of the appeal in a sense dissolves into a series of questions involving the weighing of evidence; to resolve them, it was open to the trial judge to consider the Corporation’s documents filed into evidence –minutes of meetings and the register of the impleaded party’s securities, for example –to determine to which of the directors the oppressive or inequitable conduct could lawfully be imputed. [ 40 ] Several salient facts from the file provide ample support for the judge’s conclusion.

They are as follows. [ 41 ] In May 2007, the appellant Black was Chairman of the impleaded party’s Audit Committee, whose only members were the appellant Wilson and himself. This was when the 2006 financial statements were prepared, from which it could only be concluded that,

in accordance with the corporation’s articles, the respondent’s Class A preferred shares were henceforth convertible into common shares. [ 42 ] From June 2007 to February 2008, the appellant Wilson held the position of Acting Chairman and Chief Executive Officer of the impleaded party. [ 43 ] The agenda of the meeting of the Board of Directors held on May 16, 2007, contains a passage on the “Approval of the conversion of Class A shares to common shares”.

It appears from the minutes of this meeting that: [The respondent] moves to approve the conversion of the Class A to the directors. [The appellant Black] says they have seen draft financials, but not seen the final. I ( sic ) will send the hard copies of the financials to the board. Board approval of the conversion of Class A shares will be considered after review of final financials. [ 44 ] The following passages are from the minutes of the meeting of the Board of Directors held on the following June 15: Dr. Black then commented that he continued to have serious issues as to whether Mr.

Al-Harayeri should receive common shares of the Corporation on conversion of the Class A shares given his recent conduct and the directors discussed this at length. And later: Mr. Wilson suggested that the board continue to review all facts surrounding Mr.

Al-Harayeri’s conduct in the current circumstances and decided whether they should proceed with the conversion of the Class A shares into common shares. [ 45 ] According to the same source, at the meeting of the Board of Directors of July 17, the advisability of converting the respondent’s preferred shares into common shares was again the subject of discussion by one of the appellants. The minutes state: Dr. Black indicated that Mr.

Al-Harayeri had not been forthcoming with the other directors and there was doubt whether the Corporation should, as a matter of course, agree to a conversion of the Class A Shares held by Mr.

Al-Harayeri and the directors then discussed this at further length. [ 46 ] As the trial judge affirmed, the financial statements for 2006 were never adopted by the Board of Directors, but the reference in them to the possibility of converting Class A shares was repeated in the financial statements of subsequent years and the figures in the 2006 financial statements were used in the 2007 financial statements. [ 47 ] We now come to the impact of the private placement on the respondent’s holdings (the advisability of the financing transaction for the impleaded party is not challenged here, as attention should instead be focussed on the role played by the appellants and the personal benefit they obtained from the initiative).

The following elements should be pointed out: ― As of July 24, 2007, the appellant Black was given the task of proposing for the impleaded party a means of financing other than a merger with Mitec. ― On September 13, at a meeting of the Board of Directors, the appellant Wilson took a position on the impleaded party’s financial situation. The minutes read as follows: Mr. Wilson then describes that the Corporation has been slow to pay certain suppliers, given the cash crunch and the Corporation may be accordingly sustaining such damage to its reputation. Mr.

Wilson then indicates that the Corporation would need some type of emergency financing before the proposed transaction between Mitec and Mr. Al-Harayeri is completed and the directors then discussed this at length. It is thereafter agreed that financing should be pursued aggressively by the Corporation and the directors agree to follow up on different contacts with a view to implementing this on an accelerated timeframe. ― The minutes of the meeting of September 28 contain the following, inter alia : Mr. Steinberg [Chairman of the impleaded party] then advised the directors that discussions had been held with Mr.

Wilson and Dr. Black, and that they would seek financing of the Corporation immediately so as to ensure that the Corporation could pursue its operations, provided however that the board agreed on financing terms and next steps. Mr. Steinberg then referred to a draft term sheet prepared by Mr. Wilson but indicated that it was up to the board to discuss it before taking a decision. Mr. Steinberg then indicated that he felt it was critical at this juncture to hear from all directors on the current situation. Dr. Rob Roy indicated that he agreed with the views expressed by Dr. Black and Mr.

Steinberg; he added that he was happy that Dr. Black, Mr. Steinberg and Mr. Wilson were taking necessary steps to ensure funding of the Corporation in the current context and he felt that this was overall the right approach to take. David Tahmassebi indicated that he concurred with the overview provided by Mr. Steinberg and Dr. Black; he indicated though that he had some questions as to how the other shareholders of the Corporation would participate in the financing.

The directors then discussed the manner in which other shareholders would participate, the timing of the offering for the purposes of such participation, dilution issues and the overall effect of the proposed financing. ― Lastly, the appellant Wilson stated during his testimony: [T]he Ramzi issue had disappeared because he was no longer a shareholder in a position to block and be a big influence on all of the stuff that the company was doing, and the premise that we should be accepting, a creeping takeover, because the justification was good for shareholders because it got rid of the Ramzi issue, and the Ramzi issue had just taken care of itself, didn’t hold water anymore.

[ 48 ] The trial judge therefore had all the evidence required to conclude that the appellants had indeed played the role that he attributed to them at paragraph [167] of his reasons; from this standpoint, his judgment contains no errors justifying its reversal. (ii) The audi alteram partem rule and the benefit obtained by the appellants [ 49 ] The first two situations identified by the author Koehnen, referred to above at paragraph [14], are clearly what the judge had in mind when he drafted the second and third sentences of paragraph [167] of his reasons, quoted above at paragraph [32].

The appellants challenged this determination on two distinct grounds.

It apparently took them by surprise, in that the respondent had never alleged that they had benefited from the outcome of the decision of September 28, 2007, and that it was “completely unsupported by the evidence adduced at trial”. [ 50 ] On the first point, the appellants argued that the allegations in the application were of a general nature and would have covered only the impleaded party’s Board of Directors or the defendants collectively, namely the two appellants and the defendants Roy and Tahmassebi, who were both exonerated at trial. [ 51 ] A consideration of this ground requires first referring to the relevant allegations of the motion to institute proceedings.

The motion, filed in May 2010 and then amended four times, alleged the following in its last version of November 2013: … B.

The Defendants’ Oppressive Conduct 13.1 From December 2005 to his resignation in June 2007, Plaintiff was the heart and soul of Wi2Wi as well as a significant minority shareholder; 13.2 Developing Wi2Wi into a great company was his project and ambition: he devoted night and day to the Corporation; 13.3 Having created and successfully headed the OEM Division of Actiontec since 1997, he understood Wi2Wi’s clients’ needs as well as the direction in which the market was heading with regards to wireless technology; 13.4 Wi2Wi could not grow without the Plaintiff’s experience, know-how and expertise…; 13.5 The success of Wi2Wi thus relied entirely on Plaintiff’s shoulders; 13.6 In fact, Plaintiff successfully managed Wi2Wi and was able to grow its revenue to over $12,000,000 CAD in its first year of operation as well as exceed his Series A shares’ gross margin target set forth in the Share Purchase Agreement, the whole as more fully described herein below in

Section C of the Plaintiff’s Second Re-Amended Motion to institute proceedings; 13.7 In doing so, Plaintiff was able to negotiate, in early 2007, the merger of Wi2Wi with Mitec Telecom Inc. (“Mitec”) for a very large premium and at very advantageous conditions; 13.8 Indeed, Mitec submitted a Letter of Intent to Wi2Wi’s Board, offering approximately $60 million USD for the acquisition of all of Wi2Wi’s outstanding common and preferred shares, bringing the Investors’ initial investment from $3 million USD to just under $30 million USD in less than two (2) years, the whole as more fully described herein below in

Section F of the Plaintiff’s Second Re-Amended Motion to institute proceedings;

13.9 Both companies complemented each other’s business and the merger was to create synergies as well as permit Wi2Wi to grow better and faster; 13.10 Moreover, by exceeding the financial objectives which were set out in the Share Purchase Agreement, Plaintiff became entitles to convert his 1,000,000 Series A shares into 1,000,000 common shares bringing his stake in Wi2Wi to 3,000,000 common shares out of 6.7 million outstanding shares, the whole as appears from Exhibit P-4; 13.11 However, instead of working in the best interest of Wi2Wi and its shareholders, the Defendants: (

a) refused to finalize the conversion of the Plaintiff’s Series A shares; (

b) tried to minimize the Plaintiff’s return on the merger by requiring Mitec to disregard Plaintiff’s Series A and B shares from the purchase price; (

c) Frustrated the merger of Wi2Wi with Mitec, thereby preventing its investors to ( sic ) cash in on their initial investment; the whole as more fully described herein below in Sections C and F of the Plaintiff’s Second Re-Amended Motion to institute proceedings; 13.12 As a result, Mitec withdrew its offer but since it was still interested in merging with Wi2Wi, it extended a new offer to the Board and submitted a second Letter of Intent, the whole as more fully described herein below in

Section F of the Plaintiff’s Second Re-Amended Motion to institute proceedings; 13.13 The Defendant again frustrated this second offer in their pursuit to minimize the Plaintiff’s return and by demanding that Mitec first negotiate a separate deal with the Plaintiff and by trying to force the Plaintiff to accept a lower price for his shares and to surrender his Series A and B shares; 13.14 As a result, this second offer also fell through, the whole as more fully described herein below in

Section F of the Plaintiff’s Second Re-Amended Motion to institute proceedings; 13.15 Instead of working in the best interest of Wi2Wi and its shareholders, the Defendants continued their oppressive conduct and acted in their own personal interest: (

a) first, they put a stop to all discussions with Mitec; (

b) then, they needlessly diluted Wi2Wi’s equity, refused for a long time to call a shareholder meeting to disclose Wi2Wi’s financial statements to the Plaintiff, the whole as more fully described herein below in Sections G, H and I of the Plaintiff’s Second Re-Amended Motion to institute proceedings;

13.16 By diluting Wi2Wi’s equity, the Defendants ensured their position on the Board by barring any shareholder, and more particularly the Plaintiff, from ever being able to replace them on the said Board and to eventually conclude a transaction with Mitec for the benefit of both Wi2Wi and its shareholders, the whole as more fully described herein below in Sections G and H of the Plaintiff’s Second Re-Amended Motion to institute proceedings; 13.17 Indeed, when finally a shareholder meeting was called in March 2008, Plaintiff’s stake in Wi2Wi had been diluted to the point where he could no longer fairly exercise his rights as a shareholder since he now barely owned 1% of the shares of Wi2Wi, the whole as more fully described herein below in Sections G and H of the Plaintiff’s Second Re-Amended Motion to institute proceedings; 14.

Given the above, the Defendants have acted in a manner that is oppressive, prejudicial, and that unfairly disregards the interests of the Plaintiff as a minority shareholder, contrary to the provisions of s. 241 of the

Canada Business Corporations Act ; 15. The Defendants have violated the Plaintiff’s reasonable expectation to be treated fairly and the cumulative effects of their conduct has been oppressive to the Plaintiff for the following reasons: (

a) The Directors refusal to finalize the conversion of the Plaintiff’s Series A shares; (

b) The Directors refusal to finalize the conversion of the Plaintiff’s Series B shares; (

c) The Directors unreasonable refusal to allow the Plaintiff’s sale of 300,000 common shares in 2007; (

d) The Directors frustration of Mitec Telecom Inc. (“ Mitec ”)’s offers to purchase the Corporation’s shares; (

e) The Directors efforts to dilute the Plaintiff’s shares in the Corporation; (

f) The Directors refusal to call shareholder meetings; and (

g) The Directors refusal to disclose Wi2Wi’s financial information. C. The Defendants’ failure to convert the Plaintiff’s shares Series A shares 16. The Plaintiff was entitled to convert his 1 million Series A shares into an equivalent number of common shares upon Wi2Wi achievement of certain gross margins in fiscal year 2006, the whole as appears from Exhibit P-4;

17. Under the Plaintiff’s successful management, these margins were achieved by Wi2Wi in 2006, the whole as appears from the unsigned Consolidated 2006 Financial statements of… Wi2Wi, as well as the signed Consolidated 2006 Financial Statements of Wi2Wi, communicated herewith respectively as Exhibit P-5 and Exhibit P-5A ; 18. In early 2007, the Board approved the Plaintiff’s conversion option, thereby entitling him to an additional 1 million common chares, for a total of 3 million out of 6.7 million issued shares, making the Plaintiff an over 40% shareholder of the Corporation; 19.

These additional common shares, although approved by the Board, were never provided to the Plaintiff, despite the fact that the Board had signed the Consolidated 2006 Financial Statements of the Corporation (Exhibit P-5A) since April 2007 which recognized Plaintiff’s right to convert his 1 million Series A shares into a like number of common shares and Plaintiff’s repeated requests to obtain them, the whole as appears from note 14(

b) of the signed consolidated 2006 Financial Statements of the Corporation (Exhibit P-5A) and the Plaintiff’s written requests communicated herewith as Exhibit P-6 ; 19.1 The right to the conversion of the Plaintiff’s Series A shares into common shares was reiterated in the Board’s 2010 Notice of Annual and Special Meeting of Shareholders under item “Share Capitalization”, as well as in Note 10 of the Consolidated Financial Statements for the years ended September 30, 2008 and 2009, the whole as appears from the 2010 Notice of Annual and Special Meeting of Shareholders of Wi2Wi communicated herewith as Exhibit P-22 and the Consolidated Financial Statements for the years ended September 30, 2008 and 2009 of Wi2Wi communicated herewith as Exhibit P-23 ; 19.2 This conduct by the Defendants is oppressive towards the Plaintiff; D.

The Defendants’ failure to convert the Plaintiff’s shares Series B shares 20. The Plaintiff was entitled to convert part of his 1.5 million Series B shares on a prorated basis as per the Share Purchase Agreement and Wi2Wi’s By-Laws as amended in December 2005 and subject to the Corporation’s audited 2007 financial statements, the whole as appears from Exhibits P-3 and P-4; 21.

The Defendants unjustifiably refused to provide audited financial statements for the 2007 year or convert the Plaintiff’s Series B shares as per the Share Purchase Agreement, thereby denying the Plaintiff an important and substantial percentage of the common shares of the Corporation;

21.1 As of June 1 st , 2007, date of Plaintiff’s resignation as CEO of Wi2Wi, Plaintiff should have been allowed to convert his 1.5 million Series B shares into 470,056.47 common shares: 1.5 million Series B shares X (3,447,080.77 ÷ 11,000,000) = 470,056.47 shares The whole as appears from the Corporation’s Balance Sheet and Profit & Loss Statement dated August 14, 2007, communicated en liasse herewith as Exhibit P-27 ; 21.2 This conduct by the Defendants is oppressive towards the Plaintiff; … G. The Defendants’ efforts to dilute the Plaintiff’s shares in the Corporation 42.

Without calling a shareholder meeting, on September 28, 2007, Wi2Wi issued a share offering to all shareholders, purporting to give them the opportunity to invest $1.00 CAD for every 2 common shares owned, the whole as appears from…Wi2Wi’s share offering communicated herewith as Exhibit P-18 ; 43. The Directors knew the Plaintiff had insufficient capital to participate in the share offering; 44. The share offering was issued deliberately by the Directors to dilute the Plaintiff’s shareholdings; 45.

The board readjusted the shares of the Directors and employees who did not participate monetarily in this share offering but elected not to adjust the Plaintiff’s shares, and refused to address the conversion of his Series A and B shares; 46. This conduct by the Defendants is egregiously oppressive towards the Plaintiff; … [ 52 ] It can be seen that paragraph 13.15 of the motion refers explicitly to the appellants’ personal interest: “…the Defendants continued their oppressive conduct and acted in their own personal interest”.

This allegation appeared in the first amended version of the motion in November 2010 and in all subsequent versions. Moreover, in their defence of January 25, 2011, the appellants themselves raised this matter at paragraph [122]: ”[t]he business decisions at issue were

i) made by the Defendants in good faith, ii) not motivated by self-interest…”. In the joint declaration of the full file, dated December 10, 2012, the same terms are found under the heading “ position of the parties … defendants / respondents ”, as well as in the amended defence of November 13, 2013.

The defence of January 25, 2011, elicited a response from the respondent, dated April 25, 2012, in which he alleged inter alia : “[t]he Defendants’ acts and considerations were never in the interest of Wi2Wi and its shareholders, there (sic) main preoccupation being there (sic) self interest in Wi2Wi…”, and “[t]he Defendants acted to the detriment of Wi2Wi and its shareholder in focusing mainly on their personal financial gains”. In such conditions, it may be difficult to argue that the matter of the appellants’ personal interest (or the advantage they derived) came as a surprise to them.

The parties had indeed disputed this matter, which is not surprising in any way because, as we have seen, the law seems clear on this point: the personal advantage of directors accused of oppression under

section 241 of the CBCA is a recognized component of the analysis. [18] [ 53 ] The appellants, however, cited Budd v. Gentra [19] and made the following criticism: “[t]he Plaintiff’s own Motion to institute proceedings barely contains any allegation of specific acts by Black, Roy, Tahmassebi, or Wilson”. I can easily see that this judgment states an important principle – indeed, this is the reasonI cited an excerpt from it at the beginning of these reasons. But the application of this principle depends on the circumstances of each case. It is immediately apparent that the facts of Budd v.

Gentra do not ground an analogy with those that gave rise to the this appeal. At the start of his reasons, Doherty, J.A., clearly pointed out what rendered the claim based on

section 241 of the CBCA deficient in that case:

[2] Farley J. struck certain parts of the appellant’s statement of claim. His order terminated the appellant’s action against 30 individuals described as directors of Gentra Inc. (formerly Royal Trustco Limited) and collectively referred to in the statement of claim as the “defendant directors”; 9 individuals described as officers of Gentra Inc. and collectively referred to in the claim as “management defendants”; and Ernst & Young the former auditors of Gentra.

The order did not affect the action against the other defendants, Gentra Inc. and several corporate defendants referred to collectively in the claim as the “controlling shareholder defendants.” The appellant appealed the order of Farley J. but subsequently abandoned his appeal against Ernst & Young. The appeal as argued involves only the claims against the director defendants and the management defendants. … [4] I think the claim as framed fails to reveal a reasonable cause of action against the director defendants or management defendants personally and I would affirm the order of Farley J.

In the appeal file, the application concerned four directors and made the allegations against them that are reproduced at paragraph [51], above. In the matter that gave rise to Budd v. Gentra , the claim targeted thirty directors, nine officers, five portfolio companies, an accounting firm, and Gentra as defendants, without distinction and without specifying what would justify the individual liability of one or more of the directors or officers identified by name.

It was, in short, a different situation altogether – a difference of kind, not of degree. [ 54 ] Given the explicit reference in the motion to institute proceedings to the appellants’ personal interest, the allegations against them, and the state of the law and case law to which I referred in the preceding paragraph, it cannot be concluded here that the respondent deviated from the audi alteram partem rule. I would even say that to argue the opposite would be audacious.

The appellants had sufficient means – whether through a motion for particulars, an examination on discovery or otherwise – to garner the details of what, moreover, presented all the characteristics of an application was easily consistent with the generic terms of subsection 241(2) of the CBCA . At the end of his analysis, the judge rejected several of the respondent’s arguments but accepted others, in whole or in part, in terms that set forth in a detailed manner how the appellants’ actions were oppressive or unfair. The appellants could not expect more from a remedy under

section 241 of the CBCA . In short, the right to be heard does not give entitlement to an accessory right to be informed of the claims of which one is the target in terms rigorously identical to those of the eventual judgment that will allow the same claims. [ 55 ] But it is not sufficient to allege something; evidence must be adduced. The appellants go further, however, arguing that the judge’s conclusion concerning their personal interests and benefits was “completely unsupported by the evidence adduced at trial”.

What is one to make of this statement? [ 56 ] It is true that the appellants are not the only investors who have benefited from the private placement, but in ascribing liability to them the judge does not base his conclusion on their mere participation in the financing transaction, which was, moreover, legitimate. There is much more. They alone played an active role, not only by setting up the private placement but also by refusing to convert the respondent’s preferred shares, when there was no parallel measure to protect his legitimate expectations.

This set of background circumstances makes the direct or indirect personal benefit obtained by the appellants a convincing factor justifying the personal order against them under

section 241 of the CBCA . [ 57 ] Moreover, the benefit in question cannot be seen as limited to the value of the common shares acquired as a result of the private placement. While it is plausible that the impleaded party’s financial position in the fall of 2007 and thereafter was precarious and therefore the realization of a tangible cash profit in the near future was a rather hypothetical if not illusory possibility, a personal benefit does not necessarily take the form of an economic or cash gain.

It may be inferred from several decisions reviewed on such matters that the benefit obtained by a director may also consist of something other, such as increased control over the share capital of the corporation and the conduct of its business. [20] The respondent raised this matter at paragraphs 13.6 and 13.7 of his motion to institute proceedings, quoted at paragraph [51] above, and the evidence shows that the private placement enabled the appellants –albeit especially the appellant Black – to consolidate their control over the impleaded party. [ 58 ] Returning now to the evidence, we see many business links that the appellants maintained with various persons, investment firms, and management companies. [ 59 ] Concerning the appellant Black, we may refer to the securities register of the impleaded party, [21] while keeping two pieces of information in mind: this appellant exercised control over various corporations (Hedge Hog, Conserve Fund, The Q Settlement, and Savosa Trading Ltd.) and was an associate (within the meaning of subsection 2(1) of the CBCA ) of his two sons, Alexander Richard Black and Hans Arthur Black.

In this regard, an excerpt from the proxy circular sent on February 26, 2008, with the notice of the impleaded party’s annual shareholders meeting contained the following details: To the knowledge of the directors and officers of the Corporation, the only persons who, as at February 1, 2008, beneficially owned or exercised control or direction over shares carrying more than 10% of the voting rights attached to the Common Shares of the Corporation were Ramzi Al-Harayeri, who held 1,500,000 Common Shares, representing 12.26% of the issued Common Shares, Alexander Richard Black who held 1,462,500 Common Shares, representing 11.96% of the issued Common Shares, Hans Arthur Black who held 1,462,500 Common Shares, representing 11.96% of the issued Common Shares and Hans Peter Black who through Hedge Hog and Conserve Fund, The Q Settlement and Savosa Trading Ltd. exercised control or direction over 4,300,000 Common Shares, representing 35.15% of the issued Common Shares. … Dr.

Black beneficially owns and/or controls 3,900,000 Common Shares through Hedge Hog and Conserve Fund, and 160,000 Common Shares through the Q Settlement and 240,000 Common Shares through Savosa Trading Ltd., a total of 4,300,000 Common Shares, representing 35.15% of the issued voting shares of the Corporation. Hans Peter Black is an Associate (as defined under the Canada Business Corporations Act ) of Alexander Richard Black who holds 1,462,000 Common Shares, representing 11.96% of the issued Common Shares and Hans Arthur Black who holds 1,462,500 Common Shares, representing 11,96% of the issued Common Shares of

the Corporation. It is therefore possible to deduce from the evidence that, as of June 20, 2008, the date of the conversion of the bonds purchased by Savosa Trading Ltd. at the time of the private placement, this corporation controlled by the appellant Black held 35,270,125 common shares of the impleaded party, of which 35,030,125 were issued in the private placement. As for The Q Settlement, taking

part in the private placement enabled it to acquire 6,500,000 common shares of the impleaded party.

Lastly, Hedge Hog obtained 10,000,000 common shares by the same means. [ 60 ] As for the appellant Wilson, he benefited personally from the private placement when the bonds subscribed on that occasion were converted in July 2008 into 666,675 common shares of the impleaded party. [22] After the private placement and the conversion of the bonds on July 30, 2008, the appellant Wilson, through YTW Growth Capital Limited Partnership and YTW Growth Capital Management Corporation, owned or controlled 11,093,342 common shares of the impleaded party. [23] Moreover, the proxy circular quoted in the preceding paragraph specifies: Mr.

Wilson personally owns 26,667 Common Shares and beneficially owns and/or controls 326,667 Common Shares through YTW Growth Capital Limited Partnership and 100,000 Common Shares through YTW Growth Capital Management Corporation, of which Mr. Wilson is President. Through YTW Growth Capital Management Corporation, the appellant Wilson held Class C preferred shares, which were also convertible into common shares. The trial judge wrote on this matter: The Private Placement did benefit the Defendants personally to varying degrees.

The Board accelerated the conversion of Wilson’s 100,000 C Shares (but not the C Shares held by others) to allow him to participate in the Private Placement and issued to him 100,000 common shares despite the doubts expressed by the auditors in February 2007 as to whether the test for conversion had been met. The two other holders of Class C shares, Mazzen Haddad and Rick Groome, did not benefit from such accelerated conversion. [ 61 ] From the foregoing, it can only be concluded that the appellants were mistaken when they faulted the judge for ruling against them without adequate evidence.

On the contrary, there was a preponderance of evidence in the file to serve as the basis for the conclusions set forth at paragraph [167] of the trial judge’s reasons. (iii) The cause of the financial prejudice alleged by the respondent [ 62 ] In this respect, the appellants fault the judge for ruling in the respondent’s favour in the absence of any evidence of a causal connection between the loss of the value of his shareholdings and the appellants’ behaviour, which the judge had previously deemed oppressive. They refer more specifically to paragraph [160] of the reasons filed in Superior Court.

It is useful here to quote this passage but also to place it in context along with other short excerpts from the judgment: [61] In my view, therefore, there are two related acts of oppression, namely the failure to convert the A Shares into common shares, and the failure to consider Ramzi’s rights as holder of the A Shares in the context of the Private Placement in October 2007 and to ensure that he was not prejudiced by the Private Placement. … [72] …the Private Placement in October 2007 did go forward.

As set out more fully below, the conversion of the Notes had a very serious dilutive effect on the common shares and on their voting rights and value, and therefore, by ricochet, had a similar effect on the B Shares. No steps whatsoever were taken by the Board to protect the holder of the B Shares from that prejudice. As described below, the Board did take steps to protect the option holders and Wilson as holder of some of the C Shares, but did nothing with respect to the B Shares.

I find that this conduct by the Board amounts to an unfair disregard for the rights of the holder of the B Shares and therefore constitutes oppression. For the purposes of the remedy, I will give effect to the fact that the B Shares would have been converted into 223,227 common shares. … [159] The Private Placement was offered to all holders of common shares. It did not include any offer or any other provisions for the holders of A or B Shares.

As a result, the A and B Shares remained convertible into 1,223,227 common shares, but the value and voting power of those common shares dropped dramatically as a result of the dilution pursuant to the Private Placement. There was nothing that the holder of the A and B Shares could do to avoid that loss. [160] In my view, it is not a defence to argue that the dilution would have occurred even if the A and B Shares had been converted into common shares, because Ramzi would not have exercised his rights under the Private Placement. That is speculative in nature.

Mitec might have been more interested in Ramzi’s shares and might have pursued them more aggressively if he had more of them. Ramzi might have called the shareholder’s meeting if he was in a better position to control the outcome of the meeting.… [161] Moreover, there were other ways to deal with the A and B Shares in the Private Placement other than immediate conversion, such as making them convertible into a greater number of common shares (which was essentially the approach taken with respect to the options).

That was not dependent on Ramzi’s participation in the Private Placement and would have avoided the loss that he suffered. [162] As a result, I conclude that the causal link between the oppression and the loss on the A and B Shares has been established. [ 63 ] Presented schematically, the judge’s reasoning consisted of the following: (

i) the refusal to allow the conversion of the Class A preferred shares, combined with the failure at the time of the private placement to take any measures to protect the Class A and Class B preferred shares, constituted oppression; (ii) the direct consequence of the oppression took two forms: the loss of value of the respondent’s shares (at a time when he was in active negotiations with a potential purchaser) and the dramatic reduction of their relative

weight in the impleaded party’s voting capital. The elements of fault, causation and damage were therefore present, and the prejudice remained to be assessed. [ 64 ] Regarding the causal connection, it should be reiterated that this is a question of fact, in respect of which a palpable (plainly seen) and overriding (fatal to the reasoning process it underpins) error must be shown in appeal. As Gascon, J.A., as he then was, stated in the unanimous reasons he wrote on behalf of the Court in Laval (Ville de) (Service de protection des citoyens, département de police et centre d’appels d’urgence 911) v .

Ducharme : [24] [ translation ] [72] … the case law equates the establishment of a causal connection to a purely factual matter. As the doctrine emphasizes, when the appeal questions the judge’s decision on the causal connection, the Court’s attitude is generally to deem the problem to be a mere matter of fact left to the sovereign assessment of the first judge, which limits the power to interfere on appeal to only those cases involving a palpable and overriding error. [ 65 ] Can a fault of this type be detected in the judge’s analysis?

In my view, this question must be answered in the negative. [ 66 ] The appellants argue that, in any case, the respondent could not have taken

part in the private placement because he was short of funds in late September and early October 2007. This assertion, which the judge described as speculative, ignored the fact that the respondent would have had funds at his disposal if he had been able to convert his Class A preferred shares into common shares and, subject to the Board’s approval, sell them to the highest bidder. Moreover, the assertion disregards a plausible aspect of the story: if the respondent had had a larger block of common shares, the transaction with Mitec would have had a greater chance of taking place.

It is impossible to know what the actual state of affairs would have been if the Class A shares had been converted in a timely fashion, namely several months before September 2007. But the respondent probably could have consolidated his situation and his holdings would have escaped the massive devaluation and marginalization caused by the private placement. [ 67 ] At paragraph [161] of his reasons, supra , the judge refers to “ the approach taken with respect to the options”.

There can be no doubt that the members of the Board of Directors were fully aware of the inevitable dilutive effect that the private placement would have on the shareholders’ equity before the placement. The options granted to the impleaded party’s employees and directors would also be affected. The minutes of the board meeting held on September 28, 2007, contain the following passage: The directors then discussed their concern regarding the options and how to best address the fact that, due to significant dilution of the proposed financing, new options would need to be issued to employees.

The directors concurred that they could not penalize the employees. Mr. Steinberg indicated that this was a complex issue and asked Mr. Tahmassebi, as Chair of the Human Resources Committee of the Corporation, to make a recommendation on this matter. The directors agreed that any decision with respect to the options would be deferred until such time as such a recommendation was presented to the directors. Less than a month later, on October 23, the directors returned to this matter. The minutes state: Dr.

Black explained that the major change was that everyone has options at $1.25, the round of note financing was done at 2 cents, and that any further round of financing would be expected at 5 cents. He then noted that the largest optionholder was the key scientist and it was important that the board move quickly to ensure retention through new option grants. Mr.

Tahmassebi then explained in detail the process which led to the proposed option plan, including noting that the plan follows the standard of Silicon Valley, the shares will be grandfathered to the start date of each employee, and there will be monthly vesting over the remaining three years. Mr.

Tahmassebi then noted that the key employees were [XX], to whom 2% has been allocated, and [YY] to whom they adjusted 1% to 1.5%. … The directors then agreed they would approve the new plan, provided however they would consider any comments of [a board member who had expressed reservations] received before Thursday, October 25, 2007. It appears from the file that these changes were made as stated. Twenty employees of the impleaded party and seven board members benefited from them. [ 68 ]

Section 241 of the CBCA gives a judge broad discretion to decide an application made under it.

It cannot be argued in this case that the judge made a palpable and overriding error by using the evidence adduced at trial to draw the conclusions reproduced at paragraph [62] above, including those set out at paragraph [160] of his reasons. (iv) The value of the common and preferred shares held by the respondent [ 69 ] In the alternative, the appellants fault the trial judge for erring in his assessment of the pecuniary damages suffered by the respondent, first by attributing an excessive value to the common shares that the respondent could have obtained from the conversion of his preferred shares, and second by not taking into account the effective residual value of the same preferred shares for compensation purposes. [ 70 ] It is appropriate to begin by quoting the passages of the judgment where the judge discussed this matter, not including the footnotes: [136] I note at the outset that neither party presented any expert evidence on the value of Wi2Wi’s common shares or the adequacy of the $0.02 conversion price. [137] Based on the audited financial statements of Wi2Wi for the year ended September 30, 2007, the book value of the common shares was negative and therefore the $0.02 conversion price was not at a discount to book value. [138] However, there is other evidence in the file that suggests a higher value.

The common shares were issued at $0.75 and $1.25. Ramzi sold some of his common shares to Mitec in July 2007 for US $1.50. The evidence closest in time to the Private Placement is the October 9 Offer, which provided a price of US $0.50. This offer was made by Mitec after it had conducted its due diligence and it was

accepted by Ramzi, and in my view, it represents the best evidence of the value of the common shares in October 2007. It is also interesting to note that the value of US $0.50 is somewhat confirmed by Black’s comment at the October 23, 2007 Board meeting that “any further round of financing would be expected at 5 cents” and by the fact that the next shares issued by Wi2Wi in May 2008 were at US $0.05. … [163] Ramzi claims that the value of the common shares before the Private Placement was US $1.50 based on the September 13 Offer.

That is clearly not an appropriate measure – Mitec terminated that offer following the due diligence in which it learned of Wi2Wi’s precarious financial position. In my view, the best indication of value is the October 9 Offer’s price of US $0.50 per common share.

Using the conversion rate on September 6, 2007 (the only exchange rate in the record), this is equal to $0.53. [164] Applying that value to the 1,223,227 common shares into which Ramzi’s A and B Shares were convertible, the total loss was $648,310. … [168] Ramzi cannot keep the shares and their value. [169] There are two ways to deal with the A and B Shares – either I deduct their value after the Private Placement from their value before the Private Placement to calculate the damages, or I order Ramzi to return them. [170] The best indication of the value of the common shares after the Private Placement is $0.05 per share, based on Black’s comment at the October 23, 2007 Board meeting and the subsequent issuance of shares in May 2008 at US $0.05.

As pointed out above, the figures of US $0.50 and $0.05 are consistent. [171] However, Ramzi never had the ability to obtain that value because his A and B Shares were never converted into common shares.

Moreover, and although I do not have complete evidence on the subject, it appears that the reverse takeover of Wi2Wi by ISEC, if it indeed happened, may have resulted in the exchange of Wi2Wi common shares for ISEC shares and the cancellation of the A and B Shares. [172] As a result, I do not consider it appropriate to reduce the damages awarded to Ramzi by the value of the A and B Shares because that value is too uncertain.

Instead, I will order Ramzi to remit the share certificates for the A and B Shares to the Defendants Black and Wilson or to whomever they designate. [ 71 ] In addition, the appellants argue that it was also necessary to take into account the judge’s comments at paragraphs [91], [92] and [108] of his reasons, in which he stated that it reasonable for the appellants and the other members of the Board of Directors to have refused to authorize the sale of the respondent’s shares to Mitec: [25] “…the Board was concerned that the Ramzi shares would give Mitec effective control without Mitec ever paying a control premium to the other shareholders.” Given the impleaded party’s share capital structure, it is understandable that the Board, to use the judge’s words, “had concerns about a creeping takeover of Wi2Wi by Mitec”. [ 72 ] A few figures are also relevant to analyze the appellants’ arguments on this point.

Before the private placement, the impleaded party’s share capital consisted of 5,807,760 [26] common shares. Of that number, the respondent held 2,000,000, or 34.4% of the total. This proportion fell to 25.8% early in July 2007, when the Board of Directors approved the transfer of 500,000 of his shares, or 8.6% of the total, to Mitec. The other shareholders, who collectively formed the majority, held 3,807,760 actions, or 65.6% of the total.

If, before the private placement, the respondent had been able to convert his Class A preferred shares into common shares, the number of common shares of the impleaded party would have increased to 6,807,760, of which 3,000,000, or 44% of the total, would have belonged to the respondent. The possibility of a creeping takeover was therefore not illusory because Mitec potentially had other supporters among the shareholders. In this sense, it can also be s

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