DUCK MOUNTAIN ELK RANCH INC. PLAINTIFF - v. -, 2016 SKQB 276

QUEEN’S BENCH FOR SASKATCHEWAN Citation: 2016 SKQB 276 Date: 201 6 08 26 Docket: QB 236 of 2015 Judicial Centre: Yorkton BETWEEN: DUCK MOUNTAIN ELK RANCH INC. PLAINTIFF - and - ZOOCAN INC. DEFENDANT AND: Docket: QB 224 of 2009 Judicial Centre: Yorkton BETWEEN: ROBERT BAKER PLAINTIFF - and - OLIVER DURHAM and DUCK MOUNTAIN ELK RANCH INC. DEFENDANTS Counsel: Peter V. Abrametz for Duck Mountain Elk Ranch Inc. and Oliver Durham Terry J. Zakreski, Q.C. for Zoocan Inc. and Robert Baker

JUDGMENT PRITCHARD J. AUGUST 26, 2016 [ 1 ] This decision deals with two separate but related originating applications. The first application was made by Duck Mountain Elk Ranch Inc. [Elk Ranch] as plaintiff, against Zoocan Inc. [Zoocan] as defendant. In that application, Elk Ranch seeks an order setting aside the purported transfer to Zoocan of 11 parcels of farm land that had previously been registered in the name of Elk Ranch. [ 2 ] The Elk Ranch application was answered by one made by Robert Baker [Baker] as plaintiff and Oliver Durham [Durham] and Elk Ranch as defendants.

In this application, Baker seeks an order setting aside the shareholders’ meeting of Elk Ranch held on May 28, 2015 in which Durham, as the only person in attendance, purported to elect himself as the sole director of Elk Ranch. Background Facts [ 3 ] Elk Ranch was acquired by Baker and Durham in 2005 through a share acquisition from a third party. The purchase was made for the purpose of developing an elk hunting business in Saskatchewan.

Although Baker paid the entire purchase price for all of the shares (and also paid all costs of acquiring additional land, elk and the necessary operating equipment for the enterprise) he only received a 49% interest in Elk Ranch. The remaining 51% of the shares were held by Durham. [ 4 ] There is some dispute as to whether a promissory note was given by Durham for some or all of the 51% interest he received in Elk Ranch. In my view this is entirely irrelevant to the determination of these applications.

Of more relevance is the fact that this 51% - 49% share allocation was influenced by The Saskatchewan Farm Land Security Act , SS 1988-89, c S-17.1 [ Act ] which requires that one or more Saskatchewan resident hold a majority interest in any corporation owning significant acres of Saskatchewan farm land. [ 5 ] It is undisputed that when the shares of Elk Ranch were acquired by Baker and Durham, Baker was, and to this day remains, a resident of the United States of America.

Durham had also been an American resident when the shares were acquired but he gave up his U.S. residency and moved to Saskatchewan to operate Elk Ranch. It is clear that whatever arrangements were actually made for Durham to contribute to the cost of the shares he acquired in the business, the end effect was that Durham receive a 51% of the shares of Elk Ranch, at least in part, as an inducement for him to move to Saskatchewan to satisfy the residency requirements of the Act .

Ultimately, Durham also managed Elk Ranch and received an annual salary for these efforts. [ 6 ] Around 2009, the relationship between Baker and Durham soured and Baker, as the minority shareholder, brought an application for an oppression remedy against Durham. That application was ultimately settled by minutes of settlement dated August 31, 2009 [Settlement] but before the Settlement was actually signed, Baker and Durham were back in court with Baker alleging that Durham was refusing to execute a written document reflecting their new arrangement.

That application was also ultimately settled. [ 7 ] Pursuant to the Settlement, Durham immediately resigned as a director of Elk Ranch with his shares to be held in escrow to be delivered to Baker for corporate redemption once the terms of the Settlement were fulfilled. At the commencement of these proceedings, the only outstanding term of the Settlement was the disbursement of proceeds (if any) that might be received by Elk Ranch from a still unresolved class action in which neither Durham nor Baker are parties. [ 8 ] The settlement is dated August 31, 2009.

Between late October 2009 and October 2015, Durham and Baker operated under the Settlement with Durham taking no

part in business of Elk Ranch. This all changed when Durham purported to call a shareholders’ meeting for May 19, 2015 and on that date appointed himself as the sole director of Elk Ranch. Durham’s actions then prompted Baker to respond by transferring title to all of the Elk Ranch farm lands to Zoocan, an extra-provincially registered corporation whose sole shareholder and director is a daughter of Baker. At the time of the transfer of the lands to Zoocan, they were the sole asset of any value then held by Elk Ranch.

The sole shareholder of Zoocan is also a non-resident of Saskatchewan. [ 9 ] Baker and Durham each take issue with the most recent steps taken by the other. Baker argues that Durham had no power to call the purported shareholders’ meeting in which Baker was removed as a director of Elk Ranch and Durham was reinstated as a director. Durham maintains that Baker was not a director of Elk Ranch when he purported to execute the land transfers of the Elk Ranch lands to Zoocan. And, both parties point to the Settlement to support their diametrically opposed positions. The relevant terms of the Settlement are: 1.

Robert Baker agrees to pay to Oliver Durham…the sum of $10,000.00 USD on or before September 10 th 2009. 2. Robert Baker agrees to pay to Oliver Durham the additional sum of $7,500.00 USD on or before December 31 st 2009, … 3. Robert Baker/Duck Mountain Elk Ranch Inc. will authorize and direct Robertson Strongberg [sic] Peterson … to make payment of 51% of 50% of the entitlement to the class action suits of “Holland v.

Government of Saskatchewan” being a class action suit pertaining to CWD, such Authorization, Direction to Pay to be delivered to the said Reynold Robertson authorizing such payment directly to Oliver Durham. The balance of 49% of 50% is to be paid to Duck Mountain Elk Ranch Inc., to be applied in accordance with the formula set forth in

number 4 hereinafter following. 4. The proceeds of the Class Action law suit against the Government of Canada pertaining to CWD shall be paid to the corporation, “Duck Mountain Elk Ranch Inc.”, and after an accounting, to be applied against the following accounts on a pro rata basis: a. Robert Baker shareholders loan; b. Oliver Durham shareholders loan; c. General creditors; d. Oliver Durham, Cecilia Durham’s salary arrears. The above accounting is to be performed by the offices of Parker Quinne [sic] in Yorkton, said accounting to be paid for by Robert Baker/Duck Mountain Elk Ranch Inc. … 12.

Oliver Durham agrees to resign as a director of the corporation and place his shares in the corporation, for delivery to Robert Baker for corporate redemption in escrow with his solicitor but subject only to the fulfilment of the terms herein before set forth. … There have been no disbursements of proceeds from the class action referenced in the Settlement as no such proceeds have been received. ISSUE [ 10 ] The dispute between the parties revolves around the status of the shares held in escrow under the Settlement [Escrow Shares].

Durham maintains that he remains the beneficial owner of the Escrow Shares until all of the provisions of the Settlement have been satisfied. Baker says that under the terms of the Settlement, Durham holds no beneficial interest in the Escrowed Shares and therefore cannot exercise any of the voting rights attached to those shares. THE LAW [ 11 ] Section 139(1) of The Business Corporations Act , RSS 1978, c B-10 [ BCA ] directs that a court may determine any controversy regarding the election or appointment of a director of a corporation. The relevant powers of the court are set out in ss. 139(2) (

b) and (

d) as follows: 139

(2) Upon an application under this section, the court may make any order it thinks fit including, without limiting the generality of the foregoing: … (

b) an order declaring the result of the disputed election or appointment; … (

d) an order determining the voting rights of shareholders and of persons claiming to own shares. [ 12 ]

Section 137 of the BCA sets out the powers of a shareholder to request the directors of a corporation to call a meeting of shareholders and grants authority to the shareholders to call the meeting if the directors fail to do so. The relevant portions of s. 137 state: 137

(1) The holders of not less than five per cent of the issued shares of a corporation that carry the right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition. …

(4) If the directors do not within twenty-one days after receiving the requisition referred to in subsection (1) call a meeting, any shareholder who signed the requisition may call the meeting. DISCUSSION [ 13 ] Durham claims that pursuant to s. 137 of the BCA he was entitled to requisition and call a shareholders’ meeting for Elk Ranch. Baker states that when Durham purported to requisition and call a shareholders’ meeting for May 19, 2015 he was not a “holder” of the required percentage of the voting shares of Elk Ranch as required under s. 137 .

In support, Baker relies upon clause 12 of the Settlement under which Durham resigned as a director of Elk Ranch and which provides for the Escrow Shares to be delivered to Baker for corporate redemption upon fulfilment of the terms of the Settlement. [ 14 ] There is no dispute that the Escrow Shares were still being held in escrow when Durham purported to exercise the voting rights that were attached to those shares. The issue is who, if anyone, holds the voting rights to the Escrow Shares.

[15] Whether shares held in escrow retain voting rights was considered in Nadeau v Nadeau & Nadeau Ltd. (1972), (NB KB), 6 NBR (2d) 512 (NB SC) [Nadeau]. When the issue arose in Nadeau, the shares were being held in escrowpursuant to para. 6 of requirements imposed by the Province of New Brunswick as a condition to extending the company’s loanagreement with the province. That condition stated: 11. … (6)All common and preferred shares of the Company owned by Mr. J.D.

Nadeau and members of his immediate family are to be placed'in escrow' until such a time as the loans borrowed by the Company under the guarantee of the Board are retired. In Nadeau, the company’s loan with the province was still outstanding at the time of the company’s shareholders’ meeting held inSeptember 1971.

At that time, a motion was passed “that the Nadeaus will not be allowed to vote either the shares they personally ownedor the proxies or the shares they represented as proxies at the meeting” (para 25). [16] At trial, the defendants in Nadeau maintained, inter alia, “that under the arrangement with the province the plaintiff’sshares are in escrow and his rights therefore as a shareholder are suspended while they are in escrow.” The court reviewed the escrowprovisions in the loan agreement and at para. 30 stated: 30 …The only conceivable purpose of this provision could be, as confirmed in testimony by the representative of the Board, toprevent the sale or transfer of those shares.

Nowhere in the agreement is there any suggestion of depriving the holders of those shares oftheir voting rights. The restriction on Mr. J. D. Nadeau's participation, it will be recalled, was only a restriction upon his "activeparticipation in the day to day management of the company". This was clearly intended to provide, in effect, that he must get out asgeneral manager. It is inconceivable that it should ever have been the Province's intention, as now suggested by Mr. Ouellette, to deprivethe Nadeau family members of their voting privileges.

Those members held collectively at that time a majority of the … issued commonshares, sufficient to ensure control over election of a board of directors, were voting confined only to the common shares.

Deprived oftheir voting rights, control of the company could be maintained by others in such a way, i.e., by failure to relieve the Province of itsguarantee or by failure to pay dividends, that control of the company would never revert to the majority holders of the common stock.Even if, as contended by Ouellette, the preferred shares acquired by the plaintiff should be held in escrow as non-voting shares, thecompany could be controlled indefinitely by the holders of a minority of the total issued shares simply by failure to discharge down tothe last dollar the guaranteed indebtedness. [17] On this issue, the court concluded and declared at para. 36: 36 … 3.1 …the holding of the Nadeau shares in escrow by the Provincial Bank of Canada in no way abrogates the voting rights in respect ofsuch shares or the right of the holders thereof to be elected as officers or as directors of the company. [18] Both parties in these proceedings rely on Nadeau in support of their opposing positions.

Durham maintains that, like theregistered owners of the escrow shares in Nadeau, he was entitled to exercise the 51% majority voting rights attached to the EscrowShares and thereby oust Baker as a director and reinstate himself as the sole director of the corporation.

Baker acknowledges that the endresult in Nadeau appears to support Durham’s position but maintains that as in Nadeau, the court must consider the purpose behind therequirement that the shares be held in escrow before determining whether voting rights thereunder are retained by the registered owner.He then argues that the purpose for the escrow in Nadeau was to ensure that Nadeau did not dispose of his shares while the loan was stilloutstanding which purpose would not normally be meant to deprive the holder of his voting rights under these shares.

In contrast, thepurpose of the escrow under the Settlement was to ensure that Durham relinquished all rights of ownership and control in Elk Ranchwhich would necessarily include the voting rights attached to the Escrow Shares. [19] I agree with Baker. Based on the entirety of the Settlement, it is clear that the essence of the arrangement was thatDurham was to immediately and ultimately be removed from all control of Elk Ranch.

As required under the terms of the Settlement,Durham had resigned his role as a director of Elk Ranch and there is no provision or other condition in the Settlement under which he isor might be entitled to resume as a director of Elk Ranch. The Settlement was entered into on August 31, 2009. Both Baker and Durhamhad complied with all of its terms to the extent it was in their power to do so.

The only reason that the Escrow Shares had not beencancelled by 2015, when Durham purported to exercise voting rights under the Escrow Shares, was because the anticipated funds from aclass action law suit had not been received by the corporation for disbursal in accordance with the Settlement. [20] Under the Settlement, the Escrow Shares are being held for ultimate cancellation and, for the purposes of theseproceedings, it is unnecessary to determine if Baker holds any voting rights under the Escrow Shares.

The only necessary determinationis that Durham was not entitled to exercise any voting rights that may have remained attached to the Escrow Shares. Accordingly, thisCourt declares that Durham’s purported exercise of such rights was improper and the resulting termination of Baker as a director and theappointment of Durham as the sole director and officer of Elk Ranch are expunged along with any registrations at the InformationServices Corporation based on such unauthorized transactions. [21] Consistent with the foregoing, the originating application against Zoocan is hereby dismissed in its entirety.

Given thatthe interests of both Zoocan and Baker under both originating applications were aligned and as both were represented by one counsel,they shall be entitled to one set of costs for each application calculated under Column 1 of the Tariff of Costs. J. J. L. G. PRITCHARD