2010 ONSC 6391, 2010 ONSC 6391

CITATION : Jochem v. MacPherson, 2010 ONSC 6391 COURT FILE NO.: 05-86/10 DATE: 20101119 ONTARIO SUPERIOR COURT OF JUSTICE IN THE MATTER OF the Estate of Hans Josef Jochem B E T W E E N: ) ) LISELOTTE JOCHEM Applicant - and - KARIN MacPHERSON , KLAUS JOCHEM and ANDREW JOCHEM Respondents ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Howard J. Alpert and Ellad Gersh , for the Applicant Michael W. Kerr , for the Respondents Karin MacPherson and Klaus Jochem Milton Verskin , for the Respondent Andrew Jochem ) ) HEARD: November 17, 2010 Hoy J. REASONS FOR DECISION

[1] The Applicant, Liselotte Jochem, one of the four executors of the estate of Hans Josef Jochem (the “Estate”), owns 25% of theoutstanding shares of Intertechnology Limited (the “Corporation”). She accepted an offer made October 6, 2010 to sell those shares, and,in her capacity as executor of the Estate, to sell the remaining 75% of the shares owned by the Estate to 1831967 Ontario Limited (the“Purchaser”), a corporation owned by one of her three children, Andrew Jochem, who works for the Corporation, and DomenicCristiano, General Manager of the Corporation.

The other three executors of the Estate are Andrew, and his siblings, Karin MacPhersonand Klaus Jochem, the Respondents in this application. The Applicant, Andrew Jochem and the Respondents are the beneficiaries of theEstate. [2] The Applicant brings this application for, inter alia, (

a) a declaration that she acted within her discretion, and in accordance withher fiduciary duties, when she accepted the offer; and (

b) an order approving the sale transaction. [3] The Applicant required this matter to be heard on an urgent basis because the closing of the sale transaction is scheduled forNovember 30, 2010.

While the declaration and order sought on this application are not specifically referred to as conditions of closingfor the benefit of either party, it is a condition for the benefit of the Purchaser that all legal matters relating to the purchase of the shareshave been approved by counsel for the Purchaser, and I assume that, absent the declaration and order sought, the Purchaser will assertthat such condition has not been fulfilled. I am dubious that this matter was indeed “urgent”. There was no evidence from the Purchaseras to urgency.

One would expect, given the Purchaser’s relationship to both the Estate and the Corporation, that an extension of theclosing date would be provided. [4] The parties agree that the applicable test is that in McKay Estate v. Love (1991), (ON SC), 6 O.R. (3d) 511,44 E.T.R. 181 (Gen. Div.); affirmed 6 O.R. (3d) 511 at 519, 44 E.T.R. 190, 52 O.A.C. 159 (C.A.): The, “duty of a trustee is to ensurethat the sale is in the best interests of the beneficiaries.

The performance of that duty requires the court to be satisfied that the sale priceis the best which can be obtained.” [5] The court must be satisfied that it has before it all the material appropriate to enable it to make the determination sought. It isthe trustee’s obligation to obtain and put such information before the court: Marley v. Mutual Security Merchant Bank & Trust Co. Ltd.,[1991] 3 All E.R. 198. [6] The Purchaser made an initial offer to the Estate and the Applicant in March of 2010 for an aggregate price of $75,000. Theoffer was rejected by the Respondents as improvident.

They advised that they wanted the Estate to retain an independent businessvaluator and that, as disinterested trustees, wished to direct the party who would undertake the valuation. [7] A valuation of the shares of the Corporation by Susan B. Geller, a chartered accountant and chartered business valuator,addressed to the Applicant (who is now 86 years of age) was obtained. The Respondents were not consulted with respect to the selectionof the valuator, or the parameters of her valuation. Ms. MacPherson’s evidence is that the Applicant mentioned to her that she paid$3,000 for the valuation.

While there is no evidence to the contrary, counsel for the Applicant submits that the Applicant may have paidsomewhat more. Nonetheless, it is not disputed that the valuation was not expensive. [8] The range of Ms. Geller’s valuation was between $82,338 and $295,454; she concluded that $185,000, the mid-point in herrange, was the fair market value. She utilized a capitalized earnings approach: adjusted earnings were multiplied by a price earningsmultiple. She made a number of assumptions in arriving at her opinion, including that remuneration to shareholders represented fairwages.

This is often a key adjustment in the valuation of private companies, and results in an upward adjustment in earnings and in ahigher valuation. The affidavit of Karin MacPherson indicates that the Applicant receives significant remuneration. I suspect - based onthe Applicant’s age - this assumption as to remuneration paid to shareholders may be invalid, and there was no evidence before me as tothe validity of the remaining assumptions. There was no explanation of why Ms. Geller selected the price earnings multiple she did.

Sherelied on discussions with the Corporation’s management, which presumably included, and may have consisted of, Andrew Jochem andDomenic Cristiano. [9] The valuation undertaken was a limited exercise. [10] On October 6, 2010, the Purchaser made a second offer to the Applicant and the Estate – this time for an aggregate price of$185,000. On October 6, 2010, Andrew Jochem signed an Authorization by Executors of the Estate, authorizing the Applicant to acceptthe offer.

On the following day, the Applicant signed both that Authorization and the offer and counsel for the Applicant forwarded thevaluation and offer to the Respondents. [11] The Respondents were neither consulted nor informed of any pending discussions regarding the sale, its terms or any otherattempts to market the Estate’s shares in the Corporation. They are not members of the Corporation’s board of directors and have limitedknowledge of the operations of the Corporation. [12] Neither the Applicant nor any other Trustee engaged in any efforts to sell the Estate’s shares in the Corporation.

They did not listthe Corporation for sale with any broker, or advertise the Corporation for sale - either generally or in any trade publication. They did notsolicit or have discussions with any other prospective purchasers.

There was no indication that management of the Corporation wascanvassed as to the identity of possible purchasers. [13] Counsel for the Applicant argues that because the Corporation is a relatively small private corporation, with less than $4 milliondollars in annual sales, such efforts are not warranted and the Applicant fulfilled her fiduciary duty by obtaining the valuation from Ms.Geller before accepting the offer.

Counsel for the Applicant also argues that the fact that the Applicant is selling her own shares in theCorporation at the same price indicates that price is the best price that can be reasonably obtained. Counsel submits that this case isanalogous to Kidd Family Trust v. Kidd, 2005 Carswell NS 335 (N.S.S.C.). [14] It goes without saying that the nature and value of the assets disposed of have a bearing on the measures that a reasonable trusteewould undertake to maximize value. I have reviewed the financial statements of the Corporation and had regard to the fact that the assets

in question are 75% of the shares of a private company, and that the balance of the shares are held by the Applicant. In that regard, I note that the power of the Applicant, as a minority shareholder of the Corporation, to effectively veto any sale of the Estate’s shares that she does not approve of is tempered by her role as a fiduciary. [ 15 ] Given the limitations of Ms. Geller’s valuation, the fact that the offer is for the amount of the valuation does not persuade me that the offer price is the best which can be obtained. I note that in McKay Estate v.

Love , where a sale was made based on an appraised price, no issue was taken with respect to the valuation and the sale was to an arm’s-length third party, not to a trustee. [ 16 ] The price at which an 86 year-old mother agrees to sell her shares to her adult son is not compelling evidence of “best price”. [ 17 ] This case is quite different than Kidd Family Trust . There, the court noted that the trustees had “beaten the bushes” in the community following the testator’s death; they had contacted nine potential investors.

Five were provided with confidential information packages and signed confidentiality agreements; negotiations ensued with two of them. The offer which the trustees subsequently accepted from some of the beneficiaries was for an amount in excess of the amounts offered in the arm’s-length negotiations. [ 18 ] The material which the Applicant has put before me has not permitted me to determine that the Applicant acted in accordance with her fiduciary duty and that the price in the offer is the best price which can be obtained.

In the result, the Applicant’s application for relief in relation to the offer - set out at paragraphs 1(

a) through (

e) of her Notice of Application - is dismissed. [ 19 ] At the hearing, there was considerable discussion about the proper

interpretation of two provisions of the Will. They did not ultimately affect the outcome of the portion of the application heard by me. I offer my comments below, to the extent that they may assist the parties as they move forward. [ 20 ] The first provision, paragraph 2 of

Part I, provides as follows: Subject to the provisions of Paragraph 3 of

Part I, [1] below, I direct that should any difference of opinion at any time exist among my Trustees in relation to the commission or omission of any act in the execution of the trust of this my Will, the opinion of my Trustee having the majority of votes shall prevail, notwithstanding that any one or more of my Trustees may be personally interested or concerned in the matter in dispute or question; provided that my wife, so long as she is a Trustee hereof , shall have that number of votes which is equal to the number of my Trustees other than my wife, and each of my Trustees other than my wife shall have one vote. [ 21 ] Pursuant to this provision, the Applicant has three votes, and each of the three children has one vote. [ 22 ] The second provision, paragraph 14 of

Part III of the Will, deals specifically with the sale of Estate assets to a beneficiary: I authorize any one or more of the beneficiaries of this my Will, (notwithstanding that such beneficiary or beneficiaries may be a Trustee or Trustee of this my Will), to purchase any part or parts of my estate, real or personal, either at public auction or by private contract, provided in the latter case that the sale shall be conducted by Trustees (or by the disinterested Trustee or Trustees of this my Will, in the event that a beneficiary or beneficiaries so purchasing is also a Trustee or Trustees of this my Will), and shall be at such price or prices and subject to such terms and conditions and either for cash or credit or for

part cash and

part credit as the Trustee or Trustees of this my Will conducting the sale shall consider fair and reasonable. [emphasis added] [ 23 ] A power in a will which gives a trustee the power to purchase trust property will be strictly construed. Such power does not relieve the trustee of his fiduciary duty to accord the beneficiaries his finest loyalty: Ontario (Attorney General) v. Ballard Estate (1995), E.T.R. (2d) 212 at p. 219. [ 24 ] Similarly, paragraph 2 of

Part I, which permits a Trustee to vote even if interested or concerned in a matter, does not relieve a Trustee of his or her fiduciary duty. [ 25 ] In reliance on Paragraph 2, of

Part I, Andrew and the Applicant, representing a total of four of the six votes held by the Executors, signed the Authorization by Executors of the Estate, authorizing the Applicant to accept the offer. [ 26 ] Counsel for the Respondents submits that the requirement of paragraph 14 of

Part III that a sale to a beneficiary be conducted by disinterested Trustees clearly means that, despite the wording of paragraph 2, Andrew cannot vote to authorize a private sale of Estate assets to himself. I agree with the Respondents. Paragraph 14 must be strictly construed. Authorizing the sale is, in my view, part of conducting the sale; the sale cannot be completed without authorization by the Trustees.

The “specific” in paragraph 14 takes precedence over the “general” in paragraph 2. [ 27 ] Counsel for the Respondents also argues that since the Applicant is a vendor in her personal capacity, she is not a disinterested Trustee for the purposes of paragraph 14 and similarly cannot vote to authorize the sale, or conduct the sale. Given the construction of paragraph 14, it is my view that a “disinterested Trustee” for the purposes of that paragraph is a Trustee who is not purchasing part of the Estate by private contract.

Hence, the Applicant is not precluded by paragraph 14 from being involved in the conduct of the sale, which includes voting to authorize the sale, but she must of course do so in accordance with her fiduciary duty. [ 28 ] Counsel for the Respondents further argues, and I accept, that paragraph 14 mandates the involvement of all disinterested Trustees in the conduct of a private sale to a beneficiary who is a Trustee.

Hence, the negotiation of any direct or indirect sale to Andrew Jochem should be conducted with the involvement of the Respondents; they may not ultimately agree with the Applicant with respect to any such sale, but pursuant to the Will they are to be involved in the process. Given the Applicant’s personal interest in any such sale, I would think that, as a fiduciary, she would welcome the involvement of the Respondents. And hopefully, in the course of this process, the Respondents will be mindful of the fact that the involvement of Andrew Jochem and Mr.

Cristiano may be important in maximizing the value of the Estate’s shares in the Corporation. Costs

[ 29 ] If the parties are unable to agree on costs, the Respondents may make brief written submissions within 14 days, and the Applicant may make brief written submissions in response within 10 days thereafter. No reply submissions shall be provided without leave. Adjournment of the Balance of the Application [ 30 ] The balance of the application, namely the relief sought at paragraphs 1(

f) and (

g) of the Notice of Application in relation to a proposed post-closing wind-up of the Estate, was clearly not urgent and was accordingly not heard by me. It is adjourned to a date to be fixed at a Scheduling Appointment. ___________________________ Hoy J. Released: November 19, 2010 CITATION : Jochem v. MacPherson, 2010 ONSC 6391 COURT FILE NO.: 05-86/10 DATE: 20101119 ONTARIO SUPERIOR COURT OF JUSTICE IN THE MATTER OF the Estate of Hans Josef Jochem B E T W E E N: LISELOTTE JOCHEM - and - KARIN MacPHERSON , KLAUS JOCHEM and ANDREW JOCHEM

REASONS FOR DECISION Hoy J. Released: November 19, 2010