2017 ONSC 879, 2017 ONSC 879

CITATION : 969625 Ontario Ltd. v. Goldstone Resources Inc., 2017 ONSC 879 COURT FILE NO.: 2393/10 DATE: 20170206 ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: ) ) 969625 ONTARIO LIMITED and VERA CONN, Estate Trustee for GARY CONN ) ) ) P. James Zibarras and Lorne Honickman , for the plaintiffs ) Plaintiffs ) ) - and - ) ) ) GOLDSTONE RESOURCES INC. ) ) ) Jeffrey B. Simpson , Adam D.H. Chisholm and Paul Boshyk for the defendant ) Defendant ) ) ) ) ) ) HEARD: March 15, 16, 17, June 20, 21, 22, 23, 24, 27, 28, 29, October 3, 4 and December 16, 2016 Grace J. A.

Overview [ 1 ] Gary Conn was a shareholder, officer and director of Goldstone Resources Inc. (“Goldstone”) and its forerunners for a long time. On October 1, 2010, Conn was summarily dismissed. At issue is how much, if anything, Goldstone owes pursuant to a contract or, alternatively, at common law. [ 2 ] The plaintiffs seek judgment in the amount of $2,368,611.84. They rely on the terms of a Management Consulting Agreement dated as of June 30, 2008 (the “2008 MCA”) entered into with Goldstone’s predecessor Ontex Resources Limited (“Ontex”).

The other parties to the 2008 MCA were Conn and a company he controlled, 969625 Ontario Limited (“969”). While 969 is described as the “consultant”, for ease of reference and unless stated otherwise, I have treated Conn and 969 as one. [ 3 ] Goldstone maintains the plaintiffs are owed nothing under the contract. Goldstone alleges the 2008 MCA is unenforceable because Conn owed and breached a fiduciary duty by negotiating and entering into an agreement tainted by an inadequate process and

unfair and unreasonable terms. [4] If the 2008 MCA governs, Goldstone argues no payment is due because the agreement was terminated with cause aspermitted by and described in paragraph 4 (

b) of the 2008 MCA. [5] Just cause is Goldstone’s answer to the plaintiffs’ secondary claim to damages based on common law principles relating towrongful dismissal. B. Is the 2008 MCA Unenforceable? i. The Applicable Principles [6] The evidence is best understood if given some legal context. [7] Goldstone is the current name of a company incorporated pursuant to the Ontario Business Corporations Act (“OBCA”). [8] The statute requires officers and directors to disclose the nature and extent of their interest in any material contract theypropose to enter into with the corporation they serve.

That requirement is not in issue. Conn and his company were named parties in the2008 MCA. [9] Section 134(1) through (3) of the OBCA set forth the standard of care officers and directors must meet. The subsectionsprovide:

(1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall, (

a) act honestly and in good faith with a view to the best interests of the corporation; and (

b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

(2) Every director and officer of a corporation shall comply with this Act, the regulations, articles, by-laws and any unanimousshareholder agreement.

(3) Subject to subsection 108(5), no provision in a contract, the articles, the by-laws or a resolution relieves a director or officer from aduty to act in accordance with this Act and the regulations or relieves him or her from liability for a breach thereof. [10] Section 108(5) has no application to this case. [11] The purpose and consequence of the standard officers and directors must meet were explained in Re Unique BroadbandSystems, Inc., 2014 ONCA 538 (“UBS”).

At paras. 45 and 46 Hourigan J.A. wrote in part: The imposition of fiduciary duties on directors and officers of a corporation is consistent with the origins of the doctrine in trust law. Adirector or senior officer of a corporation is in a position of trust. He or she is charged with managing the assets of a corporationhonestly and in a manner that is consistent with the objects of a corporation.

Courts will be loath to interfere with the legitimate exerciseof corporate duties, but they will intervene where a fiduciary breaches the trust reposed in him or her. [The officer’s] fiduciary duties included an obligation to act in good faith and in the best interests of the corporation. He had a specificobligation to scrupulously avoid conflicts of interest with the corporation and not to abuse his position for personal gain… [Citationsomitted] [12] In Rooney v. Cree Lake Resources Corp., 1998 CarswellOnt 3059 (Gen.

Div.) at para. 52, Dilks J. concluded it is an officerand director’s fiduciary duty which requires the contract under consideration to be fair and reasonable to the corporation. The plaintiffsaccept that principle subject to their argument that Goldstone affirmed and therefore cannot challenge the 2008 MCA.[1] [13] A contract flowing from a breach of the required standard may be set aside by the court in whole or in part: Rooney v. CreeLake Resources Corp., supra at para. 57; UPM-Kymmene Corp. v.

UPM-Kymmene Miramichi Inc. (2002), 27 B.L.R. (3d) 43 (Ont.S.C.J.) at para. 213; aff’d (2004), (ON CA), 42 B.L.R. (3d) 34 (Ont. C.A.) (“UPM”). ii. Was the 2008 MCA affirmed? [14] The plaintiffs submit Goldstone affirmed the 2008 MCA and therefore cannot seek to set it aside. They rely on DiFlorio v.Con Structural Steel Ltd., [2000] O.J. No. 340 (S.C.J.). At para. 129, J. Wilson J. summarized the applicable principle in these words: The general principle governing the affirmation of a contract is that if a party to a contract either proceeds with the contract while

knowing that it contains a misrepresentation, or behaves in a fashion inconsistent with an intention to rescind the contract, that party will be bound by his or her affirmation and any remedy will be limited to damages. [Citations omitted] [ 15 ] On October 13, 2009, Ontex entered into a letter agreement which contemplated the acquisition of Roxmark Mines Limited (“Roxmark”). Ontex, Roxmark and 2223951 Ontario Inc. (“222”) entered into an Amalgamation Agreement the following month. The parties completed what was described as a three-cornered amalgamation in December, 2009.

Ontex changed its name to Goldstone at that time. [ 16 ] The plaintiffs note that no attempt was made to challenge the 2008 MCA prior to Conn’s termination although its terms were fully known by those who had come from Roxmark and, in time, gained control of Goldstone. In fact, the October 1, 2010 termination letter referred to and relied upon the termination provision the 2008 MCA contained. [ 17 ] The plaintiffs’ argument would be formidable if those were the only relevant facts. However, there is more. [ 18 ] As mentioned, the letter agreement contemplated Roxmark’s acquisition by Ontex.

As I will explain in more detail later in these reasons, two incompatible groups came together. Mr. Conn appears to have led what I will describe as the Ontex group and Philip Cunningham the rival Roxmark group. Although some of the details were kept from my view, it is clear a power struggle ensued and that over time the latter obtained the balance of power. [ 19 ] Dissatisfaction with the compensation paid to the former Ontex management generally and Conn specifically was expressed by members of the Roxmark group in early February, 2010. That theme was a recurring one.

In August, 2010 a possible alternative contractual arrangement was proposed. In fact, draft Consulting Service Agreements between Conn and Goldstone dated as of June 1, 2009 were sent to Conn for his review on August 5 and 19, 2010 by lawyer Bruce Rosenberg. [ 20 ] By that time, tension between the two factions was clearly escalating both outwardly and behind the scenes. [ 21 ] In my view, the most that can be said is that the opposing faction within Goldstone tolerated the status quo for a period of time. The 2008 MCA was one of many issues in play post-amalgamation.

In September, 2010, the composition of the board of directors of Goldstone changed markedly. Once that occurred, Conn stood alone. Other than as a director, Conn’s roles with Goldstone ended on October 1, 2010. This action was commenced only four days later. Goldstone challenged the validity and enforceability of the 2008 MCA in the statement of defence and counterclaim delivered on its behalf later that month. Those responsible for taking that position did not affirm the agreement.

Their opposition simmered before boiling over. [ 22 ] Goldstone’s position is that those in control of Ontex pre-merger either approved the 2008 MCA when they should not have done so or wrongly turned a blind eye to it because of their loyalty to Conn. Those issues warrant consideration on the merits. iii. The Sources of Evidence concerning the 2008 MCA issue [ 23 ] Eight witnesses testified at trial. The evidence of four of them related to the 2008 MCA.

Conn and Denis Crane were called by the plaintiffs, Howard Burshtein and Robert Levasseur by Goldstone. [ 24 ] The parties also compiled and on consent filed a significant documentary record including tabbed volumes. Absent an objection, a tab became part of the evidence once referred to by a witness. As will be seen, the numbered exhibits helped the parties and the court piece together what did and did not happen during the period of time that is relevant to the dispute. [ 25 ] Mr. Crane was a shareholder, director and member of the Compensation Committee of Ontex at the time the 2008 MCA was entered into. Mr.

Burshtein is a corporate lawyer. He periodically provided legal services to Ontex both before and after execution of the contract. Mr. Levasseur is an executive compensation consultant and was retained by Goldstone for the purposes of providing expert testimony at trial. [ 26 ] The manner in which Mr. Conn’s evidence was introduced requires explanation. A date for the commencement of trial had been long and anxiously awaited by the parties. It finally started on March 15, 2016. The parties knew the hearing could not be completed in the time that was then available. [ 27 ] Mr. Conn was the second witness called.

His examination-in-chief started late in the day on March 15 and continued on March 16 and 17, 2016. The matter was scheduled to be completed in a two week block commencing June 20, 2016. Sadly, Mr. Conn passed away on June 5 th . Mr. Conn’s examination-in-chief had not yet been completed. Needless to say, cross-examination had not yet commenced. [ 28 ] With the parties’ agreement Mr. Conn’s testimony was completed by each party reading in excerpts from affidavits previously sworn by him in this and related proceedings, transcripts of cross-examinations thereon and from Mr.

Conn’s examination for discovery. [ 29 ] On June 29, 2016, the evidentiary phase of the trial was completed. Closing argument occupied two days in October and an afternoon in December, 2016. [ 30 ] Mr. Conn’s spouse Vera represents his estate. An order to continue was granted as the Rules of Civil Procedure require. iv. Conn and his early history with Ontex

[ 31 ] Mr. Conn was born in northern Ontario in 1943. His interest in mining activities started as a teenager although he was an auto mechanic by trade.

Conn took up residence in London, Ontario and owned and operated an automobile repair business there for many years. [ 32 ] Conn testified that he became involved with a small, private mining company named Faymar Gold Mines Limited (“Faymar”) in the late 1960’s or early 1970’s. [ 33 ] In October, 1998, Faymar, Ontex and two other companies entered into a letter agreement that contemplated, among other things, an amalgamation of Faymar and Ontex. [ 34 ] Faymar and Ontex issued a Joint Management Proxy Circular and Proxy Statement (the “Circular”) in advance of seeking approval from their shareholders.

It noted that Conn was being paid $2,000 per week to serve as Faymar’s president. [ 35 ] The Circular explained that Conn was to serve as Executive Vice-President and Secretary of the amalgamated entity and that an employment agreement was to be entered into. The Circular also addressed two aspects of the employment arrangement: term and salary. Five years was contemplated for the former. Salary was to be determined by the board of directors. However, the Circular indicated that an annual stipend of $104,000 was anticipated.

That corresponded to the amount Conn was being paid by Faymar. [ 36 ] The Circular set forth one risk factor. In bold letters it read: The operations of Ontex and Faymar are speculative due to the high risk nature of their business which involves the exploration and development of mining properties. [ 37 ] Necessary approvals were obtained and the amalgamation was completed in December, 1998. Ontex continued to be the name of the amalgamated entity. [ 38 ] Thereafter, Conn becoming a shareholder, officer and director of Ontex. I mentioned the fact that Faymar was a private company.

The shares of Ontex were listed on the Alberta Stock Exchange at the time of the amalgamation. They were listed on the Toronto Stock Exchange (“TSE”) during the years that are most relevant to the parties’ dispute. [ 39 ] As contemplated, the parties entered into an Independent Contractor Agreement dated as of December 15, 1998 (the “1998 agreement”). [ 40 ] The principal provisions of the 1998 agreement are summarized in the following table: Contract term Initial five year term ending December 14, 2003, subject to Conn’s right to renew for an additional five year term: para. 2.1 Conn’s Title(

s) Executive Vice-president:

schedule “A” Conn’s Duties Conn was to use his best efforts to enhance the business and profile of Ontex including providing the following services: a. Soliciting financing and negotiating financial contracts; b. Assisting the Chief Executive Officer; c. Completing projects as assigned; d. Financial consulting; e. Field activities.

In addition, Conn was to act honestly, in good faith and in the best interests of Ontex and was to exercise the degree of diligence and responsibility that a person having his expertise and knowledge of the affairs of Ontex would reasonably be expected to exercise in comparable circumstances: para. 3 and Sch. “A” Conn’s Remuneration $5,000 per month plus reimbursement of reasonable expenses: para. 5. Annual increase No.

Termination by Conn On sixty days’ written notice: para. 7.1. Termination by Ontex Immediately in the event of Cause for Termination: para. 7. [ 41 ] The 1998 Agreement executed by Conn and Ontex contained an option to renew the Circular had not mentioned. In addition, Conn’s annualized salary was $60,000 and not $104,000 as had been forecast when the Circular was distributed. Evidence was not led concerning the process undertaken in respect of this contract.

During his examination-in-chief, Conn testified that the 1998 Agreement had been drafted by lawyer Manoj Pundit. [ 42 ] A June 6, 2003 resolution of the board of directors of Ontex noted that Conn had exercised his option to extend the term of the 1998 agreement until December 15, 2008. The board approved an amendment which saw the fee paid to Conn increase to $8,666.67 per month or $104,000 annually. [ 43 ] Several more years passed. During a June 29, 2007 meeting, the Ontex board of directors resolved that Conn would serve as president, chief executive officer and treasurer. v.

The 2008 MCA and its terms [ 44 ] The 2008 MCA came into effect almost exactly a year later. There were three signatories: Ontex, Conn and 969. [ 45 ] The principal provisions of the 2008 MCA are summarized in the following table: Contract term Initial five year term commencing June 30, 2008 and ending June 30, 2013, subject to Conn’s right to renew for an additional five year term: para. 2. Conn’s Title(

s) President and Chief Executive Officer or Chairman: para. 1. Conn’s Duties The Consultant was to: a. Be involved in all aspects of mineral and hydrocarbon exploration and development including personnel and regulatory approvals; b. Be involved in acquiring mineral and hydrocarbon leases and other property interests; c. Provide financial consulting, fund raising and investor and shareholder communication; d. Fulfill additional responsibilities as reasonably assigned by Ontex; e. Report to the Ontex board: para. 1.

Ontex acknowledged that 969 and Conn would be engaged in other businesses and employment with related and unrelated entities: para. 3. Conn’s Remuneration $175,000 per year plus reimbursement of reasonable expenses: para. 6. Annual increase Yes. The salary was to increase at the rate of 10% per annum: para. 6. Termination by Conn On thirty days’ written notice: para. 4(c). Termination by Ontex Only in the event of cause: para. 4(a).

vi. The Approval Process [ 46 ] Many documents were introduced into evidence. Minutes of some of the meetings of the board of directors of Ontex were among them, including one held on July 24, 2008. Those minutes did not mention the 2008 MCA. [ 47 ] Ontex also had a Compensation Committee. Three members of the Ontex board were appointed to serve on that committee during a June 29, 2007 meeting: Crane, Jason Evdoxiadis and Robert Montemarano.

They continued to serve in that role when the 2008 MCA was signed. [ 48 ] As noted, Crane, a former Chair of the Ontex Compensation Committee, testified at trial. [ 49 ] Crane is a well-educated and experienced London, Ontario based businessman with involvement at the board and management level in companies engaged in a range of activities from manufacturing to investment. [ 50 ] He was introduced to Conn in the early 1980’s when their non-mining business paths crossed. [ 51 ] Crane said his connection to Ontex began in September, 1998.

He started buying shares because Conn promoted the company as a worthwhile and significant investment. [ 52 ] Crane remembered becoming a director of Ontex in 2005. It was not the only mining company with which he was involved at that level. A relationship with another junior exploration company, Strike Minerals, had commenced the year before. [ 53 ] When asked about the 2008 MCA, Crane offered this explanation. He said Ontex was looking to renew an earlier agreement which had expired. Conn presented a draft agreement which was based on the one that had been in place for the previous Chair Salvatore (Sam) Fuda.

Crane explained that discussions concerning a new arrangement were ongoing for approximately two months. [ 54 ] Crane told the court the company was growing, thanks in large measure to Conn’s efforts. Conn had a proven track record of raising funds, managing investor relations and implementing a successful exploration program. Conn had developed important contacts and relationships. A long-term contract offered needed stability.

It demonstrated Conn’s commitment to taking Ontex’s operations to new heights and added credibility to the statement the company was a long-term player in the mining industry. [ 55 ] With respect to compensation, Crane said information from comparable companies operating in the same geographical area was obtained. He said the Compensation Committee was of the unanimous view Conn was being paid a market rate. vii. Subsequent Events [ 56 ] A July 9, 2008 press release outlined changes in management that had occurred at Ontex over the past year.

Conn’s appointment as president and CEO was mentioned but nothing was said concerning the 2008 MCA. [ 57 ] Roles were shuffled by the Ontex board of directors again on July 24, 2008. John Thompson became president of Ontex. Conn relinquished that role. He continued to be CEO. Chairman and Treasurer were additional titles Conn was given at that time. [ 58 ] Neither the existence nor terms of the 2008 MCA were disclosed to the Ontex shareholders until sometime in 2009. Some details appeared in the company’s December 31, 2008 consolidated financial statement.

Released under cover of a February 27, 2009 auditor’s report, a note to the financial statement contained this passage: The Company has an ongoing commitment in the amount of $175,000 per year, escalating by ten percent annually under an agreement expiring December 31 [ sic ], 2018, to compensate an executive officer for management services. [ 59 ] The executive officer in question was unnamed. [ 60 ] The shareholders of Ontex learned more about the 2008 MCA soon afterward.

In a March 12, 2009 e-mail exchange concerning the Management Discussion and Analysis (“MD&A”) that was to be provided to shareholders, Crane suggested including a paragraph about the 2008 MCA. Crane proposed the following: The Company has an ongoing commitment in the amount of $175,000 per year, escalating by ten percent annually under an agreement expiring December 31 [ sic ], 2018, to compensate Gary Conn the Chairman and CEO for management services. Ontex is pleased to have secured Mr. Conn’s long-term commitment to the Company under the agreement. [ 61 ] Mr.

Evdoxiadis suggested the MD&A contain something more expansive. His preferred version read: Ontex is pleased to have secured the long term services of Gary Conn in his management role at the company. The Board of Directors felt that it was integral to provide the company with the stability and knowledge base that Mr. Conn has demonstrated to the company in his past capacities and in his current role as CEO and Chairman. The contract, in the view of the Board, has significantly reduced the key person’s risk which would impact the company in this critical phase of the gold cycle.

The company has entered into an ongoing commitment in the amount of $175,000 per year, escalating by ten percent annually under an agreement expiring December 31 [ sic ], 2018, to compensate Gary Conn for management services. This is at the low end of the pay scale, as determined by the compensation committee, for similar roles and functions.

[ 62 ] I did not see the version of the MD&A the shareholders received. However, it is reasonable to conclude the revised wording was used. Crane approved the revised draft although he regarded it as “a little wordy”. [ 63 ] The financial terms raised the ire of shareholder Ross McGroarty. He referenced the note to the December 31, 2008 financial statement in an April 16, 2009 e-mail sent to Conn and the members of the Ontex Compensation Committee. Mr. McGroarty calculated the executive officer in question would receive $2,789,049 over the ten year term of the Ontex commitment. [ 64 ] McGroarty was not alone.

Shareholder Jim Chapman expressed concerns in an April 22, 2009 e-mail. [ 65 ] Crane sent Evdoxiadis an e-mail on April 28, 2009 in an effort to calm “very aggressive” calls Evdoxiadis was receiving concerning Conn’s compensation. [ 66 ] On November 17, 2009, McGroarty sent a long e-mail to Conn, Crane, Montemarano and Patrick Sheridan. Crane and Montemarano were the remaining members of the Compensation Committee. Mr. Sheridan had become the president and CEO of Ontex on June 3, 2009.

Conn had relinquished his CEO role and become the Chief Operating Officer instead. [ 67 ] McGroarty explained why, in his view, Conn was ill-suited for the roles he held. Mr. Sheridan sent a three word response the following day. It consisted of McGroarty’s first name and a two word expletive. [ 68 ] The amalgamation agreement among Ontex, Roxmark and 222 was signed that same day and the transactions it contemplated were completed the following month. [ 69 ] As mentioned earlier, displeasure with Conn’s contractual arrangement was communicated forcefully among members of the Roxmark group in February, 2010.

As also noted, negotiations occurred in August, 2010 which would have resulted in a new agreement had they been successful. viii. Analysis and Conclusion [ 70 ] There are two concerning aspects of the 2008 MCA: the decision making process that preceded its execution and some of the terms the agreement contained. I turn first to the process. [ 71 ] The approach that was to be adopted seems clear enough. The Ontex board of directors had established a Compensation Committee. Three board members belonged to that committee during the relevant period.

They were Crane, Evdoxiadis and Montemarano. [ 72 ] No contemporaneous document was produced during the trial that sheds any light on the nature or extent of the Compensation Committee’s involvement in the formation, preparation, negotiation, finalization or approval of that agreement. It should be noted that the 1998 agreement was not scheduled to expire until December, 2008. I do not know why the parties decided the 2008 MCA would have effect before then. [2] [ 73 ] Conn suggested the 2008 MCA was drafted by Mr. Pundit. I have no way of knowing whether that is so. Mr.

Pundit did not testify, although the plaintiffs’ counsel informed me of his current professional affiliation in Toronto during the trial. [ 74 ] Mr. Pundit had been retained by Ontex as a consultant pursuant to a July 17, 2000 agreement. He had been appointed to hold the office of secretary at a June 29, 2007 board of directors meeting. Mr. Pundit’s name did not appear in the May 30, 2008 minutes. Mr. Burshtein attended that meeting as counsel to Ontex. I saw nothing that evidenced Mr. Pundit’s participation in the exercise. [ 75 ] Crane did not mention Pundit.

He thought the 2008 MCA was based on one Ontex had entered into with Sam Fuda. An Independent Contractor Agreement dated December 15, 1998 between those parties was made an exhibit at trial. However, its principal terms, including the five plus five year term, were similar to if not identical with those in the 1998 agreement, not the 2008 MCA. Fuda and Ontex were not parties to any other agreement that was produced during the trial. [ 76 ] Adding to the procedural uncertainty is the absence of Compensation Committee minutes as acknowledged by Crane in a draft letter he authored in late July, 2010.

The document was formulated to respond to an inquiry made by the TSE. The draft referred to notes Crane had made in his journal. Five meeting dates in April and May, 2008 were listed. More were said to have been held in June and July, 2008. Crane represented that Conn’s increased role and proposed compensation were discussed. [ 77 ] The draft letter offered an explanation for the amount Ontex agreed to pay Conn. The previous Chair had resigned. Conn had agreed to assume his role too. Fuda and Conn had been paid a combined $204,000 per year.

According to Crane “a salary of $175,000 would be within the operating budget of Ontex.” Sage Gold, Kodiak Explorations and Roxmark were identified as other mining companies operating in the same geographical area as Ontex. The draft letter referred to a set of numbers said to have been drawn from the financial statements of those companies and recorded in Crane’s notes. [ 78 ] Although those figures for each comparable far exceeded $175,000, they are perplexing for two reasons. First, the numbers Crane recorded are not confined to executive compensation.

Payments by Kodiak for “management fees including exploration, administration, salary”, by Roxmark for “Office and Administration” and by Sage on account of six different categories including “salary”, “directors and officers” and “management” were set forth. On its face, the draft letter compared dissimilar things. [ 79 ] Second, as mentioned, Crane provided information to Compensation Committee member Jason Evdoxiadis on April 28, 2009 for the purpose of responding to inquiries the latter had received concerning Conn’s remuneration. Crane did not mention Roxmark at that time.

Instead he made this comment and suggestion:

Gary [Conn] is paid the market rate for an exploration company. If the comparison were expanded, I am sure you would find more comparisons. [ 80 ] It is more probable than not that Roxmark was, in fact, an additional company Crane identified sometime after April 28, 2009. It was not a company that had been regarded as comparable when the 2008 MCA was executed. [ 81 ] Furthermore, one wonders why Crane needed to provide comparable information to Mr. Evdoxiadis at all. Mr. Evdoxiadis was not new to the Compensation Committee. He had been appointed in 2007 and was still a member at the time of the 2008 MCA.

Information concerning compensation paid in similar circumstances should already have been in hand. Why was it necessary for Crane to provide market data to a fellow committee member after the fact? [ 82 ] The answer is revealed by two documents. First, Goldstone’s response to the TSE dated August 4, 2010 included an edited version of Crane’s draft explanation. It identified the individuals who settled Conn’s compensation in 2008. Only two names appeared: Crane and Montemarano.

The name Evdoxiadis was conspicuously absent. [ 83 ] Second, Crane’s April 28, 2009 e-mail contained an attachment summarizing the annual salary of and securities under option held by the presidents of Sage Gold and Kodiak. The figures used by Crane for Sage Gold were drawn from information Sage Gold sent to its shareholders in February, 2009. [3] Those numbers post-dated the 2008 MCA. They could not have been relied upon by the Ontex Compensation Committee before the agreement was signed.

Lower numbers appeared in the document Sage Gold sent to its shareholders in February, 2008. [ 84 ] The smell of an after-the-fact analysis and justification is already strong. However, it became overwhelming when Crane testified that his journal was no longer available. He said he thought the Conn compensation issue was resolved by Goldstone’s August 4, 2010 letter because nothing more was heard from the TSE. [ 85 ] However, Conn was terminated less than two months later. This action was commenced within days. Pleadings were exchanged in October, 2010. The validity of the 2008 MCA was called into question.

It is highly unlikely that Conn failed to advise Crane of that fact. Crane appeared at trial without a summons. Crane’s evidence concerning the decision-making process is not credible. It is not reliable. [ 86 ] I add some other observations. No resolution of the Compensation Committee or the board of directors concerning the 2008 MCA was produced. That seems extraordinary. Those are routine corporate documents. If signed, where did they go? [ 87 ] As noted, the 2008 MCA was trumpeted by Conn and Crane as an agreement that provided stability.

The clear implication was that same was expected to please existing and prospective investors. A press release was issued by Ontex on July 9, 2008. Conn was mentioned. In part, Ontex announced: Over the past year, the Company’s management has been changing and getting stronger and intends to be aggressive over the coming year. Last year, Mr. Gary Conn was appointed President and CEO of the Company… [ 88 ] Conn’s titles were disclosed. However, no other details were provided.

There was no mention of the 2008 MCA or the extension of his arrangement. [ 89 ] Was that omission a product of the fact the 2008 MCA was signed a little later in the year? It was not. Press releases dated September 5, October 20, December 18, 2008 and March 30, 2009 made no mention of the 2008 MCA either. Not a single word was said about the fact Conn and Ontex had entered into a long-term commitment. Needed stability was in hand and unmentioned? That seems very odd. [ 90 ] The June, 2009 consulting service agreement between Ontex and Sheridan provides a stark contrast (the “Sheridan agreement”).

It was the subject of a resolution of the Compensation Committee. A press release was issued the same day the arrangement was approved by the Ontex board of directors. That development was celebrated. Strangely, if not tellingly, silence reigned when it came to Conn’s new, long-term contract. [ 91 ] It is clear from the evidence that Ontex did not seek advice from its counsel concerning the 2008 MCA before execution. It was, however, the subject of an after the fact discussion. [ 92 ] Mr. Burshtein testified at trial. He identified a handwritten note he authored on November 17, 2008. With Mr.

Burshtein’s assistance the contents of the note can be recited verbatim. After referring to a discussion with Conn, its date and the 2008 MCA, Burshtein wrote: Advised him of vulnerabilities No termination provision by company Board/Committee may be exposed because of above/subject to criticism Take-over/defence tactics – could be challenged Renewable at option of Conn only/not company Corporate concerns Doesn’t want an employment lawyer to review the agreement

[ 93 ] At trial, Conn testified he had no recollection of the event. Even if that was so, I have no doubt the conversation occurred exactly as Burshtein recorded it. [ 94 ] In re-examination Crane was asked whether friendship had anything to do with decisions made. He denied that was so. With respect, the record leads to the opposite conclusion. There is no contemporaneous record of any decision making process, let alone due diligence. There is no evidence of negotiation. There is no indication that outside advice of any kind was contemplated, let alone solicited.

There is no proof that anyone considered, let alone assessed, the wisdom of the arrangement from the perspective of Ontex. [ 95 ] A May 21, 2009 e-mail is also telling despite the fact it was written months later. Conn was intent on hiring Patrick Sheridan. Evdoxiadis had expressed concerns. He suggested that Ontex obtain an independent report. Soon afterward Montemarano e-mailed Conn and Crane. In part he wrote: We will vote yes together and this will be enough to approve the deal. [Evdoxiadis’] vote does not matter so he can vote no or whatever.

No need to waste two weeks on [Evdoxiadis] asking around about Pat Sheridan. [ 96 ] Conn expressed his appreciation to Crane and Montemarano for their support. Conn answered: …I have been very proud to have you for a [ sic ] close friend and always backing me. You two are very close to me and I thank both of you for putting up with me at times. [ 97 ] As mentioned, Crane and Montemarano and Evdoxiadis were the persons identified as having negotiated the 2008 MCA with Conn in the letter Goldstone sent the TSE on August 4, 2010. I am confident it was accurate. The letter bore the names of Sheridan and John Timmons.

Conn had been responsible for hiring both of them. They were all members of the Ontex group. [ 98 ] In my view, the decision making process leading up to the 2008 MCA was woefully deficient. The evidence supports only one conclusion: the agreement was presented in the form Conn desired and was rubber stamped by a Compensation Committee and board of directors that was friendly to him, rather than mindful of the responsibilities the law imposes. [ 99 ] In that regard this case is similar to UBS .

At issue there were decisions made by the board of directors, on the recommendation of the company’s compensation committee, to terminate a Share Appreciation Rights Plan (“SARs plan”), to establish a SARs cancellation payment pool of $2.31 million and to create a bonus pool in the amount of $3.4 million. Dissatisfied shareholders reacted soon afterward. Changes in management and at the board of directors’ level followed. One of the casualties was a former officer and director named Gerald McGoey.

McGoey had also been a member of the UBS compensation committee. [ 100 ] After UBS made application under the Companies’ Creditors Arrangement Act , McGoey filed proofs of claim seeking payment of amounts alleged to be due from the SARs cancellation payment and bonus pools. The monitor appointed under that statute denied the claims. McGoey’s entitlement was the subject of a trial before the Honourable Justice Mesbur. [ 101 ] The trial judge concluded the decision making process of UBS was flawed. At para. 142, Mesbur J. wrote: Here the UBS compensation committee had no independent members at all.

Each of the members of the compensation committee held SARs units, and stood to benefit from any enhancements to the SAR plan. Having made the decision to trigger the SARs, the board members (most of whom were SAR holders) also knew their personal SAR units would likely be worth very little if they were valued according to the terms of the plan. [ 102 ] Unlike this case, the UBS board had at least sought and obtained general advice from its corporate counsel.

However, at para. 159, the trial judge noted that the lawyer “was not asked to opine on the reasonableness of the changes to the SAR and bonus plans.” [ 103 ] The nature, rather than the fact, of the retainer was of critical importance. Mesbur J. observed at paras. 160 and 161: In my view it is not an answer to complaints about the board’s actions to point simply to a letter outlining what the board’s duties are, and how it should exercise its business judgment. The court must have evidence of how exactly the board went about its task.

Having board members recognize their obligations to act in the best interests of the corporation and its shareholders is not the same as leading evidence to show that their actions were actually in those best interests, and taken only with a view to enhance those best interests. Put another way, it is not enough to say the board was given an appropriate roadmap, without showing that the board actually followed the map’s directions. [ 104 ] The Court of Appeal agreed with that finding. At para. 43, Hourigan J.A. wrote: …the trial judge’s finding that Mr.

McGoey breached his fiduciary duties to UBS was well supported in the evidence before her and by the lack of any clear explanation from Mr. McGoey as to how the UBS Board decided to establish the SAR Cancellation Awards and the Bonus Pool. [4] [ 105 ] The absence of a documented process is at odds with the evidence of Crane that the 2008 MCA was negotiated over a period of months and the subject of discussion at several meetings.

For reasons already given and for more to follow, the 2008 MCA was very likely accepted by Ontex without any critical analysis or bargaining. [ 106 ] The influence exercised and control over the affairs of Ontex enjoyed by Conn in mid to late-2008 is obvious. However, the company was not his personal fiefdom. The Compensation Committee and board of directors of Ontex did not provide any oversight. Protection of the interests of Ontex required questioning minds rather than immediately nodding heads. [ 107 ] Goldstone does not rely on a flawed internal procedure alone.

It submits that all of the principal terms of the 2008 MCA are

unfair to and unreasonable from the perspective of the company. [ 108 ] At trial, Crane offered reasons for his belief that the terms of the 2008 MCA were fair and reasonable to Ontex. The company was growing, thanks in large measure to Conn’s efforts. He had a proven track record of raising funds, managing investor relations and running a successful exploration program. Conn had developed important contacts and relationships. A long-term contract offered needed stability.

It demonstrated Conn’s commitment to taking Ontex to new heights. [ 109 ] Goldstone maintains the initial annual compensation of $175,000 was too high, an automatic annual ten percent increase egregious, the term of five years with an option to renew excessive and the grounds of termination available to Ontex far too restrictive. [ 110 ] I will deal with the length of the contract later in these reasons.

With respect to the balance of the items, I agree with Goldstone even though I do not quarrel with Crane’s testimony there was good reason for Ontex to continue its relationship with Conn. [ 111 ] I start with the salary. Some increase may well have been warranted in 2008. The amount payable to Conn had been adjusted in 2003 but not afterward. However, the Compensation Committee and board of directors of Ontex were clearly subject to influence from Conn.

It was therefore imperative that they have fact based data that, objectively, supported the conclusion that the compensation awarded was in the best interests of the company’s shareholders. [ 112 ] I have already concluded that executive compensation data from comparable companies was not sought until after the 2008 MCA was signed. [ 113 ] The true explanation for the amount of the initial remuneration lay elsewhere in the draft letter Crane authored in July, 2010. In seeking to justify the compensation package, Crane noted that Conn would be assuming the role of Chairman following Fuda’s resignation.

Crane added: We also realized that previously the combined salary of S. Fuda and G. Conn would be equal to $208,000. We decided that a salary of $175,000 would be within the operating budget of Ontex. We also looked at the new commitment being made by Mr. Conn to focus his efforts on Ontex… [ 114 ] Three things are mentioned: a combination of roles, a more focused effort and the Ontex operating budget. The first two do not withstand scrutiny. The third is, in my view, irrelevant.

Let me explain. [ 115 ] During cross-examination, Crane agreed Conn’s compensation level was based on the premise he would fulfil Fuda’s former role too. However, Conn did not make a long-term commitment to fill an additional position. [ 116 ] Dated as of June 30, 2008, the 2008 MCA contemplated Conn serving as “the President and Chief Executive Officer or Chairman”. Conn already held the first two positions. He had been appointed by the board of directors to the offices of President, CEO and Treasurer on June 29, 2007. Mr. Fuda had been appointed Chairman at the time. [ 117 ] By July 24, 2008, Fuda had resigned.

The board appointed Conn to the offices of Chairman, CEO and Treasurer on that day. John Thompson replaced Conn as president of Ontex. By that time the ink on the 2008 MCA had barely dried, if it had been applied at all. Conn did not add Fuda’s duties to the ones he retained. He simply shifted from President to Chairman. [ 118 ] Furthermore, less than a year later Sheridan replaced Thompson. As intended, Sheridan played a significant role in the affairs of the company until his dismissal in September, 2010. [ 119 ] The suggestion Conn intensified his focus on Ontex is at odds with paragraph 3 of the 2008 MCA.

It provided: During the term of this agreement, the Consultant shall faithfully serve the Corporation and shall devote such amount of time as shall be necessary to discharge its obligations pursuant to this agreement. The Corporation acknowledges that the Consultant and Conn shall be engaged in other businesses and employments with other entities unrelated and related to the Corporation at various times during the term of this Agreement . [Emphasis added] [ 120 ] Third, the fact Ontex could afford to pay Conn annual compensation of $175,000 was not a reason to award it.

His earnings should have been determined after considering the nature and value of the services Conn had provided and was to provide. At that point, budgetary considerations were relevant. Not before. [ 121 ] Furthermore, Crane’s financial analysis was flawed. He made no mention of amounts paid to Thompson or Sheridan or their inevitable impact on the company’s operating budget.

Crane was wrong when he suggested the number of senior officers declined following Fuda’s resignation. [ 122 ] I turn to the annual ten percent increase contemplated by the 2008 MCA. [ 123 ] In real terms that meant compensation would have increased from $175,000 in year one to $256,217 in year five. If the renewal option had been exercised, Conn would have been earning $412,640 by year ten. [ 124 ] Robert Levasseur was qualified as an expert at the request of Goldstone and permitted to give expert opinion evidence on issues relating to executive compensation.

He is a senior consultant and principal with McDowall Associates. After graduating from McGill University in 1976, he was in private industry until 1998. He had a range of duties that included executive compensation and benefits. He has acted as a consultant since that time and has often advised management and boards on compensation arrangements.

Levasseur said he had historical experience in dealing with a junior mining organization. [ 125 ] As occurred in UBS , Levasseur was asked whether the principal terms of the 2008 MCA were in the range McDowall Associates would have considered fair and reasonable had it been advising the Ontex board of directors at the time. Several provisions

were ones Levasseur would not have recommended. A ten percent annual increase was one of them. [ 126 ] In Mr. Levasseur’s opinion a raise of that magnitude was too high. Furthermore, a mandatory increase fettered the discretion of the board of directors. Ordinarily the board decided whether an annual increase was warranted. Based on his experience, Mr. Levasseur said such a provision was unusual, if not unprecedented. [ 127 ] During cross-examination, Levasseur acknowledged that his experience in the mining industry was historical and limited.

His opinion was based on knowledge gathered from experience gained primarily in other industries. All but one or two of the agreements he had reviewed related to an industry other than mining. [ 128 ] In my view, the evidence of Levasseur added little to the analysis. His testimony was anecdotal. His opinions flowed from his personal experience rather than any objective study. [ 129 ] However, it does not follow that the provision is fair and reasonable from the perspective of Ontex. An automatic annual increase for a period of at least five and potentially ten years is eyebrow raising.

A fixed rate of ten percent is too. [ 130 ] Conn had been earning $104,000 per annum at the time of the Faymar and Ontex amalgamation. The 1998 agreement reduced his compensation to $60,000 annually. It did not provide for any increase. [ 131 ] Conn exercised the option to renew the 1998 agreement in 2003. Soon afterward the contract was amended to increase Conn’s annual compensation to $104,000. The amending agreement did not contemplate an adjustment. [ 132 ] The 2008 MCA was entered into months before the expiry of the 1998 agreement.

As mentioned, Conn’s annual compensation jumped to $175,000 in the first year. [ 133 ] For the first time, the issue of an annual increase was addressed. [ 134 ] During direct examination Crane was asked to explain the compensation provision including the yearly adjustment. Explanation and justification was appropriately sought. It is self-evident that the agreed upon rate is significant. The increase for each subsequent year is based on the amount paid in the previous year.

By my calculation the compensation payable in the tenth year ($412,640) represented a two hundred and thirty five percent increase over that paid in the first ($175,000). [ 135 ] Crane’s description of Conn’s enhanced role seemed intended to address all aspects of his compensation. I have already concluded that evidence was overstated. Crane also testified about the path Ontex was expected to follow. He said it was anticipated that the activities of Ontex would soon evolve from exploration to production.

When that occurred, dozens of new employees would be hired. [ 136 ] However, there is nothing in the 2008 MCA that tied remuneration to those expectations. There were no performance markers for Conn or Ontex. To be clear, unless Ontex terminated the 2008 MCA, a ten percent pay raise was automatic for the entire term. Ontex did not have to discover another ounce of gold. It did not have to produce a thing. [ 137 ] In time, the key provisions of the 2008 MCA were disclosed to the Ontex shareholders. As mentioned, some of them reacted swiftly and negatively to the new deal.

McGroarty emphasized the aggregate payment of $2.789 million the contract required in his April 16, 2009 e-mail. [ 138 ] Mr. Chapman sent one of his own the following week. He noted that the effect of the arrangement was “to add a significant liability for any potential buyer to consider.” He said questions were also being raised by others. That was corroborated by Evdoxiadis when he advised Crane of the discontented calls he was fielding concerning Conn’s compensation. [ 139 ] The court is not to assume the role of an armchair quarterback.

Second guessing after the fact is often easy but almost always unfair to those involved in making business decisions in real time. Trial judges should not substitute their business judgment, assuming they have any, for that of a company’s board of directors. However, that does not mean that all corporate decisions are untouchable. The comments of Hourigan J.A. in UBS at para. 72 must be borne in mind: It must be remembered that the business judgment rule is really just a rebuttable presumption that directors or officers act on an informed basis, in good faith, and in the interests of the corporation.

Courts will defer to business decisions honestly made, but they will not sit idly by when it is clear that a board is engaged in conduct that has no legitimate business purpose and that is in breach of its fiduciary duties. [ 140 ] The business judgment rule applies only if the following preconditions are proven: honesty, prudence, good faith and a reasonable belief that the actions were in the corporation’s best interests: UBS , supra at para. 71 . [ 141 ] Those elements have not been established on the evidence introduced at trial.

I have no idea what analysis, if any, was undertaken by the Ontex Compensation Committee concerning the annual increase. Why ten percent? Why annual? Why were there no performance markers? The failure by the plaintiffs to provide answers to any, let alone all, of those questions is at best mystifying and at worst, damning. [ 142 ] This deep hole in the evidence was clearly in the minds of the plaintiffs’ counsel. During the trial, Conn was shown management consulting agreements executed by various consultants with Pifher Resources Inc. (“Pifher”) and Echo Energy Inc. (“Echo”).

Some of them included the same annual increase provision. However, those examples are unhelpful. Their existence says nothing about their fairness or reasonableness or the process that preceded them. [ 143 ] In any event, arrangements with other companies are not in issue in this case. The anecdotal evidence was interesting but not compelling. I also note that three of the contracts were provided by Conn on the eve of or during the trial although he had been involved

with Pifher and Echo for years. They did not advance the plaintiffs’ position on this issue. [ 144 ] I turn to the termination provision the 2008 MCA contained. [ 145 ] The 1998 agreement could be terminated by Ontex for six reasons. The 2008 MCA reduced the number to four. [ 146 ] For ease of reference a comparison of the relevant provisions is set forth in the following table: 1998 Agreement 2008 MCA Ontex could terminate Conn in the event of Cause for Termination which was defined as:

a) Conn’s failure to comply with the agreement if same continued for 10 days after Ontex had given Conn written notice of such failure;

b) Conn engaging in any act that was injurious to Ontex;

c) Conn engaging in any criminal act of dishonesty resulting in or intended to result in direct or indirect personal gain at Ontex’s expense;

d) Conn personally profiting from a transaction involving Ontex unless the transaction involved shares held by Conn or was disclosed to and approved by Ontex;

e) Conn breaching the non- competition, non-solicitation or confidentiality provisions of the agreement; or

f) Any other cause for termination recognized by law. Ontex could terminate Conn/969 in the event of cause which was defined as:

a) Same as

a) in the 1998 Agreement. However, the notice period was extended to 30 days;

b) Conn being unable to perform his duties due to mental disease, affliction or death;

c) Gross negligence by 969 or Conn;

d) Same as

c) in the 1998 Agreement. [ 147 ] While the 2008 MCA added two circumstances allowing termination that were not found in the 1998 Agreement, the provision in the former is narrower than in the latter. Why were events b), d),

e) and

f) in the 1998 agreement deleted from the 2008 MCA? The 2008 MCA contained non-competition, non-solicitation and confidentiality provisions too. Why would a breach of them no longer justify termination? Why would participation in an undisclosed and unapproved transaction involving Ontex no longer have that consequence either? Why was the reference to other circumstances constituting cause at law omitted? Why would Ontex have agreed to such amendments?

Once again, I simply do not know. [ 148 ] The termination provision in the 2008 MCA limited the circumstances in which Ontex could extricate itself from the arrangement. Conn’s position was largely entrenched for the entire five, or if he chose to exercise the option he was given, ten year period. [ 149 ] No external advice of any kind was sought by the Compensation Committee or board of directors. No explanation for the significant narrowing of the circumstances in which Ontex could exercise a right of termination was provided.

There is no evidence of consideration of, let alone negotiation concerning, that lopsided clause. [ 150 ] Mr. Burshtein, did not see the document until November, 2008. It had been signed months earlier. Concerns were expressed by the lawyer then acting for Ontex. The fairness of the agreement from the perspective of the company was questioned. The potential exposure of the board of directors and Compensation Committee was highlighted. The reason is clear. The 2008 MCA contained terms which were more than simply disadvantageous. [ 151 ] Those would have been caught if appropriate procedures had not been adopted.

Even when that deficiency was brought to Conn’s attention, nothing was done. Conn did not want an employment lawyer to review the agreement. Only when the relationship with the Roxmark group descended into darkness in 2010 did Conn consider agreeing to changes to its terms. [ 152 ] The provisions to which I have referred were unfair and unreasonable. An increase in compensation may well have been justified but the Compensation Committee did not exercise reasonable – or perhaps any – diligence before agreeing to the sum of $175,000.

The annual increase and termination provisions are bewildering in their scope and indefensible on the evidence presented. The terms of the 2008 MCA resulted from an abdication of responsibilities rather than business judgment. Conn was the person who orchestrated a selfish and over-reaching deal. [ 153 ] As in UBS , supra at para. 43 , Conn’s actions “were driven by self-interest, unsupported by any reasonable or objective criteria,

and contrary to the interests of” the company he was obliged to protect. Conn breached the fiduciary duties he owed. [154] In UBS and in UPM the trial judges concluded the appropriate remedy was to set aside the agreement that was entered into as aresult of the breach of fiduciary duty. Because the focus at trial was on particular provisions of the 2008 MCA, only the compensationand termination provisions will be set aside. C.

Was Conn terminated by Goldstone for Cause? [155] Goldstone acknowledged that it must establish it had just cause to oust Conn from his consulting role even if the terminationprovision of the 2008 MCA was inoperative. [156] The general legal principles that apply are undisputed. [157] While reasons for termination were set forth in the letter Goldstone delivered to Conn on October 1, 2010, Goldstone is notconfined to them. An employer may rely on pre-termination misconduct even if undiscovered until after dismissal: Lake OntarioPortland Cement Co. v.

Groner (1961), 28 D.L.R. (2d) 590 (S.C.C.) at p. 598; Bannister v. General Motors of Canada Limited, (ON CA), [1998] O.J. No. 3402 (C.A.) at para. 27. In any event, Goldstone’s letter of termination reserved the right tocontinue to investigate Conn’s conduct and to rely on further matters. [158] Multiple instances of misbehaviour may cumulatively constitute just cause even if insufficient when viewed individually:Nossal v.

Better Business Bureau of Metropolitan Toronto Inc., 1985 CarswellOnt 861 (C.A.) at para. 18. [159] As noted earlier, members of senior management owe a fiduciary obligation to the company they serve. Persons in thosepositions owe a duty of loyalty and are obliged to act honestly and in good faith. They must avoid conflicts of interest and must not actin their own self-interest without obtaining the company’s fully informed consent: Felker v.

Cunningham, 2000 CarswellOnt 2974 (C.A.)at para. 14. [160] Goldstone relies on Conn’s actions before and after the three cornered amalgamation involving Ontex, Roxmark and 222. Clearly Conn breached his fiduciary duty in his handling of the 2008 MCA. The failure of other directors of Ontex to do their jobs doesnot excuse him. Goldstone maintains that Conn did so again the following year. [161] I have mentioned Patrick Sheridan several times before. He became president of Ontex in June, 2009.

Sheridan’s arrangementwith the company was memorialized in a consulting service agreement made as of June 1, 2009 (the “Sheridan agreement”). Its termswere approved by resolution of the Compensation Committee dated June 30, 2009 and signed by Crane and Montemarano. [162] Goldstone relies on earlier e-mail exchanges. On May 19, 2009, Sheridan informed Conn that he was willing to assume the roleof president of Ontex if given, among other things, representation on the board, a three year contract, an annual management fee of$240,000, options and shares.

Conn’s prompt one-line response included the words “I agree to all”. Sheridan’s e-mail was forwarded toCrane the following day along with a caution to keep its contents to himself. [163] Goldstone submits the Sheridan agreement is another example of Conn treating Ontex as if he was its only stakeholder. On thispoint I disagree. [164] Conn’s agreement to the terms proposed was not definitive. A decision making process was followed in relation to thatcontract. The Compensation Committee was involved. Evdoxiadis raised concerns. Crane and Montemarano carried the day.

Theboard of directors met to discuss the Sheridan agreement on June 3, 2009. Sheridan e-mailed Conn thereafter. In part he said: I understand the bod [sic] meeting went ok. Assuming my contract looks ok could we proceed with the option grant based on yesterdays[sic] close of 23.5? [165] E-mails were produced and filed which evidenced the fact Burshtein and his more junior colleague Mr. Pizale acted for Ontexin finalizing the agreement that secured Sheridan’s services. [166] Furthermore, the terms of the Sheridan agreement are not the same as or similar to those found in the 2008 MCA.

Mr.Levasseur made adverse comment about the termination provisions the Sheridan agreement contained. He expressed the opinion theyimposed monetary obligations on Ontex that significantly exceeded the norm. In my view, Goldstone was inviting the court to step intoan arena where it does not belong. Certain terms may have been generous. However, Sheridan’s hiring was significant. It was the firstitem mentioned in a June 3, 2009 press release. A non-brokered private placement of up to $5 million was also announced.

I acceptConn’s evidence that Sheridan was its catalyst. [167] The evidence establishes that Roxmark knew of the 2008 MCA and of the Sheridan agreement before the completion of thetransactions contemplated by the letter agreement it entered into with Ontex. While unhappy with their terms, Roxmark was willing toproceed. The Sheridan agreement does not help Goldstone’s argument on this issue. [168] For reasons that will become clear, it is my view that further analysis of Conn’s conduct in relation to the 2008 MCA isunnecessary in light of what occurred in 2010.

I turn to those events now. [169] Ontex changed its name to Goldstone as the parties’ agreement contemplated. The post-closing board of directors had sevenmembers. Conn, Sheridan and Alan Ferry were from Ontex. Cunningham, James Richardson and Jeffrey Elliott came from Roxmark. [170] It is clear from the evidentiary record that both sides discovered things before or soon after the mid-December, 2009 closing

that they did not like. That did not bode well for the future. In fact, the united front presented to the outside world was an illusion. The Ontex and Roxmark groups were like repelling magnets. [ 171 ] Monir Younan had been president and CEO of Roxmark. Younan became Goldstone’s first president post-merger. He was also its first casualty after being suspended and then terminated in April, 2010. [ 172 ] Discord and a struggle for power were already evident as demonstrated by a February 3, 2010 e-mail from Elliott to others including Richardson and Cunningham.

To the extent relevant he said: Chaps I have been thinking about Gary Conn. As it stands, we have encouraged Rick [Williams] to pursue GC’s contract and getting him out of the way. My fear is that, as [Sheridan’s] proxy, Rick will take the path of second least resistance which is to let Gary keep his titles, office, and “responsibilities” as a means of sweetening the offer of options. What we really need before anything is negotiated with GC is a meeting of the other directors at which we can push them to put the screws to Gary on ALL fronts… [ 173 ] Richardson and Cunningham responded favourably.

Cunningham wrote: If we are going to attack the GC issue on ALL fronts, what job if any do we see him playing? How many shareholders are in his camp that might be sellers? Does it matter? I really have no idea of GC history with Ontex. [ 174 ] So it began. All directors, officers and senior employees owed fiduciary obligations to the company. However, there were clearly two factions: the former Ontex group lined up on one side and those from Roxmark on the other.

For months, Goldstone seems to have been inappropriately regarded by all of the antagonists as the prize rather than the responsibility. [ 175 ] Rick Williams was the exception. He was the seventh member of the board of directors of Goldstone. He was the only director of Goldstone who appeared to be without ties to Ontex or Roxmark. It also appears that he was on Goldstone’s compensation committee. [ 176 ] In a February 7, 2010 e-mail, Williams agreed with Richardson’s suggestion “that the former Ontex management and directors are receiving a disproportionate compensation”.

He also acknowledged that the terms of Conn’s arrangement were “controversial and that we have been asked to try to address it.” He seemed unaware that the Roxmark group’s dissatisfaction with Conn ran even deeper. Williams expressed the laudable goal that group “fairness, optics and long term should be stressed” during the search for a solution. [ 177 ] Cunningham e-mailed the rest of the Roxmark group the following day. After addressing Richardson by his first name he wrote: Looks like things are proceeding in the right direction, even though nobody wants to make a decision without [Sheridan’s] blessing.

That’s fine but they should be reminded that Patrick [Sheridan] said he would deal with the Gary Conn issue and the comp committee should hold him to that. The board certainly will…Go get them Tiger! [ 178 ] For a while the flow of electronic messages among members of the Roxmark faction concerning Conn stopped. The noteworthy events occurred on the Ontex group’s side. [ 179 ] Goldmark’s chief financial officer was George Harrison. He had worked for Ontex.

In late February, 2010, he informed Conn by e-mail that the Canada Revenue Agency had disallowed some of Roxmark’s Canadian exploration expenses following an audit. A few days later Conn forwarded the e-mail to the rest of the Ontex group. Conn expressed his belief that the results of the audit were known before mid-December, 2009 and withheld by Roxmark. [ 180 ] I have mentioned lawyer Bruce Rosenberg before. Mr. Rosenberg represented that he had been retained by Goldstone “in quarterbacking all of the Roxmark issues” in an April 27, 2010 e-mail. [ 181 ] Mr.

Rosenberg sent a memorandum to Conn and Sheridan three days later. By then Younan had been terminated. According to the memorandum, Mr. Rosenberg’s task was to identify Roxmark breaches of the October 13, 2009 letter agreement and to review certain conduct of three members of that group being Messrs. Younan, Richardson and Elliott. As can be seen, Rosenberg did not represent Goldstone. He was acting for Conn and those associated with him. [ 182 ] Among other things, Rosenberg reported: The discovery on the hard drive of the computer of M. Younan by G. Conn of email correspondence between P. Cunningham, J.

Richardson and J. Elliot [ sic ], copied to M. Younan in which they have conspired against G. Conn and J.P. Sheridan in apparent conjunction with a distinct pattern of obstructive behaviour over the course of the period of time from the date of amalgamation to date. [ 183 ] Perhaps before but certainly after, the war was on; particularly insofar as Conn and Cunningham were concerned. [ 184 ] Two e-mails illustrate the point. A lengthy June 4, 2010 e-mail authored by Cunningham followed a rocky meeting of the Goldstone Board of Directors. In it, Cunningham complained about “Mr. Conn’s disgusting agenda”.

He said that Sheridan and Conn were involved in “rigging the bids” for drilling contracts. Conn’s tactics were said to be “unsavoury, unethical” and “backroom”. His treatment of employees was said to be “abusive”. Cunningham alleged Conn had “planted two individuals” at one of Goldstone’s locations. While conceding that Conn might be earning his salary in some respects, Cunningham maintained Conn “has a serious lack of

ethics, judgment and management skills”. [ 185 ] Conn was hardly a fan of Cunningham. In a June 11, 2010 electronic message, he told Sheridan and employee Andrew Harris that “we have to isolate Phil [Cunningham] to end all this crap we don’t have time nor energy for”. [ 186 ] Andrew Harris had been hired post-merger to work in and around Beardmore, Ontario. Roxmark had owned properties there pre-amalgamation and they became part of Goldstone. [ 187 ] Harris became the third Goldstone employee in that part of Ontario. He joined Cheryl Lesperance and Rick Robert. Both had worked for Roxmark.

They performed administrative and site manager roles respectively. Located in Beardmore was a small building that contained living quarters as well as two offices (the “Beardmore building”). [ 188 ] The Beardmore building and other properties in the area occupied a great deal of trial time. At issue are cameras that were installed inside two buildings. Some context is required. [ 189 ] There had been a break-in at the Beardmore building sometime in February, 2010. A truck parked outside had been vandalized. Lesperance reported those incidents on February 19, 2010.

She said that steps would be taken to make the Beardmore building more secure. In fact, a sensor system was installed the following month. [ 190 ] Ian Schleihauf of IRS Security Systems had been retained by Conn in June, 2010 to install some surveillance cameras at the Goldstone properties in and around Beardmore. He installed more over the Labour Day weekend. [ 191 ] A property described as the Leitch mine was in that region too. Harris had come to suspect that some loose aggregate – or rip rock – had been removed from the site without permission. A number of inquiries were made.

Harris did not find Lesperance or Robert helpful when questioned. [ 192 ] A fax was sent by Harris to Conn on August 29, 2010. He attached details of loads of rip rock that had been removed and added “Mill Manager – Rick Roberts (sic) has only key to Leitch Mine.” [ 193 ] Harris e-mailed Sheridan concerning the same issue the next day. He advised that Lesperance had been fired. He described Lesperance and Robert in a derogatory fashion. [ 194 ] Three hidden cameras were installed during Schleihauf’s second trip to Beardmore.

One was hidden in Robert’s office at the mine. [ 195 ] Two others were hidden behind walls inside the Beardmore building. One of those was installed in the living room. [ 196 ] Based on the evidence I am satisfied of three things. First, Conn and Schleihauf were the only persons who knew that hidden cameras had been installed. Even Andrew Harris, who worked for Goldstone in that area and reported to Sheridan and Conn, did not know of their existence until months later.

Second, while Robert discovered the camera hidden in his office before Conn’s termination, those concealed in the Beardmore building were not found until afterward. Third, the primary purpose of the cameras was to monitor the movements and activities of Robert because he was believed to be an employee who was loyal to the Roxmark group. To be clear, their placement had nothing to do with anyone or anything unrelated to the internal power struggle.

In other words, Conn’s instructions were not given in the interests of Goldstone but for his own purposes. [ 197 ] Unfortunately, that was just one of several breaches of Conn’s duty to Goldstone. I turn to the others. [ 198 ] Ontex had entered into July 6, 2009 consulting agreements of indefinite term with Christine Robinson and John Timmons. Their mid-level employment continued after merger. [ 199 ] Robinson and Timmons entered into new consulting agreements with Goldstone. They were appropriately dated “as of” May 30, 2010 because they were actually signed much later.

Their origin and terms are significant. [ 200 ] On June 4, 2010 Timmons e-mailed Conn, Robinson and Patrick Sheridan. He said: As per Patrick’s request, please provide updated contracts for Robinson and Timmons with a three year salary payout in the event of a change of control. [ 201 ] That is exactly what the new agreements contained. Conn and Sheridan signed both on behalf of Goldstone. They had not been disclosed to anyone from the Roxmark group, let alone approved by Goldstone’s board of directors. The 2009 agreements did not contain a provision that was remotely similar.

The new provisions were clearly designed to allow the Ontex group to continue in positions of influence and to make it prohibitively expensive for the Roxmark group to displace them. [ 202 ] It is obvious from the evidence that new agreements were entered into containing significant changes to help Conn and those loyal to him in their ongoing battle with Cunningham and his allies. They were not made to benefit Goldstone. In fact, the 2010 agreements were not in the company’s interest at all. Conn allowed his personal interest to govern.

Once again, he breached the duties owed to the corporation. [ 203 ] Meetings of the shareholders and board of directors of Goldstone were held on June 30, 2010. Cunningham had retained a lawyer named Paul Davis the day before. Mr. Davis had immediately written to Goldstone’s lawyer to voice concerns about Conn. [ 204 ] The minutes of the board meeting indicated that Cunningham also voiced his displeasure with Conn directly. Cunningham was said to be contemplating calling a special meeting of shareholders to elect another slate of directors.

Conn’s offer to speak with Cunningham after the meeting about his concerns was also recorded.

[ 205 ] On July 17, 2010, Cunningham e-mailed Williams. Among other things he said: Just for the record Mr. Conn as far as I’m concerned continues to damage our position in the community… [ 206 ] In a postscript Cunningham added: I have yet to hear from Gary Conn. Patrick [Sheridan] thought it might be good if we met to see if we could find common ground and move on. He has had my email address, home #, cottage # & cell # for 17 days. I know he has been busy trying to find a chink in my armour but hasn’t called.

No matter, given the agenda he continues to work feverishly on, I see no need in sitting down with him… [ 207 ] Williams responded promptly. He had spoken to Conn concerning terms of the 2008 MCA Williams found “objectionable”. He reported telling Conn “that the overall corporate overheads appeared to be high, given that there was no cash-flow or immediate prospects for same”. Williams disclosed that he had encouraged Conn to consider capping his salary and shortening the term of his contract. Cunningham’s reply was brief. In reference to Conn he said simply “He can call me but it is too late.

I can’t work with an individual like that.” [ 208 ] On August 9, 2010, Sheridan e-mailed Cunningham and others. He said: Gary has agreed to adopt the same management contract I have, which does not seem to offend anyone, so I hope this issue is now solved. [ 209 ] It was not the solution. Tension mounted. [ 210 ] On August 23, 2010, Cunningham distributed a requisition for a special meeting of the Goldstone shareholders to remove Conn and Ferry as directors.

Morris Prychidny was one of those Cunningham proposed to fill the vacancies a successful vote would create. [ 211 ] Late that afternoon Harris sent an e-mail to Conn. He wrote: Gary, sorry I did not call you today, [ sic ] I will call Tuesday mid day [ sic ]. We have to do SOMETHING about this skunt phill [ sic ] the pill. Just say the word. [ 212 ] “Skunt” was the insulting word Harris had used to describe Lesperance and Robert a few days earlier. The e-mail was not coincidental.

Conn had called Harris after learning of Cunningham’s requisition. [ 213 ] Three days later a press release was issued on Goldstone’s stationary announcing the temporary suspension of a drilling program the company had previously announced to the public.

The August 26, 2010 publication continued: Following the requisition of a shareholders’ meeting by Philip Cunningham on August 23, 2010, the Company’s site geologists resigned their positions with the Company. [ 214 ] Those requesting further information were asked to contact Sheridan. [ 215 ] While Conn’s involvement in the press release was debated at trial, Cunningham’s was not. He was surprised – perhaps more accurately – blindsided by it. So too were the others in the Roxmark camp. [ 216 ] Two geologists had walked out but Cunningham disputed the allegation their decision was connected to his requisition.

The response he issued to the August 26, 2010 press release said in part: At the outset, it is important to note that the news release was issued without being reviewed by, and without the approval of, the Board of Directors of Goldstone. …the clear intent of the Goldstone news release is to infer that the resignations of the contract geologists were caused by, or are somehow related to, the delivery of my requisition.

This disclosure is highly misleading. [ 217 ] Cunningham’s release went on to outline his version of events leading up to the geologists’ departure. [ 218 ] Soon afterward Sheridan, Ferry and Williams resigned as directors of Goldstone. [ 219 ] An eventful meeting of the Goldstone board of directors was held on September 13, 2010. Prychidny was appointed to fill one of the vacant positions on the board as Cunningham’s requisition for a special meeting had contemplated. Prychidny was also elected to the audit committee and appointed to serve as its Chair.

Save one, all of the members of the board were appointed to a newly established Executive Committee. Conn was the sole exception. The minutes recorded the fact Cunningham advised the board that he had withdrawn his request for a special meeting of shareholders. [ 220 ] There were other corporate developments soon afterward too.

Goldstone retained Younan as an “advisor” despite the fact he had been terminated a few months earlier. [ 221 ] On September 20, 2010, the Executive Committee instructed the audit committee to investigate two issues described in the minutes as follows: (1) the basis on which Goldstone issued its press release of August 26, 2010 and the information that led Mr. Cunningham to issue his responding press release on August 27, 2010; and

(2) allegations pertaining to the sale of crushed rock from the Leitch mine. [ 222 ] Prychidny outlined the audit committee’s findings in a September 30, 2010 report. It concluded:

(1) Conn approved the August 26, 2010 press release knowing it contained misleading information because the geologists resigned mainly due to frustrations with management, not Cunningham’s requisition; and

(2) Sales of crushed rock were completed as part of a long-standing practice at the Leitch property. [ 223 ] Conn took issue with those findings at trial. Goldstone maintained he could not do so for two reasons. First, Conn participated in a September 30, 2010 meeting of the Goldstone board of directors. Minutes were taken. They showed that the audit committee report was unanimously approved. Second, Goldstone had served a request to admit in accordance with the Rules of Civil Procedure .

Paragraph 54 alleged that Conn advised the audit committee that he knew of and agreed to the issuance of a press release on August 26, 2010. That fact was admitted in the response served on Conn’s behalf. A mid-trial motion seeking leave to withdraw the admission was dismissed. [ 224 ] In the absence of the minutes and response to the request to admit to which I have referred, I would have placed no weight on the audit committee’s report. Bluntly, I would have concluded it was a worthless document. Let me explain. [ 225 ] Goldstone’s audit committee had three members. Elliott and Prychidny were two of them.

Elliott was very much part of the Roxmark group. I have mentioned the February 3, 2010 e-mail he authored before. Conn was the person Elliott spoke of “getting out of the way”. Elliott identified Conn as the person the directors would be encouraged “to put the screws to”. [ 226 ] Prychidny had been proposed as a director by Cunningham several times starting in June, 2010. The two exchanged e-mails on July 18, 2010 concerning a meeting Prychidny was to have with Goldstone director Alan Ferry the following day. In

part Cunningham said: Good Luck [ sic ] tomorrow. As discussed stay calm on the Gary [Conn] issue, [ sic ] we don’t want to tip our hand that we are going to remove him as soon as possible. [ 227 ] During his examination for discovery Prychidny candidly said this in relation to the “investigation” undertaken by the committee he chaired: …there looks like there was a whole conspiracy against Mr. Conn by the directors even before then. [ 228 ] It is fair to say the audit committee was not an independent body. It was a creature loyal to Cunningham. The result was pre- ordained. The exercise was a sham.

Standing alone, the Compensation Committee report is of no value whatsoever. [ 229 ] A review of the evidence reveals the following circumstances that are relevant to the press release. [ 230 ] Des Cullen and Jarita Barry were the geologists who resigned from Goldstone on August 24, 2010. [ 231 ] Barry was said to be “at her limit” in an August 19, 2010 e-mail Cullen crafted. On August 22, 2010, c

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