2017 QCCS 855, 2017 QCCS 855

J.A. Belmont Mercantile Investment Corporation 2017 QCCS 855 JCOB37 SUPERIOR COURT CANADA PROVINCE OF QUÉBEC DISTRICT OF MONTREAL N° : 500-11-052104-177 N° : 500-17-097568-177 DATE : MARCH 3, 2017 BY THE HONOURABLE DAVID R. COLLIER, J.S.C. File no 500-11-052104-177 J. A. BELMONT MERCANTILE INVESTMENT CORPORATION and JACQUES SCHONBERG Plaintiffs v. 9025-7007 QUÉBEC INC. and NAILA JAFFER Defendants and LES MODES CONCEPTS M. INC. and GAVIN CORREA Mis-en-cause File no 500-17-097568-177 9025-7007 QUÉBEC INC. Plaintiff v. J. A.

BELMONT MERCANTILE INVESTMENT CORPORATION and JACQUES SCHONBERG Defendants and NAILA JAFFER and LES MODES CONCEPTS M. INC. and GAVIN CORREA Mis-en-cause JUDGMENT _ OVERVIEW [ 1 ] This case concerns a dispute over a buy-sell clause, commonly known as a shotgun clause, in a unanimous shareholders’ agreement. [ 2 ] 9025-7007 Québec Inc. and J.A. Belmont Mercantile Investment Corporation are each 50% shareholders of the mise-en-cause Les Modes Concepts M. Inc. Naila Jaffer is the sole shareholder of 9025 and Jacques Schonberg is the sole shareholder of Belmont.

Concepts is the holding company for a number of retail businesses that design and sell women’s clothing and jewelry in Europe. [ 3 ] Concepts was incorporated under the

Canada Business Corporations Act [1] in 1996. Jaffer is its president and Schonberg is its

secretary treasurer. Both are directors of Concepts. Under the terms of a unanimous shareholders’ agreement (USA) dated August 22, 2009 (replacing an earlier agreement) the parties recognize that Jaffer will manage the operating companies controlled by Concepts, while Schonberg will have free access to the books and records of Concepts and receive semi-annual verbal or written reports from Jaffer regarding the operating companies. [2] [ 4 ] Under the terms of the shotgun clause in the USA, either shareholder of Concepts (9025 or Belmont) may make an offer to purchase the shares and interest of the other.

The offer “shall set forth all the terms and conditions including the price per Share and the Interest Purchase Price”. [3] The USA defines the “Interest Purchase Price” as “the purchase price for the Interest of a shareholder”, which “Interest” includes shareholders’ and directors’ loans to the company. [4] The “Share Purchase Price” means the portion of the Interest Purchase Price attributable to the purchase of shares. [5] [ 5 ] Under the shotgun clause, upon receiving an offer, the offeree has 30 days to accept it, or to provide notice that he or she will purchase the offeror’s interest upon the same terms and conditions and at the same price per share as set out in the offer. [6] [ 6 ] On December 20, 2016, Jaffer, through 9025, made an offer to purchase Belmont’s “Interest” in Concepts for $100.

The offer stipulated that since Belmont had made no loans to Concepts, the Interest Purchase Price of $100 was equal to the Share Purchase Price. [ 7 ] Schonberg alleges that Jaffer’s offer took him by surprise; that the offer of $100 for Belmont’s shares is derisory; and that he is unable to respond to the offer because he has little or no information respecting the value of 9025’s “Interest” in Concepts. [ 8 ] On February 17, 2017, Belmont and Schonberg filed in the commercial division an application in oppression under s. 241 CBCA , alleging that Jaffer and 9025 had failed to report to them regarding the financial situation of Concepts and the operating companies and had triggered the shotgun clause in bad faith. [ 9 ] Four days later, on February 21, 2017, Jaffer and 9025 brought an injunctive action before the civil division, alleging that Belmont is deemed to have accepted the December offer and should be required by the Court to sell its shares to 9025. [ 10 ] On February 28, 2017, the Court ordered the two actions to be joined in the commercial division.

It then heard Belmont and Schonberg’s request for a safeguard order as well as 9025 and Jaffer’s request for case management. [ 11 ] For the reasons that follow, the Court is of the opinion that the motion for a safeguard order should be denied and that the parties should set the case down for trial and judgment as soon as reasonably possible. ANALYSIS [ 12 ] Schonberg [7] argues that under

section 241 CBCA and

article 49 of the Code of Civil Procedure, the Court may issue an interim safeguard order protecting his rights for a limited time pending trial.

In this regard, he asks the Court to suspend the delays under the shotgun clause and to order Jaffer [8] to assist him in obtaining information from Concept’s subsidiaries so that he can intelligently respond to Jaffer’s offer to purchase. [ 13 ] The Court may issue a safeguard order in cases of urgency, and where the applicant 1) has an apparent right, 2) requires the relief sought in order to avoid serious or irreparable injury and, 3) the balance of convenience favours the applicant in the event his right is considered doubtful or only possible. [9] [ 14 ] Schonberg claims the urgency in this case is that without a suspension of the delays under the shotgun clause he will be forced to accept Jaffer’s offer, or make a counter-offer, in the absence of financial information respecting Concept’s business. [ 15 ] Schonberg relies on the decision of this Court in Sovell c. 2727901 Canada Inc. , [10] where Hamilton J. suspended the applicant’s delay to respond to an offer made under a shotgun clause on the basis that the impending expiry of the delay would force the applicant to respond without knowing the full extent of the offeror’s interest in the company.

In that case, the applicant questioned the validity of several loans purportedly made by the offeror to the company, which the applicant would have to purchase if he made a counter-offer under the shotgun clause. In suspending the applicant’s delay to respond by 30 days, the Court permitted him to undertake an enquiry into the validity of the loans in question. [ 16 ] In Sovell , the applicant’s petition was heard two days before the expiry of the delay to respond to the shotgun offer.

In the present case, however, Schonberg’s delay to respond to Jaffer’s offer arguably expired on January 19, 2017, over six weeks ago, and the urgency described in Sovell does not exist. [ 17 ] As stated, Jaffer’s offer was made on December 20, 2016. Schonberg had 30 days to accept the offer or make a counter-offer on the same terms.

On January 16, 2017, shortly before the 30 days expired, Schonberg responded to Jaffer’s offer, firstly to state that he considered the offer to be invalid, since it failed to specify what loans Jaffer had made to the company that would have to be purchased by Schonberg in a counter-offer. Secondly, Schonberg stated that if Jaffer’s offer was valid, Schonberg was making a counter-offer to purchase Jaffer’s “Interest” in Concepts at the same price of $100. [11] [ 18 ] Schonberg’s reply gave rise to an exchange of correspondence between the parties’ attorneys.

On January 16, Jaffer wrote to Schonberg to argue that her offer was valid, and to provide information concerning her loans to Concepts. The next day, on January 17, Schonberg asked for information concerning the business affairs of Concepts’ operating subsidiaries. On January 19, Jaffer replied that certain information would be provided. [ 19 ] Then, on January 31, Jaffer wrote to request that Schonberg clarify whether his January 16 counter-offer constituted an offer to purchase Jaffer’s “Interest” in Concepts, including the loans she had made to the company.

Jaffer gave Schonberg until February 3 to confirm his intention, stating that in the event he did not intend to buy Jaffer’s shares and loans, Jaffer would consider the January 16 counter-offer to be null and that Schonberg had accepted her December 20 offer.

[ 20 ] In late January and early February, Jaffer sent additional information to Schonberg respecting her loans to Concepts and the company’s business dealings.

On February 9, she informed Schonberg that, given his failure to clarify his intentions, she considered his January 16 counter-offer to be null, with the effect that her December 20 offer had been accepted. [ 21 ] In her injunctive proceeding, Jaffer takes the position that under the terms of the USA, she was entitled to purchase Schonberg’s shares at the latest on February 19, 2017, namely 30 days following his deemed acceptance of her offer to purchase. [12] [ 22 ] It was two days prior to that deadline, on February 17, that Schonberg served and filed his motion in oppression and for a safeguard order.

Several days later, Jaffer brought her action in injunction. [ 23 ] It the Court’s opinion, there is no urgency in the present case. In light of what has transpired, the issue now between the parties is the validity and effect of Jaffer’s December 20 offer and Schonberger’s January 16 response.

Since Schonberger is no longer within the 30 day delay to respond to Jaffer’s offer (and in fact has already responded), he is not in the same position as the applicant in Solvell , who argued that the delay to respond under the USA had to be interrupted, and an enquiry commenced, in order to allow him to reply intelligently to the offer made to him. [ 24 ] In the present case, the parties are beyond the delay to respond and their positions are drawn: Jaffer contends that her offer is valid and that Schonberger must sell to her; Schonberger argues that her offer is invalid because it lacks certain vital information concerning her loans to Concepts, and that he need not respond to it at all, or at least not until all the information he requires is provided.

Clearly, these are issues for trial and do not raise any urgency. [ 25 ] If the Court were to suspend the delays under the USA as requested, it would necessarily be the deadline to complete the share transfer. However, since Schonberger refuses to proceed with the transaction, the transfer will not occur and will have to be decided at trial. [ 26 ] Moreover, Schonberger’s request that Jaffer be ordered to assist him in obtaining information from third parties does not preserve the status quo between the parties, as is generally the objective of a safeguard order.

Rather, it would impose an obligation on Jaffer that she does not appear to have under the USA. [ 27 ] Given there is no urgency in the present matter, it is not necessary to address the other criteria that apply to the issuance of a safeguard order. Nevertheless, since much time was spent in argument on Schonberger’s right to an oppression remedy, the following comments are germane to his request for an interim order. [ 28 ] First, the Court notes that Schonberger’s right to a safeguard order is not apparent, but only doubtful or possible.

His allegations that Jaffer did not keep him informed of Concepts’ business dealings, which he characterizes as oppressive conduct, are general in nature. More specifically, Schonberger does not state that Jaffer hid information from him, or that she refused specific requests for information prior to the triggering of the shotgun clause.

Schonberger does not allege that he was kept in the dark regarding Concepts’ business dealings and financial picture, only that he was unaware of the business group’s organizational structure until recently. [13] The nuance is important. [ 29 ] Schonberger admits that he knew about the corporate group’s tax issues in Belgium as early as 2015, and that Jaffer told him in the summer of 2016 that Concepts needed an important injection of new capital to keep functioning.

In October 2016, Jaffer sent Schonberger a business evaluation, as in each previous year. [ 30 ] Schonberger suspects business mismanagement by Jaffer, and questionable loans to the company, but at this stage his suspicions remain unsubstantiated. [ 31 ] For her part, Jaffer asserts that she told Schonberger about all of her loans to Concepts. Schonberger denies authorizing the loans identified by Jaffer. [ 32 ] These facts distinguish the present case from that of Sovell .

Moreover, it cannot be said that the mere fact of triggering the shotgun clause is itself an oppressive act. [ 33 ] Secondly, it cannot be said that Schonberger will suffer serious or irreparable harm if the safeguard order is not granted. As stated above, there is no real deadline to suspend.

Furthermore, if Schonberger is correct that Jaffer’s offer was incomplete and invalid, he will not have to respond to it, and will not need any business information. [ 34 ] Finally, the balance of convenience does not favour an investigation at this point by Schonberger into the financial affairs of Concepts and its many subsidiaries. Such an investigation may be unnecessary, will entail expense, and will delay the trial. [ 35 ] The parties have every interest to determine their rights under the USA as soon as possible. While they prepare the case for trial, they will hopefully find their way to a transaction.

FOR THESE REASONS, THE COURT: [ 36 ] DISMISSES the application for a safeguard order; [ 37 ] DIRECTS the parties to file a Case Protocol in the joined cases within the delay specified in

article 173 CCP; [ 38 ] RESERVES the parties’ rights, in case of disagreement, to request a case management conference with a view to establishing an accelerated timetable; [ 39 ] ORDERS that exhibits P-8, P-9, P-16, P-19, P-29, P-30 and P-31 in case no. 500-11-052104-177 be filed in the court record under seal;

[ 40 ] THE WHOLE with judicial costs to Naila Jaffer and 9025-7007 Québec Inc. __________________________________ DAVID R. COLLIER, J.S.C. Mtre Barry Landy Mtre Marie-Lou Laprise Spiegel Sohmer Attorneys for Naila Jaffer and 9025-7007 Québec Inc. Mtre Louis Chronopoulos Mtre Marvin Segal Pinsky, Zelman, Segal, Santillo Attorneys for Jacques Schonberger and J.A. Belmont Mercantile Investment Corporation Date of hearing : February 28, 2017