Jahnke v Johnson, 2018 SKCA 59

Court of Appeal for Saskatchewan Docket: CACV3029 Citation: Jahnke v Johnson , 2018 SKCA 59 Date: 2018-07-31 Between: Gregory Jahnke Appellant (Plaintiff/Applicant) And Craig Johnson, Joshua Robins and 101200723 Saskatchewan Ltd. Respondents (Defendants/Respondents) Before: Richards C.J.S., Caldwell and Whitmore JJ.A. Disposition: Appeal dismissed Written reasons by: The Honourable Chief Justice Richards In concurrence: The Honourable Mr. Justice Caldwell The Honourable Mr.

Justice Whitmore On Appeal From: 2017 SKQB 13 , Regina Appeal Heard: November 20, 2017 Counsel: Richard Morris, Q.C., for the Appellant Rick Van Beselaere, Q.C., and Brian Lunde for the Respondents Richards C.J.S. I. Introduction [ 1 ] This appeal is rooted in problems that overtook a development project located just east of Regina. The respondent, 101200723 Saskatchewan Ltd. [Sask Corp], purchased property for the project but then encountered financial problems. Various transactions followed and, when the dust had settled, the property was owned by 1013660 B.C. Unlimited Liability Company [B.C.

Corp]. [ 2 ] The appellant, Gregory Jahnke, is a former shareholder and director of Sask Corp. He sought leave to commence a derivative action on behalf of Sask Corp against B.C. Corp and others including Paul Thomas, a former shareholder and director of Sask Corp who had played a key role in the dealings relating to the property. The action proposed by Mr. Jahnke is based on claims of breach of fiduciary duty, unjust enrichment and conspiracy. [ 3 ] A Queen’s Bench Chambers judge dismissed Mr.

Jahnke’s application for leave after determining he had not satisfied the preconditions found in The Business Corporations Act , RSS 1978, c B-10 [ BCA ], for approval of an application to launch a derivative action. More particularly, the Chambers judge found that Mr. Jahnke had not given reasonable notice of his intention to apply for leave to commence the proposed action and that the action was not in the interests of Sask Corp. Mr. Jahnke appeals from this decision. [ 4 ] I conclude, for the reasons set out below, that Mr. Jahnke’s appeal must be dismissed. The Chambers judge properly concluded that Mr.

Jahnke did not give reasonable notice of his intention to apply for leave to commence the derivative action. Further, she made no bottom-line error in her consideration of whether the proposed action was in the interests of Sask Corp. II. background [ 5 ] Clear Vistas Community #1 Limited Partnership planned to develop land [Land] it owned near White City. Michael Katz was the general manager of the project and Ken Lagasse was the general partner. [ 6 ] Mr. Jahnke became aware that the Clear Vistas project had run into financial difficulties and that foreclosure proceedings had been commenced. He approached Mr.

Thomas about purchasing and developing the Land. Sask Corp was incorporated on February 8, 2012, for that purpose. [ 7 ] Mr. Katz, Mr. Thomas, Mr. Jahnke, Mr. Lagasse and Emerson Koch were the directors of Sask Corp and its Class A shareholders. Mr. Thomas was the president. Mr. Jahnke was the vice-president and Mr. Katz was the secretary and treasurer. Corporations owned by some of these individuals held Class B shares. [ 8 ] Sask Corp required capital to purchase and develop the Land. As a result, Mr.

Thomas approached Larson Manufacturing Company of South Dakota [Larson Manufacturing]. [ 9 ] Larson Manufacturing financed the acquisition of the Land with a $6.5 million CAD loan secured by a debenture that was registered as a mortgage on the Land. Sask Corp also executed a transfer and quit claim agreement with Larson Manufacturing. They were held in escrow.

The transfer and quit claim were intended to allow Larson Manufacturing to acquire title to the Land in the event of a default by Sask Corp on its obligations and hence to avoid the delay and expense of foreclosure proceedings. [ 10 ] Sask Corp was unable to proceed with the development and marketing of the Land as quickly as had originally been anticipated. No payments were made on the Larson Manufacturing loan and, as a result, the full amount of the loan plus interest became

due and payable. Larson Manufacturing demanded payment by way of a letter dated December 2, 2013. [ 11 ] Mr. Thomas, on behalf of Sask Corp, negotiated a forbearance agreement with Larson Manufacturing whereby Larson Manufacturing undertook not to take any action on the loan until June of 2014. Sask Corp hoped to be able to pay out what was owed to Larson Manufacturing either by selling some of the Land, arranging for additional investors, or a combination of sales and new financing. [ 12 ] Sask Corp continued to be unable to develop the Land or to conclude any sales.

It therefore requested and received a further forbearance from Larson Manufacturing until August of 2014. Principal and interest on the loan had risen to well over $9 million USD and Larson Manufacturing was poised to act on the quit claim. [ 13 ] At this point, and according to Mr. Jahnke, Mr. Thomas proposed to him that Larson Manufacturing develop the Land by way of a plan whereby title would be transferred to Larson Manufacturing and Larson Manufacturing would then finance the development costs. Mr.

Jahnke executed a share purchase agreement effective September 3, 2014, pursuant to which he transferred all the Sask Corp shares he and his corporation owned to Mr. Thomas and his corporation for one dollar per share, a total of $178. Mr. Jahnke also resigned as a director and officer of Sask Corp effective September 3, 2014. [ 14 ] Mr. Jahnke explains all of this as having taken place in reliance on Mr. Thomas’s representation that there would be a written agreement in place with Larson Manufacturing whereby he and Mr. Thomas would receive 30 percent of the net profits from the development of the Land. Mr.

Jahnke says the anticipated profit sharing agreement promised by Mr. Thomas never materialized. [ 15 ] Craig Johnson, who had been the Chief Financial Officer of Larson Manufacturing until June of 2014, personally loaned Mr. Thomas and his corporation $1 million USD for the purpose of acquiring the shares of Sask Corp, i.e., the shares of Messrs. Jahnke, Katz, Lagasse and Koch, and their corporations. [ 16 ] The Memorandum of Agreement relating to the loan contemplated Mr. Thomas causing Sask Corp to transfer the Land to B.C.

Corp pursuant to the terms of the transfer and quit claim entered into between Sask Corp and Larson Manufacturing. It also provided that, upon registration of the transfer of the Land, Mr. Thomas would sell all of the shares of Sask Corp to B.C. Corp. [ 17 ] Mr. Jahnke indicates he discovered only after the fact that other shareholders of Sask Corp had been paid considerably more than he had been paid. Mr.

Katz explains this differential in payments as having been a function of the fact that larger sums were owing to those shareholders who had actually invested funds in the project. [ 18 ] In the meantime, in order to work around The Saskatchewan Farm Security Act , SS 1988-89, c S-17.1, Larson Manufacturing assigned the debts owing to it by Sask Corp, and the related security interests, to Larson Realty of Canada Inc. [Larson Realty]. Larson Realty then transferred and assigned the debts and the security to B.C. Corp. On September 23, 2014, B.C. Corp acquired title to the Land from Sask Corp. [ 19 ] Mr.

Thomas and his corporation transferred the shares of Sask Corp to B.C. Corp in April of 2015 for $1 million CAD in satisfaction of what was described in the relevant documents as a vendors’ loan owed by Mr. Thomas and his corporation to Larson Manufacturing and/or B.C. Corp. [ 20 ] B.C. Corp entered into a Consulting Agreement with Mr. Thomas and his corporation, effective September 30, 2014. Pursuant to the agreement, a payment from Land sale proceeds would be made to Mr. Thomas and his corporation if they were involved in the sale. The agreement also provided Mr.

Thomas and his corporation with an option to purchase some parcels of the Land. [ 21 ] B.C. Corp proceeded with the development of the Land to the point where subdivision approval was obtained in 2015. This involved an additional investment by B.C. Corp of some $3.7 million CAD. [ 22 ] Sask Corp was voluntarily dissolved in September of 2015. At the time of the dissolution, B.C. Corp was its sole shareholder. Sask Corp’s directors at the time were the respondents Mr. Johnson and Joshua Robins.

By the time of the dissolution, all of Sask Corp’s liabilities had been satisfied. [ 23 ] On August 12, 2016, legal counsel for Mr. Jahnke sent a notice by registered mail to Mr. Johnson and Mr. Robins advising them of Mr. Jahnke’s intention to commence a derivative action on behalf of Sask Corp against Mr. Thomas, his corporation, Mr. Johnson and B.C. Corp if Messrs. Johnson and Robins, as directors of Sask Corp, did not seek relief against those proposed defendants. [ 24 ] On August 19, 2016, Mr. Jahnke revived Sask Corp.

He took this step without notifying any of the other parties who had been shareholders of Sask Corp. Mr. Robins resigned as a director upon learning of the revival. [ 25 ] Mr. Jahnke filed his application for leave to commence the derivative action on August 26, 2016. [ 26 ] On August 29, 2016, Mr. Jahnke and his corporation, acting in their own names, filed a statement of claim naming Mr. Thomas and his corporation, B.C. Corp, Mr. Johnson, Mr. Larson and Jeffrey Rief as defendants. The claim alleges Mr. Thomas and his corporation held the shares obtained from Mr.

Jahnke and his corporation in trust pending the completion of a profit sharing agreement with Larson Manufacturing. In all other respects, the claim very closely parallels the claim proposed for the derivative action and is based on the same causes of action – breach of fiduciary duty, unjust enrichment and conspiracy. III. the proposed derivative action [ 27 ] As must necessarily be the case, Mr. Jahnke’s proposed statement of claim lists Sask Corp as the plaintiff. The defendants are B.C. Corp, Mr. Thomas, Mr. Thomas’s corporation and Mr. Johnson.

[ 28 ] The draft statement of claim recounts the factual details relating to the incorporation of Sask Corp, the Larson Manufacturing loan, the sale of Mr. Jahnke’s shares to Mr. Thomas, the transfer of the Land to B.C. Corp and the dissolution of Sask Corp. [ 29 ] The statement of claim then goes on to set out the causes of action advanced against the various defendants. First, the claim alleges that Mr. Thomas, as a director of Sask Corp, owed the corporation a fiduciary duty but breached that duty in various ways including, most significantly for present purposes, transferring the Land to B.C.

Corp for little or no consideration. As a result, so says the statement of claim, B.C. Corp holds the land in trust for the benefit of Sask Corp. The statement of claim then goes on to allege that each of the defendants were unjustly enriched by the transfer of the Land to B.C. Corp and, further, that each of the defendants conspired together to transfer the Land and the shares in Sask Corp to B.C. Corp thereby causing loss and damage to Sask Corp. By way of relief, the statement of claim seeks, most notably, a declaration that the Land is held by B.C.

Corp in trust for the benefit of Sask Corp, an accounting of all profits earned by the defendants as a result of the transfer of Sask Corp’s shares and the Land to B.C. Corp, and damages for breach of fiduciary duty and conspiracy. [ 30 ] The other original shareholders of Sask Corp, that is Messrs. Lagasse, Katz and Koch, indicate they have no desire to see the proposed derivative action go forward. IV. the relevant statutory provisions [ 31 ] As noted, Mr.

Jahnke applied to the Court of Queen’s Bench pursuant to s. 232(1) of the BCA for leave to bring an action on behalf of and in the name of Sask Corp. [ 32 ] The key features of the BCA governing applications of this sort are set out below:

Interpretation 231 In this Division: (a) “ action ” means an action under this Act; (b) “ complainant ” means: (

i) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates; (ii) a director or an officer or a former director or officer of a corporation or of any of its affiliates; (iii) the Director; or (iv) any other person who, in the discretion of a court, is a proper person to make an application under this Division. Commencing derivative action 232

(1) Subject to subsection (2), a complainant may apply to a court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate. Conditions precedent

(2) No action may be brought and no intervention in an action may be made under subsection (1) unless the court is satisfied that: (

a) the complainant has given reasonable notice to the directors of the corporation or its subsidiary of his intention to apply to the court under subsection (1) if the directors of the corporation or its subsidiary do not bring, diligently prosecute or defend or discontinue the action; (

b) the complainant is acting in good faith; and (

c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued. Powers of court 233 In connection with an action brought or intervened in under

section 232, the court may at any time make any order it thinks fit including, without limiting the generality of the foregoing: (

a) an order authorizing the complainant or any other person to control the conduct of the action; (

b) an order giving directions for the conduct of the action; (

c) an order directing that any amount adjudged payable by a defendant in the action shall be paid, in whole or in part, directly to former and present security holders of the corporation or its subsidiary instead of to the corporation or its subsidiary; (

d) an order requiring the corporation or its subsidiary to pay reasonable legal fees incurred by the complainant in connection with the action.

V. the decision of the chambers judge [33] The Chambers judge laid out the factual background of Mr. Jahnke’s application in detail and then worked through each ofthe preconditions found in s. 232(2) of the BCA for granting leave to commence a derivative action. [34] The Chambers judge began with the question of whether Mr. Jahnke was a “complainant” and thus someone with the status tomake an application under s. 232(2). She had little difficulty in concluding Mr. Jahnke qualified on this front. [35] The Chambers judge then turned to the question of whether Mr.

Jahnke had given reasonable notice to Sask Corp of hisintention to apply for leave to commence a derivative action if the directors did not bring the action. In this regard, she first questionedwhether valid or effective notice could have been given to Mr. Johnson and Mr. Robins, as directors of Sask Corp, in light of the fact thatSask Corp had been dissolved for about a year at the time Mr. Jahnke had purported to give such notice. The Chambers judge went on tofind that, even if the notice given was valid, it had not been reasonable because Mr.

Jahnke had waited only two weeks before makinghis application for leave to commence the derivative action. [36] Next, the Chambers judge examined Mr. Jahnke’s motivations in wanting to bring the claim and concluded he was acting ingood faith. [37] This took the Chambers judge to s. 232(2)(

c) of the BCA, the question of whether it was in the interests of Sask Corp that theaction be brought on its behalf. [38] In analyzing this question, the Chambers judge relied on Schafer v International Capital Corporation (1996), (SK KB), 153 Sask R 241 (QB) [Schafer], for the proposition that, in dealing with s. 232(2)(c), an applicant for leave to commencea derivative action must first rebut the presumption of the sound business judgment rule and then present a prima facie case that it is inthe interests of the corporation for the action to be commenced. [39] As for the sound business judgment rule issue, the Chambers judge observed that Mr.

Jahnke’s application for leave had beenbrought before Messrs. Johnson and Robins had been able to make a decision about whether to commence the proposed action. Thus,even assuming they were in fact directors for the purposes of s. 232(2)(c), there was no basis on which to assess their judgment byreference to the sound business judgment rule. They had not been given an opportunity to exercise it. The Chambers judge also held that,given Mr.

Johnson was a defendant in the proposed action, it would in any event have been inappropriate to apply the rule to anydecision he might have made about whether to institute proceedings. [40] With respect to the inquiry into whether it was prima facie in the interests of Sask Corp for the action to be brought, theChambers judge noted that the onus on Mr. Jahnke was not particularly heavy. She then went on to emphasize three points in concludingthe proposed claim was not in Sask Corp’s interests: (

a) Mr. Jahnke was focussed on Sask Corp’s supposed loss of opportunity to sell the Land to alternate buyers but failed to takeaccount of Sask Corp’s crushing debt problems at the relevant time; (

b) The lost chances to sell some of the Land referred to by Mr. Jahnke had not been mature sales opportunities; and (

c) Mr. Jahnke’s assertions about the value of the Land were not supported by the evidence. [41] Reviewing the whole of the affidavit evidence filed, the Chambers judge concluded the proposed claim was effectively aimedat redressing wrongs Mr. Jahnke believed he had suffered personally as a result of the alleged bargain he had made with Mr. Thomas.She did not see Sask Corp’s interests as being at the heart of the derivative action. [42] In the end, and as indicated, the Chambers judge dismissed Mr. Jahnke’s application. VI. analysis [43] Mr.

Jahnke’s appeal from the decision of the Chambers judge rests on two grounds. First, he submits the judge erred inconcluding that he did not give reasonable notice of his intention to apply for leave to commence the derivative action. Second, Mr.Jahnke contends the Chambers judge erred in finding it was not in the interests of Sask Corp that the proposed action be commenced. Iwill consider these submissions in turn. A. Was the notice reasonable? [44] As noted, the Chambers judge had significant reservations about whether the notice provided to Messrs.

Johnson and Robinscould be seen as valid or effective in light of the fact Sask Corp had been dissolved and they were merely the individuals who had beenthe directors at the time of dissolution. She went on to conclude that, in any event, the notice given had not been reasonable. Mr. Jahnketakes issue with both of these features of the Chambers judge’s reasoning. [45] Let me begin with the question of the status of Messrs. Johnson and Robins. Mr. Jahnke submits the notice provided to themshould have been seen by the Chambers judge as being effective and, in this regard, he relies on s. 219(3) of the BCA.

Section 219(3)says, in effect, that a document may be served on a corporation after its dissolution by serving a person who was a director at the time ofdissolution. Mr. Jahnke contends s. 219(3) validated the notice he gave to Messrs. Johnson and Robins. [46] I do not share Mr. Jahnke’s view about the applicability of s. 219(3) to the situation at hand. To understand the proper reachof that subsection, it must be read in the context of s. 219 as a whole.

Section 219 provides as follows:

Interpretation 219(1) In this section, “shareholder” includes the heirs and legal representatives of a shareholder. Continuation of actions

(2) Notwithstanding the dissolution of a corporation under this Act: (

a) a civil, criminal or administrative action or proceeding commenced by or against the corporation before its dissolution may becontinued as if the corporation had not been dissolved; (

b) subject to The Limitations Act, a civil, criminal or administrative action or proceeding may be brought against the corporation withintwo years after its dissolution as if the corporation had not been dissolved; and (

c) any property that would have been available to satisfy any judgment or order if the corporation had not been dissolved remainsavailable for such purpose. Service

(3) Service of a document on a corporation after its dissolution may be effected by serving the document upon a person shown in the lastnotice filed under

section 101 [notice of directors] or 108 [notice of change of directors]. Reimbursement

(4) Notwithstanding the dissolution of a corporation, a shareholder to whom any of its property has been distributed is liable to anyperson claiming under subsection (2) to the extent of the amount received by that shareholder upon such distribution and, subject to TheLimitations Act, an action to enforce such liability may be brought within two years after the date of the dissolution of the corporation. Representative action

(5) A court may order an action referred to in subsection (4) to be brought against the persons who were shareholders as a class, subjectto such conditions as the court thinks fit and, if the plaintiff establishes his claim, the court may refer the proceedings to a referee orother officer of the court who may: (

a) add as a party to the proceedings before him each person who was a shareholder found by the plaintiff; (

b) determine, subject to subsection (4), the amount that each person who was a shareholder shall contribute towards satisfaction of theplaintiff ’s claim; and (

c) direct payment of the amounts so determined. [47] The dissolution of a corporation means, as per s. 206(5) of the BCA, that the corporation “ceases to exist”. It is obvious,therefore, that dissolution involves considerable potential for unfairness to parties who otherwise would have been in a position tocontinue or institute proceedings against the corporation.

Section 219 addresses this problem by providing that proceedings commencedbefore dissolution may continue, new proceedings may be brought within two years of dissolution, and property of the dissolvedcorporation that would have been available to satisfy a judgment remains available for that purpose. Section 219(3) must be understoodand interpreted in this context. It is self-evidently designed for the specific purpose of clarifying how the service of documents inproceedings against a dissolved corporation, as per ss. 219(2)(

a) and (b), may be effected. In so doing, it does not suggest a person whowas a director of a corporation at the time it was dissolved somehow remains a director for all purposes. Rather, s. 219(3) says only thatservice of a document on the corporation may be achieved by serving it on a person who had been a director at the time of dissolution. [48] Section 232(2), on the other hand, expressly provides that reasonable notice of an intention to apply for leave to bring aderivative action must be given “to the directors of the corporation”. This is significant because the simple reality here is that, whenMessrs.

Johnson and Robins were notified of Mr. Jahnke’s plan to apply for leave to bring his proposed action, they were not directors ofSask Corp. This was self-evidently so both because Sask Corp did not exist at that time and because “director” is defined in s. 2(1)(

n) ofthe BCA as “a person occupying the position of director by whatever name called … .” [49] In short, I find the Chambers judge’s concerns on this front were well-founded. In my view, Mr. Jahnke did not meet therequirements of s. 232(2)(

a) of the BCA by sending notice of his intentions to Messrs. Johnson and Robins on August 12, 2016. [50] The proper approach to employ in circumstances such as those in issue here is the one used in A E Realisations

(1985) Ltd. vTime Air Inc., (SK KB), [1995] 3 WWR 527 (Sask QB). There, the corporation was first revived. A demand was thenmade that the directors commence the proposed action. Only after the directors had been given an opportunity to consider the matter andhad refused to launch the requested proceedings was an application brought for leave to commence a derivative action. [51] All of that said, I turn now to the question of whether, even assuming Messrs. Johnson and Robins were “directors” for thepurposes of s. 232(2)(a), the notice given to them was reasonable.

I begin by observing that the Chambers judge’s assessment of thereasonableness of the notice provided by Mr. Jahnke attracts a measure of deference from this Court. See, for example: PCLConstruction Management Inc. v Holmes, 1994 ABCA 358 , [1995] 3 WWR 502 (Alta CA) at para 9. However, let me alsonote that, even if the standard of review were strict, I would still not interfere with the Chambers judge’s decision on this point. It wascorrect. [52] The root facts speak for themselves. Mr. Jahnke gave notice to Messrs. Johnson and Robins by mailing them registered letterson August 12, 2016.

Although nothing about the situation was time sensitive, he filed his application under s. 232(1) only 14 days later.

In all of the relevant circumstances, this was simply not enough time to allow Messrs. Johnson and Robins to appropriately come to gripswith the demand that Sask Corp commence the proceedings requested by Mr. Jahnke. The following considerations carry special weightin this regard: (

a) Messrs. Johnson and Robins received notice of the revival of Sask Corp on August 19, 2016, only a week before theapplication for leave to commence the derivative action was filed; (

b) Sask Corp had been dissolved for about a year at the point when Mr. Jahnke provided notice to Messrs. Johnson and Robins.At that time, they were, by definition, no longer engaged in Sask Corp’s affairs; (

c) Mr. Johnson was resident in South Dakota. Mr. Robins was apparently located in Regina. One might fairly expect there werelogistical hurdles for them to overcome in order to get together and meaningfully come to grips with the implications of the notice; and (

d) The matters raised in the proposed claim were complex. It would have been necessary for Mr. Johnson and Mr. Robins toretain counsel and to work through involved evidence and difficult legal arguments before attempting to make a determination as towhether the proposed action should be pursued. [53] Mr. Jahnke refers to some decisions where short or no notice was provided to directors in circumstances where the directorsthemselves were to be the defendants in proposed derivative actions.

In those cases, the short notice was nonetheless held to bereasonable because it was said to be unlikely that, regardless of the time available, the directors would choose to sue themselves. See:Barnes v BWV Investments Ltd. (1991), (SK KB), 101 Sask R 245 (QB); Winfield v Daniel, 2004 ABQB 40, 352 AR82; 1199918 Alberta Ltd. v TRL Holdings Inc., 2011 ABQB 506, 523 AR 274; Warneke v 101218236 Saskatchewan Ltd., 2016 SKQB316. I am not prepared to accept these decisions as establishing or reflecting a general principle that short notice becomes good notice ifthe directors are proposed defendants.

Every case must be viewed in light of its own unique facts and circumstances and it would beinappropriate to presume, as an invariable rule, that directors will ignore their fiduciary obligations and act only in their self-interest. [54] Mr. Jahnke also suggests the Chambers judge overlooked material facts in deciding whether the notice provided here wasreasonable. In this regard, he notes that Mr. Robins was on the Sask Corp board only because a Canadian director had been required tocomplete the change of shareholders for the corporation and to pilot its dissolution. Mr. Jahnke also points out that Mr.

Robins resignedfrom the board on August 22, 2016, shortly after Sask Corp was restored. I am not persuaded that the Chambers judge erred in herhandling of this evidence. First, although the judge did not reference the specific circumstances of Mr. Robins’s appointment to theboard, it is not apparent why the narrow mandate envisioned for Mr. Robins would have been relevant to her decision. More specifically,it is not apparent how nothing more than a limited sense of what Mr.

Robins might have been called upon to do as a director could haverelieved him of other directorial responsibilities, such as determining whether Sask Corp should pursue the claim suggested by Mr.Jahnke. A unanimous shareholders’ agreement might have narrowed his role but there was no such agreement here. Second, theChambers judge was fully aware of Mr. Robins’s resignation from the board and made express reference to it at paragraph 93 of herJudgment. But, the real point in this regard is surely that Mr. Robins’s decision to step down from the board only a week before theapplication for leave was filed by Mr.

Jahnke did not give Mr. Johnson, the remaining director, any additional time to process and workthrough the various issues presented by Mr. Jahnke’s notice. One way or the other, the time given by Mr. Jahnke for Sask Corp’s boardto respond was unreasonably short. [55] Finally, Mr. Jahnke submits the Chambers judge failed to note there was no evidence that Mr. Johnson had in fact deliberatedabout the prospect of Sask Corp taking up the proposed lawsuit even though the s. 232 application was not argued until October of 2016,two months after it was filed. I am not swayed by this argument either. To begin, it was Mr.

Jahnke who carried the burden ofestablishing the reasonableness of the notice provided to Mr. Johnson. Further, once Mr. Jahnke’s application had been filed in the Courtof Queen’s Bench, it was surely not inappropriate for Mr. Johnson to wait to see how the matter played out before going any further withthe idea of the proposed lawsuit. [56] In my respectful view, the Chambers judge summarized the situation both accurately and fairly in writing as follows: [67] The respondents make a perfectly legitimate point.

Given the dissolved status of [Sask Corp] and the fact that Johnson andRobins ostensibly had no legal authority to bind the corporation because they were no longer directors, some amount of time waswarranted to assess the extent of their legal authority, if any, and the specific facts presented by Jahnke. [68] Moreover, even if Johnson and Robin’s authority was reinstituted with revival of the corporation, they only had from August 19,2016 (the date they learned [Sask Corp] was revived) until August 26, 2016 (the date this application was filed) to respond to a set ofcomplex facts and legal issues.

As discussed, the purpose of notice is for directors to determine whether the corporate entity shouldcommence the action proposed by the applicant. In my opinion, there simply was insufficient time for these complex issues to beassessed, and therefore even if the notice was valid, I find it to be unreasonable in the circumstances. [57] In the end, I conclude that Mr. Jahnke’s argument on this point must fail. The Chambers judge made no reviewable error indetermining that Mr. Jahnke did not give reasonable notice of his intention to apply for leave to bring an action in the name and on behalfof Sask Corp. B.

Is the proposed action in the interests of Sask Corp? [58] As noted above, s. 232(2)(

c) of the BCA provides that a derivative action may not proceed unless the action “appears to be inthe interests of the corporation”. Mr. Jahnke contends that, in considering s. 232(2)(c), the Chambers judge erred by getting too far intothe substantive merits of the proposed action while, at the same time, failing to consider all of the relevant facts. [59] In order to deal with Mr. Jahnke’s submissions on this point, it is important to understand the origins of s. 232 of the BCA.Simply put, it is rooted in Foss v Harbottle (1843), 2 Hare 461, 67 ER 189 (Ch).

That case famously propounded the doctrine thatindividual shareholders have no course of action for the diminished value of their shares or for any other recovery on account of wrongs

done to a corporation. Rather, such claims must be brought by the corporation itself or in the name of someone the court has appointed asits representative. [60] As is helpfully explained by Moir J. in L&B Electric Ltd. v Oickle, 2005 NSSC 110 at paras 35–36, 233 NSR (2d) 244 [L&BElectric], all of this led to the legislative response now found in s. 232.

In 1967, a Select Committee of the Legislative Assembly ofOntario concluded that the derivative action was the most effective way to enforce required standards of conduct and care on directors.However, the Committee was also alert to the abuses of derivative actions that had revealed themselves in the United States courtesy oflawyers who used such actions to extract settlements from corporations.

In order to overcome these problems, the Committee concludedthat a derivative action should be allowed to proceed only if a judge of the High Court was persuaded the shareholder-plaintiff wasacting bona fide and it was “prima facie in the interests of the company or its shareholders that the action be brought” (Ontario,Legislative Assembly, Interim Report of the Select Committee on Company Law, 27th Leg, 5th Sess (1967) at 63).

This led to theenactment of the 1970 Ontario Business Corporations Act which, in s. 99, put in place a regime whereby a shareholder of a corporationcould maintain an action in a representative capacity for himself or herself and all the other shareholders for and on behalf of thecorporation if certain prerequisites were met. Those prerequisites included, as per s. 99(3)(c), “it is prima facie in the interests of thecorporation or its shareholders that the action be commenced”. [61] Then, in 1971, came the release of the so-called Dickerson Report prepared for the Government of Canada.

Proposals for aNew Business Corporations Law for Canada, vol 1 (Ottawa: Information Canada, 1971), endorsed the idea of derivative actions in thename and on behalf of a corporation to enforce a right of the corporation. It also recommended that a shareholder be required to obtain acourt order before commencing derivative proceedings. Such orders were to be subject to conditions described as follows: … By requiring good faith on the part of the complainant this provision precludes private vendettas.

And by requiring the complainant toestablish that the action is “prima facie in the interest of the corporation” it blocks actions to recover small amounts, particularly actionsreally instituted to harass or to embarrass directors or officers who have committed

an act which, although unwise, is not material. … (s. 482) [62] The draft statute included as part of the Dickerson Report was adopted as the

Canada Business Corporations Act, SC 1974-75-76, c 33. The Saskatchewan BCA, including s. 232, is modeled closely on the federal Act. [63] A judge hearing an application for leave to commence a derivative action should not be drawn into an exercise that amounts totrying the proposed claim on its merits. Section 232(2)(

c) requires only that the action “appears to be in the interests of the corporation”.In making her inquiry on this point, the Chambers judge delved into the details of the record perhaps somewhat further than might betypical and, to some extent, I will follow suit. However, particularly when as here there are no issues of credibility to cloud the pictureand there are no contradictions in the evidence, an examination of the proposed action at this level of detail is appropriate. The s. 232(2)(

c) inquiry is not a trial of the proposed action but neither is it an exercise as limited as asking whether the pleadings reveal a cause ofaction. Regard must be had for the evidentiary record underpinning the application. [64] Numerous cases have attempted to explain how a judge should determine whether a proposed action “appears to be in theinterests of the corporation” by framing the relevant test in terms of the apparent strength or merit of the proposed claim.

In this regard,courts have used terminology such as “an arguable issue worthy of trial” (L&B Electric at para 46); “a reasonable argument which wouldnot be dismissed out of hand” (Primex Investments Ltd. v Northwest Sports Enterprises Ltd. (1995), (BC SC), [1996] 4WWR 54 (BC Sup Ct) at para 39 [Primex Investments]); a claim that does not appear “frivolous or vexatious or is bound to beunsuccessful” (Re Marc-Jay Investments Inc. and Levy (1974), (ON SC), 50 DLR (3d) 45 (Ont H Ct

J) at 47); and“whether the proposed action has a reasonable prospect of success or is bound to fail” (Jordan Enterprises Ltd. v Barker, 2015 BCSC559 at para 35). [65] The leading case on s. 232(2)(

c) in this jurisdiction is Schafer, the authority relied on and applied by the Chambers judge. Theparties here take no issue with it. In Schafer, Baynton J. explained that, because s. 232(2)(

c) uses the words “appears to be in theinterests of the corporation”, an applicant for leave to bring a derivative action need not prove the action is in fact in the interests of thecorporation. It is enough if the applicant establishes that the application is prima facie in the interests of the corporation.

Another way tomake the same point, according to Baynton J., is that the applicant must show there is an arguable case. [66] Having made these observations, Baynton J. then went on in Schafer to note that, in determining the “interests of thecorporation” issue, it was necessary to apply the sound business judgment rule. He explained this as follows: [25] … The rule is in effect a presumption that if the directors of the corporation make an informed decision that the disadvantagesoutweigh the advantages of commencing the action, then this is what is in the best interests of the corporation.

The decision tocommence or not to commence an action is like any other business decision that is ordinarily a matter of internal management to be leftto the discretion of the directors absent instruction from the shareholders. Courts seldom interfere with such intra vires discretion unlessthe directors are guilty of misconduct equivalent to breach of trust, or unless they stand in a dual relation which prevents an unprejudicedexercise of judgment.

If there is misconduct or a dual relation then the presumption that the decision of the directors is in the bestinterests of the corporation will not apply. [67] Justice Baynton’s overall approach to s. 232(2)(

c) was endorsed by this Court when it dismissed the appeal from his decisionby briefly saying “[w]e are not persuaded that the learned chambers judge’s order was based on any misunderstanding of the law”.See: Schafer v International Capital Corp., (SK CA), [1997] 8 WWR 412 (Sask CA). Since that time, the Court ofQueen’s Bench has regularly turned to Schafer in determining whether to authorize derivative actions. [68] That noted, I should clarify that the “interests of the corporation” inquiry is not tightly restricted to nothing more than anassessment of the apparent strength of the proposed action.

This is because, as recognized in the Dickerson Report itself, there arecircumstances when it would clearly not be advisable for a corporation to pursue a claim even where success seems almost certain. I havein mind here, for example, situations such as those where an action will cost far more to prosecute than it can possibly yield in damages,where pursuing a claim will harm important and ongoing business relationships, or where going to court will generate problematic

publicity for the corporation. In all of these sorts of situations, the narrow question of whether a claim is arguable will not properlyanswer the question of whether that claim is in the interests of the corporation. This is not a new idea.

Cases where a court has beenprepared to consider more than just the chances of success for a proposed action include Schadegg v Alaska Apollo Resources Inc., 1994CarswellBC 2132 (BC Sup Ct), Melnyk v Acerus Pharmaceuticals Corporation, 2017 ONSC 1285, Maxwell v Schuman, 2005 BCSC1430, Discovery Enterprises Inc. v Ebco Industries Ltd. (1997), (BC SC), 40 BCLR (3d) 43 (Sup Ct), and PrimexInvestments. Thus, while the strength of the proposed action is the central consideration in any s. 232(2)(

c) inquiry, it is not the onlyconsideration or, necessarily, the deciding consideration. [69] What then of this case? As noted, the Chambers judge concluded the proposed action was not in the interests of Sask Corp.She emphasized three considerations in assessing the merits of the action: (

a) the crushing debt problems faced by Sask Corp in 2014;(

b) the absence of any mature sales opportunities with respect to the Land in 2014; and (

c) the holes in Mr. Jahnke’s views as to the valueof the Land in 2014. She also referred to the fact that Sask Corp had been dissolved. In brief, the Chambers judge found there was nostrength in the idea that Sask Corp had not received fair value for the Land when it was transferred to B.C. Corp and, hence, there was nofoundation for a claim for damages in this regard. Her overall conclusion was that Mr. Jahnke’s true motivating concern was notprotecting the interests of Sask Corp but attempting to enforce the bargain he claimed to have made with Mr.

Thomas for the sale of hisSask Corp shares. [70] I endorse the Chambers judge’s reasoning so far as it goes. As she pointed out, the central reality of the facts underpinning thisappeal is that, by the summer of 2014, Sask Corp had not been able to sell any of the Land or obtain development approvals. Moreover,Sask Corp was in default to the extent of over $9 million USD in relation to the loan from Larson Manufacturing and LarsonManufacturing had demanded payment and was poised to act on the transfer and quit claim.

Looking only at these facts, it is notapparent how Sask Corp suffered any loss or damages by transferring the Land to B.C. Corp after B.C. Corp had acquired both LarsonManufacturing’s interest in the debt owing by Sask Corp and the security interests associated with the debt. [71] Mr. Jahnke resists this conclusion on the basis that the Land was worth more than the amount owed to Larson Manufacturingand that part of the Land, which comprises a total of 659 acres, could have been sold to satisfy the Larson Manufacturing debt. Thisargument breaks down on two readily-apparent fronts.

First, as to the value of the Land, Mr. Jahnke relies on a 2016 appraisal thatvalued a 57-acre parcel of the Land at $8,240,000 CAD. However, as the Chambers judge correctly pointed out, this valuation waspredicated on the assumptions that all required development approvals had been received, the Land had been subdivided, all services andrequired infrastructure were in place, and the lagoons located near the property would be decommissioned. None of these assumptionsrepresented the reality of the situation in 2014 and hence the appraisal says nothing useful about the value of the Land at that time.

Thesecond self-evident problem with Mr. Jahnke’s position relates to the lack of opportunities to sell the Land in mid-2014. He points to adraft agreement with All-Rite Land Development Company Inc. and an expression of interest from Terra Developments Inc. But, andagain as correctly noted by the Chambers judge, neither of these possible deals was anything like a mature sale opportunity. [72] Accordingly, the Chambers judge was not mistaken in concluding that, as of mid-2014, Sask Corp had no option of sellingsome of the Land to pay off the Larson Manufacturing loan. The proof of the pudding was in the eating.

Sask Corp had negotiated twoforbearance agreements with Larson Manufacturing to gain more time to sell some of the Land. Despite its efforts, Sask Corp failed toconclude any sales. [73] However, there is an aspect of the factual picture underpinning the proposed derivative action that was not considered by theChambers judge. It concerns the benefits Mr. Thomas and his corporation arguably received for the transfer of the Land by Sask Corp toB.C. Corp.

She might have failed to have mentioned this matter because it was not drawn clearly enough to her attention or because,given that its specifics came out only through the affidavits filed on the application before her, it was not addressed expressly in theproposed statement of claim. [74] In any event, Mr. Jahnke emphasizes that Mr. Thomas and his corporation signed a Memorandum of Agreement with LarsonManufacturing and Mr. Johnson on September 16, 2014, whereby: (

a) Mr. Johnson agreed to loan $1 million USD to Mr. Thomas and his corporation to enable them to pay for the purchase of allof the shares of Sask Corp; (

b) It was acknowledged that Larson Manufacturing would establish what was to become B.C. Corp and then assign to B.C.Corp the amounts owed to Larson Manufacturing by Sask Corp and the security obligations associated with that debt; (

c) Mr. Thomas and his corporation, as shareholders of Sask Corp, would consent to the transfer of any rights or interests in theLand to B.C. Corp in consideration of the $1 million USD loan made by Mr. Johnson and in consideration of other agreements to beentered into between B.C. Corp and one or both of Mr. Thomas and his corporation; (

d) Upon transfer of the Land to B.C. Corp, Mr. Thomas and his corporation would transfer all of the shares of Sask Corp toB.C. Corp for $1 million USD; and (

e) B.C. Corp would enter an agreement pursuant to which it would pay Mr. Thomas and his corporation commissions for theirefforts to sell portions of the Land and Mr. Thomas would be granted the right to acquire certain portions of the Land at specified prices. [75] On September 30, 2014, Mr. Thomas and his corporation entered a Consulting Agreement with B.C. Corp, as contemplatedby the September 16, 2014, Memorandum of Agreement. The Consulting Agreement set out the particulars of the commissions thatwould be paid to Mr.

Thomas and his corporation if they had been active in the sale and development of specified parcels of the Land.By way of example, the Consulting Agreement said this about Surface Parcel #145776392: 1.2 [Mr. Thomas and his corporation], in such proportion as they may in writing to [B.C. Corp] direct, shall be paid a commissionbased upon the Net Profit, as hereinafter defined, from the development and ultimate sale of lands in Parcel A where [Mr. Thomas andhis corporation] have been active in dealing with marketing and disposition of the lands in Parcel A on the following basis:

(a) [Mr. Thomas and his corporation] shall be paid a commission equal to 10 percent of the Net Profit from the disposition of the lands in Parcel A for Net Profit up to $4,560,000 USD; (b) [Mr. Thomas and his corporation] shall be paid an additional commission equal to 20 percent of the said Net Profit that is in excess of $4,560,000 USD, for a total commission of 30% for the amount of the said Net Profit that exceeds $4,560,000 and is less than $5,520,000; (c) [Mr.

Thomas and his corporation] shall be paid an additional commission equal to 5 percent of the said Net Profit that is in excess of $5,520,000 for a total commission of 35% of the amount of the said Net Profit that exceeds $5,520,000. [ 76 ] The Consulting Agreement also gave Mr. Thomas and his corporation the option to purchase various parcels of the Land at specified prices. [ 77 ] As I understand it, Mr. Jahnke says the significance of the Memorandum of Agreement and the Consulting Agreement is that they indicate the Land was worth more than Sask Corp received for it and that this extra value went to Mr.

Thomas and his corporation, not to Sask Corp. All of this is said to have been in violation of Mr. Thomas’s fiduciary obligations owed to Sask Corp by virtue of his position as a director of the corporation. [ 78 ] At least as a matter of first impression, there is some merit in this contention and it suggests the proposed action was perhaps stronger than the Chambers judge believed. The Memorandum of Agreement expressly provides that Mr. Thomas and his corporation were to cause Sask Corp to transfer the Land to B.C.

Corp, not just as per the transfer and quit claim, but “in consideration of the loan by [Mr.] Johnson to [Mr. Thomas’s corporation] and in consideration of the other agreements to be entered into between [B.C. Corp] and one or both of [Mr. Thomas and his corporation]”. As the Consulting Agreement reveals, those “other agreements” were potentially quite lucrative. All of this indicates, arguably, that Mr. Thomas effectively diverted some of the value of the Land from Sask Corp to himself and his corporation.

That would appear to be a violation of his fiduciary obligations to Sask Corp and something giving rise to a claim for damages by Sask Corp. [ 79 ] I pause here, however, to note as an aside that the wording of the Memorandum of Agreement might reflect inelegant drafting rather than the true substance of what underpinned it. B.C. Corp had acquired Larson Manufacturing’s interest in the loan that Larson Manufacturing had made to Sask Corp and it had also acquired the related transfer and quit claim. In other words, B.C. Corp had no need to offer either Mr.

Thomas or his corporation anything in order to acquire the Land. Rather, the Land was available to it by way of the transfer and quit claim. All of this means it is possible to see the real bargain underlying the Memorandum of Agreement as being B.C. Corp offering up commissions on the profits from the sale of certain parcels of the Land and options to purchase specified parcels, on the one hand, for Mr. Thomas’s work in successfully promoting the sale of parcels of the Land on the other.

In that case, the operative bargain would not be the exchange of commissions and options for the Land itself but, rather, the exchange of commissions and options for sales-related work. [ 80 ] That point made, I note that, even taking the Memorandum of Agreement at face value, there are complicating considerations to be taken into account here. Those considerations suggest the proposed action is ultimately not as meritorious or useful as it might otherwise seem. Let me explain. At the time Mr.

Thomas and his corporation entered into the Memorandum of Agreement and the Consulting Agreement and Sask Corp was thereby arguably deprived of the full value of the Land, Mr. Thomas and his corporation were the only shareholders of Sask Corp. Thus, although Sask Corp itself might be said to have been denied the full value of the Land, any loss of value was captured by its only shareholders, i.e., Mr. Thomas and his corporation because they were to receive the commissions on profits from sales and the option to purchase.

As of the date the Land was transferred, this would have meant that the key relief sought in the proposed claim would, if granted, have resulted in damages being paid by Mr. Thomas and his corporation to Sask Corp, a corporation they wholly owned. All of the shares of Sask Corp were, of course, ultimately transferred to B.C. Corp, the corporation that had given Mr. Thomas and his corporation the value said to have been denied to Sask Corp. All of this creates a rather involved litigation story with a complicated and uncertain remedial end result.

These complications and uncertainties significantly impact the question of whether, when all is said and done, the proposed action will yield bottom-line benefits for Sask Corp. As counsel for Mr. Jahnke properly acknowledged, the remedial side of the proposed action promises to be extremely complicated. [ 81 ] There is also another reality here that, while it does not bear directly on the merits of the proposed action, nonetheless warrants some consideration in the analysis required by s. 232(2) (

c) of the BCA . The Chambers judge’s fundamental reservation about the proposed action was that it was being advanced by Mr. Jahnke, not in the interests of Sask Corp, which was a revived corporation with no assets or liabilities and no ongoing operations, but in an effort by Mr. Jahnke personally to pressure Mr. Thomas and to find redress for an improvident or unfulfilled bargain concerning the sale of Mr. Jahnke’s Sask Corp shares. That is a proper assessment of the situation. One way or another, the true story line here keeps returning to Mr.

Jahnke’s complaint that the alleged agreement whereby he would share in the net profits from the development of the Land did not materialize. It is no accident that Mr. Jahnke and his corporation, acting in their own names, have commenced an action against Mr. Thomas and others that is very similar to the proposed derivative action. [ 82 ] At the end of the day, and taking all of the foregoing into account, I find the Chambers judge made no reviewable error in deciding that Mr. Jahnke had failed to establish the proposed action was in Sask Corp’s interests. VII. conclusion [ 83 ] As explained above, Mr.

Jahnke’s appeal must be dismissed. The respondents, all represented by the same counsel, are entitled to one set of costs. “Richards C.J.S.” Richards C.J.S. I concur. “Caldwell J.A.”

Caldwell J.A. I concur. “Whitmore J.A.” Whitmore J.A.