January 16, 2024
Take care when blending personal relationships with business. That is the moral of the story in Gojkovich v Buhbli Organics Inc.,, an oppression remedy case between two former lovers.
THE ISSUE
The applicant started a small business which she expanded during their relationship largely due to the expertise of the respondent. There was no agreement about what to do about the business if the relationship soured.
The relationship ended and the respondent ended up with control of the business, though both remained equal shareholders. The respondent refused to distribute profits to the applicant, but also refused to buy her shares. A classic “locked in frozen out” picture. Perfect for a finding of oppression, if supported by the right facts.
THE CASE
Rather than a compulsory purchase, however, the Ontario Superior Court judge hearing the matter ordered a winding up of the corporation. This is a remedy that is more drastic than a buy out, and less likely to realize the full value of the business. The judge imposed it because the respondent said he lacked the money to buy out the applicant and was unwilling to make a purchase. The judge also refused to delay the inevitable, by not ordering a trial, which would have led to an updated valuation of the company.
It is quite likely that the respondent convinced himself that the applicant, though a 50% owner, was merely a silent partner and not deserving of an equal share.
The judge, looking at the corporate history objectively, did not agree with the respondent. Though the respondent was the driving force of the growth and success of the corporation, the applicant made ongoing contributions, and had a reasonable expectation of the equal sharing continuing. A breach of “reasonable expectations” is at the heart of a finding of oppression.
It takes more than deadlock to be oppression. The respondent also must act wrongfully and oppressively. Unfortunately, in this case, the respondent did what most people in his position do- he took a series of steps that favoured himself over his fellow shareholder. In this case, the judge chronicled nine difference violations.
The applicant also received an order for compensation for the unequal distribution of income, and substantial indemnity costs for the application. Further costs were incurred by both parties when they could not agree on a liquidator and had to return to court.
TAKEAWAYS
This tale illustrates the value of a shareholder compulsory buy-sell agreement being agreed too by the parties when all is well in the relationship. Ideally, this should be done at the outset (time of incorporation). Despite this, many clients decline to do so because:
- They secretly fear that trying to agree will spoil the relationship, much like the reluctance of some couples to attempt to negotiate a marriage contract.
- They foolishly believe that a good thing will never end.
- They start the negotiations, but never come to an agreement. Sometimes it is because once the incorporation is complete their focus is elsewhere; sometimes their lawyer does not assertively follow up, sometimes they realize that the relationship is at risk.
- Failing to have a buy-sell agreement increases the risk of a deadlock, which typically will lead to an oppression finding. That removes control over the fate of the corporation from the owners to a judge- never a desirable situation.
- The respondent might have avoided an oppression remedy if he had continued to divide profits equally with the applicant, but the breakup was bitter, and in those situations, even smart businesspeople often do not think straight.
- In considering an oppression claim, courts will prefer the most efficient approach.
- Because the legislation permits an application, this will only require a trial where the facts cannot be determined on the record, such as credibility issues that require trial.
- Delay typically favours the respondent, who has control of the assets, and can “starve out” the applicant, so this point is important to note. There is no rigid rule as to remedy. Though a forced purchase is perhaps more common the winding up order avoids the need for a trial.
HOW WEILERS LLP CAN HELP YOU
The corporate commercial lawyers at Weilers LLP have extensive experience in drafting corporate documents including unanimous shareholder agreements. We take the time to collaborate with our clients to understand their needs and expectations, and in negotiating an agreement we assist them in achieving as close to those expectations as possible.
If, despite best efforts, you find yourself involved in a dispute, the litigation team at Weilers LLP has a solid record of negotiating favourable outcomes as well as obtaining remedies through alternative dispute resolution or litigation. We understand the different corporate remedies that are available and carefully structure your pleadings or attack the opposition’s pleadings accordingly to seek the right relief for the facts.
If you need corporate law advice of any type, give us a call. Weilers LLP may be the right lawyers for you.