Citation:
Cross v. Mountain High Recreation Ltd.,
2007 BCCA 121
Date: (略)
Docket: CA033839
Between:
Brian Cross
Appellant
(Petitioner)
And
Mountain High Recreation Ltd. and Leo Jansma
Respondents
(Respondents)
Before:
The Honourable Madam Justice Rowles
The Honourable Mr. Justice Donald
The Honourable Madam Justice Saunders
T.W. Pearkes
Counsel for the Appellant
M. Kew
Counsel for the Respondents
Place and Date of Hearing:
Kelowna, British Columbia
September 13, 2006
Place and Date of Judgment:
Vancouver, British Columbia
February 26, 2007
Written Reasons by:
The Honourable Madam Justice Saunders
Concurred in by:
The Honourable Madam Justice Rowles
The Honourable Mr. Justice Donald
Reasons for Judgment of the Honourable Madam Justice Saunders:
[1] At issue is the ownership of the controlling block of shares in Mountain High Recreation Ltd. The company was incorporated in 1987. For approximately the last 15 years, 33 of the 100 issued shares were held by the appellant Mr. Cross, 33 by the respondent Mr. Jansma, and 34 by Mr. Gfroerer.
[2] In 2005, Mr. Gfroerer gave notice that he wished to sell his shares. Mr. Cross expressed a desire to purchase the shares but, in Mr. Gfroerer's view, did not comply with the terms of the offer. Mr. Jansma had also expressed a desire to purchase the shares, which he did. This gave Mr. Jansma 67 shares and left Mr. Cross with his 33 shares.
[3] The articles of the company require shares to be transferred pro ratably where more interest is expressed in acquiring shares than there are shares available. As Mr. Cross considered that this pro rata distribution had not occurred, he brought a petition under section 227 of the Business Corporations Act, S.B.C. 2002, c. 57. That section provides:
227 (2) A shareholder may apply to the court for an order under this section on the ground
(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or
(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.
[4] In his petition Mr. Cross sought an order requiring Mr. Jansma to transfer 17 (one-half of 34) shares to him in exchange for payment of one-half of Mr. Jansma's purchase price; that is, Mr. Cross sought an order that he and Mr. Jansma, as between each other, stand in the same position to each other, as shareholders, as they had prior to the transaction. He also sought an order appointing him a director of the company.
[5] In reasons for judgment indexed at 2006 BCSC 215, the learned chambers judge dismissed the petition.
[6] On this appeal, Mr. Cross contends that the chambers judge erred in law:
1) in finding that a precondition to relief under s. 227 was either a finding that the offer failed to comply with the articles or that Mr. Cross had complied with the articles and the terms of the offer;
2) in calculating the time available to Mr. Cross to respond to the offer, and thus in concluding that Mr. Cross had failed to comply with the terms of the offer;
3) in failing to consider as fatal that both directors of the company who approved the transfer were interested in the proposed contract as the vendor and purchaser; and
4) in failing to exercise the court's equitable jurisdiction to prevent the respondents from applying a strict construction of the offer, thereby depriving Mr. Cross of his entitlement to participate equally in taking up the shares.
[7] The critical events started in July 2005. On July 5, 2005, at the annual general meeting of the company, which Mr. Cross did not attend, the number of directors was reduced from three to two. Mr. Jansma and Mr. Gfroerer were appointed the two directors of the company. Before then, Mr. Jansma, Mr. Gfroerer and Mr. Cross had been directors.
[8] On July 22, 2005, Mr. Gfroerer offered, by an e-mail, to sell to Mr. Cross his 34 shares for a price of $99,000.
[9] On July 26, 2005, Mr. Gfroerer authored a notice to the company, pursuant to its articles, setting out his desire to sell all 34 of his shares at a price of $2,647 per share, i.e., $89,998. The notice was posted on July 27, 2005. The offer provided:
1. Payment
(a) Form of Acceptance: payment by a member equal to the full amount in Cdn. dollars for the full number of shares as stated within this transfer notice, in cash, 14 days from the date of this transfer notice.
(b) Form of Payment: a member accepting this offer may transfer the amount referred to in this transfer notice, into the bank account of Mountain High Recreation Ltd., Account #69633 Max 01, Kootenay Savings Credit Union, Kaslo, British Columbia, or make payment by certified che[que] written out to Mountain High Recreation Ltd. and delivered to the office.
2. Release of funds and share transfer
(a) Upon the company receiving payment, the total amount of funds referred to herein for the total amount of shares will be released from the company to the transferor and the total amount of shares referred to herein will be transferred to the member or members in accordance with the existing articles of Mountain High [R]ecreation Ltd. Part 23.1.
(b) Should all members holding shares of this class (and they do), show interest in the shares in the above form as referred to in paragraph 1 (a) and (b), then the shares available for transfer will be apportioned and issued to those members on a pro rata basis. The balance of funds will then be refunded on a pro rata basis to the purchasers.
3. Resignation
Upon acceptance of this transfer notice, the transferor will then resign as President and director and on his resignation the remaining shareholders will hold the transferor harmless from that date forward in regard to him having any responsibility or liability, having been a director of the company.
[10] The articles require notice in the case of an intended transfer of shares, in these terms:
24.1 No shares in the capital of the Company shall be transferred by any member, or the personal representative of any deceased member or trustee in bankruptcy of any bankrupt member, or the liquidator of a member which is a corporation, except under the following conditions.
(a) A person (herein called the "proposing transferor") desiring to transfer any share or shares in the Company shall give notice in writing (herein called the "transfer notice") to the Company that he desires to transfer the same. The transfer notice shall specify the price, which shall be expressed in lawful money of Canada, and the terms of payment upon which the proposing transferor is prepared to transfer the share or shares and shall constitute the Company his agent for the sale thereof to any member or members of the Company at the price and upon the terms of payment so specified. . . . The transfer notice shall constitute an offer by the proposing transferor to the other members of the Company holding shares of the class or classes included in the transfer notice and shall not be revocable except with the sanction of the directors. . . .
(b) The directors shall forthwith upon receipt thereof transmit the transfer notice to each of the members, other than the proposing transferor, holding shares of the class or classes set forth in the transfer notice and request the member to whom the transfer notice is sent to state in writing within 14 days from the date of the transfer notice whether he is willing to accept any, and if so, the maximum number of shares he is willing to accept at the price and upon the terms specified in the transfer notice. A member shall only be entitled to purchase shares of the class or classes held by him.
(c) Upon the expiration of the 14 day notice period referred to in article 24.1(b), if the directors shall have received from the members entitled to receive the transfer notice sufficient acceptances to take up the full number of shares offered by the transfer notice . . . the directors shall thereupon apportion shares so offered among the members so accepting and so far as may be, pro rata, according to the number of shares held by each of them respectively. . . . Upon any such apportionment being made the proposing transferor shall be bound upon payment of the price to transfer the shares to the respective members to whom the directors have apportioned same. If, in any case, the proposing transferor, having become so bound fails in transferring any share, the Company may receive the purchase money for that share and shall upon receipt cause the name of the purchasing member to be entered in the register as the holder of the shares and cancel the certificate of the share held by the proposed transferor, whether the same shall be produced to the Company or not, and shall hold such purchase money in trust for the proposing transferor. The receipt of the Company for the purchase money shall be a good discharge to the purchasing member and after his name has been entered in the register the validity of the proceedings shall not be questioned by any person.
[Emphasis added.]
[11] The articles of the company provide for service of notice in these terms:
21.5 Any notice sent by post shall be deemed to have been served on the day following that on which the letter, envelope or wrapper containing that notice is posted, and in proving service thereof it shall be sufficient to prove that the letter, envelope or wrapper containing the notice was properly addressed and put in a Canadian Government post office, postage prepaid.
21.6 If a number of day’s notice or a notice extending over any other period is required to be given, the day of service shall not, unless it is otherwise provided in these articles, be counted in the number of days or other period required.
[Emphasis added.]
[12] The learned trial judge described what occurred after the notice of offer was posted:
[10] By letter dated August 10, 2005, Mr. Cross advised the Company of his willingness to purchase all 34 of Mr. Gfroerer’s Shares. Mr. Cross sent this letter by email and by registered mail. On the same day, Mr. Gfroerer contacted Mr. Cross by telephone and advised him that he and Mr. Jansma would each receive 17 Shares. He also requested that Mr. Cross attend at his residence on the following day (August 11, 2005) to complete the transaction; this would involve paying the purchase price and exchanging share certificates. Mr. Cross did not consent to, or agree to attend, the proposed meeting.
[11] After his telephone call to Mr. Cross, at approximately 10:49 p.m. on August 10, 2005, Mr. Gfroerer sent an email to Mr. Cross and informed him that he had not complied with the terms of the Offer. Nonetheless, Mr. Gfroerer informed Mr. Cross that he would transfer 17 Shares to Mr. Cross if Mr. Cross was prepared to forward to the Company a certified cheque in the amount of $44,990 before 11:00 a.m. the next morning (August 11) and provided that Mr. Cross attend a meeting at his residence at 11:00 a.m. that same morning.
[12] Mr. Cross claims he did not open this email until approximately 11:30 a.m. on August 11, 2005.
[13] At 11:34 a.m. on August 11, 2005, Mr. Pearkes telephoned Mr. Gfroerer and left a message to advise him that Mr. Cross had deposited $90,000 into the Company [sic] trust account on August 10, 2005 and that he would forward the purchase proceeds to the Company’s solicitor promptly upon being advised of his or her name. That telephone call was never returned.
[14] Mr. Gfroerer’s 34 Shares were transferred to Mr. Jansma on August 11, 2005.
[13] In his reasons for judgment, the chambers judge put the case as one requiring him to consider, first, whether the offer had complied with the requirements of the articles and, second, whether Mr. Cross had complied with the articles and the terms of the offer:
[19] Mr. Gfroerer's 34 Shares were transferred to Mr. Jansma despite the fact that Mr. Cross expressed his willingness to purchase them. Mr. Cross appears to have been unfairly prejudiced by the transfer. However, I can only reach this conclusion if the Offer failed to comply with the articles of the Company, or if Mr. Cross’ purported acceptance of the Offer complied with both the articles and the terms of the Offer.
[14] The chambers judge then quoted article 24.1(a) and (b) and said:
[21] In my view, the Offer complied with these provisions.
[15] The chambers judge next considered whether Mr. Cross had complied with the terms of the offer. He concluded that Mr. Cross had not complied in three ways:
[23] First, Mr. Cross did not comply with the time limit set out in the Offer.
[24] Mr. Cross relies on Part 21 of the articles of the Company which deals with notices:
21.5 Any notice sent by post shall be deemed to have been served on the day following that on which the letter, envelope or wrapper containing that notice is posted, and in proving service thereof it shall be sufficient to prove that the letter, envelope or wrapper containing the notice was properly addressed and put in a Canadian Government post office, postage prepaid.
21.6 If a number of day’s notice or a notice extending over any other period is required to be given, the day of service shall not, unless it is otherwise provided in these articles, be counted in the number of days or other period required.
Mr. Cross argues that the first day counted is July 29, 2005 and the last day is August 11, 2005. He submits that since he accepted the Offer before midnight on August 11, 2005, he complied with the time limit.
[25] However, service is irrelevant to the time limit set out in the Offer. All the Offer stated was that it had to be accepted "in writing within 14 days from the date of the transfer notice". The Offer was dated July 26, 2005 and therefore Mr. Cross had to accept in writing within 14 days of that date. Pursuant to s. 25(5) of the Interpretation Act, R.S.B.C. 1996, c. 238, in "the calculation of time […], the first day must be excluded and the last day included." Therefore, Mr. Cross had until midnight on August 9, 2005 to accept the Offer. He failed to meet this deadline.
[26] Second, Mr. Cross failed to transfer the full purchase price (or any amount at all) to the bank account specified in the Offer within the time specified in the Offer. Mr. Cross deposited $90,000 into the Company’s solicitor’s trust account on August 10, 2005. This was not the bank account specified in the Offer and in any event, the deposit was made after the August 9, 2005 deadline had passed.
[27] Third, Mr. Cross’ acceptance was conditional upon "appropriate undertakings." Strictly speaking, that is not an acceptance of the Offer. It is not even clear from his August 10, 2005 letter what undertakings he required. Mr. Pearkes indicated that he would want to know if there had been any significant increase in the debt of the Company or whether there were any outstanding lawsuits. Those, of course, are legitimate concerns but they are not relevant to Mr. Cross' purported acceptance of the Offer. If Mr. Cross had legitimate concerns, he had 14 days from the date of the Offer to investigate such matters.
[16] He concluded:
[28] I am satisfied that the Offer complied with the articles of the Company and that Mr. Cross did not accept the Offer on its terms. Therefore, I cannot conclude that Mr. Cross was treated in a manner that was either oppressive or prejudicial under ss. 227(2)(a) and (b) of the Business Corporations Act.
[17] Mr. Cross did not make submissions concerning his termination as a director and, accordingly, the order dismissed his petition concerning that issue.
Discussion
[18] The first ground of appeal centres on the criteria applied by the chambers judge in considering whether s. 227(2)(b) may be invoked. Mr. Cross contends that the chambers judge was wrong in having first said in paragraph 19 that Mr. Cross was "unfairly prejudiced" and then concluding in his paragraph 28 that he had not been unfairly prejudiced. He contends as well that the chambers judge erred in law in unduly restricting consideration of unfair prejudice to the two alternatives, that the offer failed to comply with the articles of the company or that Mr. Cross had failed to comply with the articles or the terms of the offer.
[19] There was another position open to Mr. Cross, that the offer did not comply with the articles. The chambers judge said that this position was unsupported by the evidence, and it was not taken on appeal. However, I observe that there was evidence before the chambers judge as to the compliance of the offer with the articles, being the offer itself and the articles. I doubt that the requirement in the offer for payment of the entire purchase price of all shares tendered by the shareholder within the 14 day notice period is consistent with article 24.1(c). That clause appears to require that an acceptance be lodged with the company and only after the total of shares tendered is known are the shares allotted and the purchase price required to be paid.
[20] I do not decide the case, however, on that basis as the grounds advanced by Mr. Cross lead, in my view, to the same result.
[21] The first of Mr. Cross’ contentions depends upon a reading of paragraph 19 that I do not think the paragraph bears when read in the context of the entire reasons for judgment. The chambers judge started his analysis with the observation that "Mr. Cross appears to have been unfairly prejudiced by the transfer". In the context of the passages replicated above, I consider that the word "appears" to be a statement of impression and not a finding of fact. To conclude otherwise is to give no effect to his subsequent analysis or his clearly stated conclusion that Mr. Cross was not treated in a manner that was prejudicial within the meaning of s. 227(2)(b).
[22] The more substantial issue raised by Mr. Cross on the issue of compliance with the terms of the offer is whether the chambers judge erred in law in setting as a requirement for a conclusion of "unfair prejudice" that either the offer had to be deficient when measured against the requirements set out in the articles, or Mr. Cross had to comply with both the articles and the terms of the offer. Mr. Cross says that this is putting too narrow a constraint upon s. 227, which is designed to provide for relief from insistence upon legal rights where such would work an injustice contrary to the reasonable expectations of the shareholder.
[23] The seminal case in British Columbia is Diligenti v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36 (S.C.). In a much applied passage in Diligenti, expressly approved by Southin J.A. in Safarik v. Ocean Fisheries Ltd. (1995), 12 B.C.L.R. (3d) 342 (C.A.), Fulton J. concluded that in the case of a closely-held private corporation such as was before him, a shareholder held equitable rights in addition to the legal rights, and that breach of the equitable rights may be a ground of relief. In reaching that conclusion he relied heavily upon Ebrahimi v. Westbourne Galleries Ltd., [1972] 2 All E.R. 492. In Nystad v. Harcrest Apts. Ltd. (1986), 3 B.C.L.R. (2d) 39 (S.C.), McEachern C.J.S.C. observed that the focus of the enquiry was "on the effect on the injured shareholder of the impugned conduct" (p. 47). Yet in all of this, as observed by Southin J.A. in Safarik, the starting place must be a consideration of the legal rights of the parties.
[24] In my view, the chambers judge was overly narrow in his paragraph 19 in describing the content of the enquiry. While a consideration of the degree of compliance with the legal rights and obligations was the necessary starting place, as observed in Safarik, there was more to the required enquiry than that question.
[25] The natural progression is first, consideration of the compliance with legal rights and obligations to determine whether or not Mr. Cross complied with the terms of the articles and the offer. If Mr. Cross did comply with the terms of the offer by accepting it in the fashion required, he is entitled to the fruits of the acceptance. In the event Mr. Cross did not comply with the terms of the offer, as the trial judge found, the court should move on to a consideration of the Diligenti aspects of the case, being the nature of the company and the reasonable expectations of Mr. Cross as shareholder, to determine whether he should obtain relief.
[26] It is said on behalf of Mr. Cross that the chambers judge erred in computing the time available for acceptance, and in finding that the terms of the offer were not met.
[27] I agree that the chambers judge erred in his conclusion on the time available for acceptance, but agree with him that Mr. Cross failed to meet the terms of the offer.
[28] On the issue of the time for acceptance, Mr. Cross contends that the last day on which he could accept the offer was August 11, 2005, which was the day he did accept the offer, and not August 9, 2005, as found by the chambers judge. He says this result flows from Article 24 read together with Article 21.
[29] The respondents say in response to this analysis that the notice required by Article 24 did not engage the service provisions of Article 21 and that the operative date from which time runs is the date set out on the notice.
[30] I agree with Mr. Cross that the date set out on the bottom of the offer is not the date of the transfer notice for purposes of Article 24.1(b). If that were the case, the real length of time in which the offer is outstanding is at the whim of the offeror, with the result that an offeree may fail to have the full measure of time intended by the articles within which the offer may be considered and within which arrangements may be made to meet the terms set out in the offer.
[31] Rather, I consider that the date of the transfer notice bears a relationship to the date on which it was sent to the company. In this case, the date at the bottom of the offer was July 26, 2005, but it was sent by post on July 27, 2005. The delivery by post engaged Article 21.5 which deems the delivery to be made the next day. The result is that the offer was not deemed to have been received until July 28, 2005. By Article 21.6, the 14-day notice period referred to in Article 24.1(c) excludes the day of its arrival. The result, in my view, is that the notice period time did not begin to run until July 29, 2005. In other words, Mr. Cross (and Mr. Jansma as well) had until August 11 within which to accept the offer in accordance with its terms.
[32] This does not mean, however, that Mr. Cross complied with the terms of the offer. The offer defined acceptance as payment of the full purchase price to the company’s bank account or delivery to the company’s office of a certified cheque payable to the company within the 14-day notice period. Setting aside the propriety of that term, an issue I identified earlier, I conclude that Mr. Cross did not satisfy the terms of the offer. Instead of either the money being paid to the company or a certified cheque being delivered, Mr. Cross paid the money into his solicitor’s trust account and the solicitor sent a letter advising that the money would be forwarded to the company’s solicitor once known, subject to "appropriate undertakings". The monies, thus, were never deposited to a company account, nor was a certified cheque delivered, as required by the offer. It follows, as the chambers judge found, that the offer was not accepted in accordance with its terms.
[33] The question, then, is whether Mr. Cross should be relieved from the deficiency in his acceptance because equitable rights operate in his favour. The chambers judge stopped his analysis after concluding that the terms of the offer were not met and did not address this question. It is open to this Court to address it for the first time.
[34] In my view, the answer to the question is yes. I have reached this conclusion for three reasons. First, the corporation is a private company that easily fits within the quasi-partnership description in the cases earlier referred to. Indeed the chambers judge described the parties in his paragraph 2 thus: "Mr. Cross, Mr. Jansma, and Jeff Gfroerer were business partners." He further described the parties as working for the company and, for approximately 15 years, acting as directors of the company. In my view, the reasonable expectation of Mr. Cross is that he would hold equal shareholding position to the other shareholders, that is, that one shareholder alone could not have his way with the company.
[35] Second, the offer provided that upon Mr. Gfroerer’s resignation the remaining shareholders would indemnify him. In my view it was not open for the company, by effecting the transfer, to purport to bind its shareholders to a contract of indemnity. By transferring all of Mr. Gfroerer’s shares to Mr. Jansma and accepting Mr. Gfroerer’s resignation as president and director, the company purported to bind Mr. Cross to a contract of indemnity even though he did not participate in the purchase. This was, in my view, unfairly prejudicial to Mr. Cross.
[36] Third, in considering the degree of prejudice to Mr. Cross and balancing the equities, it is appropriate to consider the degree of Mr. Cross’ deficiency in accepting the offer. Although there was not strict compliance with the terms of the offer, there was sufficient compliance to reveal that Mr. Cross intended to accept the offer, even at a time that Mr. Gfroerer was taking the position that strictly speaking Mr. Cross was out of time when that was not the case. And it appears that Mr. Cross was prepared to advance the purchase price for all the shares although he may only have been allotted a portion of them.
[37] The respondents have referred to an offer by Mr. Gfroerer to meet with Mr. Cross and Mr. Jansma on August 11 and there resolve the matter by agreeing to transfer one-half of his shares to each of the remaining shareholders. Mr. Cross declined to attend, a circumstance that Mr. Jansma says illustrates the potential for difficult relations in the future between the two remaining shareholders.
[38] There was, of course, no obligation upon Mr. Cross to meet on August 11. I do not consider that this feature by itself, given the confusion about the time within which the offer was open for acceptance and Mr. Jansma’s position that the time for Mr. Cross to participate in the transfer had expired by August 11, erodes Mr. Cross' entitlement to relief.
[39] I am mindful that, as pointed out in Nystad, Mr. Cross still may sell his shares, and that he continues to own as many shares as he did prior to the impugned transaction. However, he has gone from equal partner to junior partner, and from the holder of a block of shares that could join with others to form a majority, to a certain minority shareholder. The dilution of his position, in all the circumstances is, I consider, sufficient to trigger relief in his favour.
[40] I conclude, therefore, that this case satisfies s. 227(b). I would allow the appeal and order the company and Mr. Jansma to take all necessary steps to ensure the transfer of 17 common shares of the company to Mr. Cross by Mr. Jansma, upon Mr. Cross' payment to Mr. Jansma of the sum of $44,999 plus court ordered interest.
“The Honourable Madam Justice Saunders”
I AGREE:
“The Honourable Madam Justice Rowles”
I AGREE:
“The Honourable Mr. Justice Donald”