In light of recent events, private company directors should consider implementing a sexual harassment policy for their company at their next board meeting if such a policy isn’t already in place. Such a policy would be a necessary response to not only their moral obligations but to their legal obligations as well. Addressing the issue of potential sexual harassment within their company relates to key elements of corporate governance: company culture, risk management and crisis management.

It is understandable that directors may believe, in the absence of specific complaints, that their company does not have a problem. But the increasing societal awareness of sexual misconduct, and the severe consequences of misconduct allegations, are creating an environment in which more complaints are made, causing directors to take notice. Advance preparation by directors is now required to ensure an effective response.

A board needs to take seriously the risks of sexual harassment claims relating to its company environment and personnel. The damage can be extensive. While most serious to those employees personally affected, the consequences can include negative publicity, the loss of experienced personnel, reputational damage, the inability to attract top talent, the defection of valuable clients and customers, the possibility of false accusations, and the burden of defending costly and time-consuming lawsuits. Even though sexual misconduct allegations may not be a “risk factor” for a company with no reason to expect that such claims may be made, its board should at least discuss the possibility.

From the board’s oversight perspective, sexual harassment in the workplace is a governance issue. In addition to discussing and implementing a new harassment policy or amending an existing one, the board should be briefed on the company’s employee training and protocols for preventing, reporting and addressing sexual misconduct, and the factors used by management in determining which claims are to be reported to the board or a board committee. The board may want to discuss various aspects of risk management, particularly any situations that involve senior company officers, repeat offenders, or a pattern of complaints.

Ideally, the board and management should develop a crisis response plan that includes input from those performing human resources and public relations functions within the company, as well as from the company’s legal counsel. With a team and plan in place, the company should be better able to respond to a harassment situation diligently and in a coordinated fashion, ready to act quickly to protect employees, curtail ongoing misconduct, and minimize harm to the company and its shareholders.

While there are many reasons for a board to implement a harassment policy that includes a response plan, the law dealing with sexual harassment provides sufficient incentive and cannot be ignored. More than one statute deals with sexual harassment. The Canadian Human Rights Act [s. 14(2)] makes sexual harassment a prohibited ground of discrimination. The Ontario Human Rights Code [s. 7(2)] states every person has a right to freedom from sexual harassment in the workplace.

Yet it is the Ontario Occupational Health and Safety Act [s. 32, 55 and 66] that stipulates how employers should investigate and address incidents of workplace sexual harassment. It requires that both the employee who has experienced the workplace harassment and the perpetrator be given written notice of an investigation. Notice must also be given of any corrective action that the employer has chosen. There is a penalty against employers who are unwilling or fail to conduct investigations if a complaint has been made. The Ministry of Labour may also compel an employer to hire an impartial investigator selected by the Ministry to conduct an investigation in the employer’s workplace and produce a report with respect to the investigation, all at the employer’s expense.

Crafting a sexual harassment policy and response plan for a private company takes time and thought, as it must be the right policy for that company, regardless of what other companies may be doing. There isn’t a “standard form” policy to be used by all private companies, although whatever policy is created has to be understood by all of the company’s employees in order to be effective.

There are, however, a number of general principles that are worth considering at the outset before drafting a specific sexual harassment policy and response plan for the company. Serving as appropriate guidelines for company personnel, they include the following:

First, any whistleblower mechanism available for employees to tell the company of suspected sexual harassment should ensure that those listening are outside the regular chain of command and can listen objectively and make sure the right people within the company are notified promptly.

Second, care must be taken to avoid punishing those who come forward, paying particular attention to employees whom their managers say are under-performing. While those employees may be seeking to avoid disciplinary action with a false report, the performance assessment may be an attempt by their managers either to escape punishment themselves or to punish the employee for coming forward.

Third, the right people who receive the results of any investigations into alleged sexual misconduct must follow through objectively, without bias, and without regard for position or title, and ensure appropriate action is taken consistently.

Fourth, the same protections must apply to everybody who works at the company or is subject to the actions of its employees, such as temporary personnel, contractors, consultants, suppliers, customers, and partners.

Fifth, appropriate training must be in place for everybody. That training should go beyond simply reading the policy but involve various scenarios and case studies, and not only be based on what not to do but also guide people on what to do if they see or hear of sexual harassment. Such “bystander training” allows employees to act as agents of surveillance and intervene to hold their offending peers accountable for misconduct instead of being complicit in it.

Sixth, when a credible accusation is made and received, the accused should be put on a paid leave of absence while an investigation takes place. The investigation should promptly be conducted by external investigators already vetted and designated by management and the board. If the claim is substantiated, the accused must be immediately terminated, but if not, then immediately reinstated.

And seventh, due process must be maintained throughout, with trustworthy impartiality, wisdom, and dedication to do the right thing in every instance.

If the foregoing guidelines are reflected in a sexual harassment policy and response plan for the company, and the policy is implemented by the board and enforced throughout the company in a fair and diligent manner, the directors will have taken a significant step towards meeting their obligations to address the issue of potential sexual harassment within their company.

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A working capital adjustment provision that failed to clearly address timing issues created uncertainty and gave rise to litigation.

The case of De Santis and Iacobucci v. Doublesee Enterprises Inc., 2018 ONSC 400, illustrates the consequences of inserting a working capital adjustment provision into a share purchase agreement that fails to clearly specify when a closing balance sheet is to be prepared and adjustment payment made.

In De Santis, the parties entered into a share purchase agreement covering the sale of an auto collision and glass company which contained an unusual working capital adjustment provision that required the company to avoid having negative working capital on closing. If it did, there would be a corresponding reduction in the purchase price dollar-for-dollar, thereby making the target amount of working capital for the company on closing to be zero. Since there would then be no incentive for the vendors to leave funds in the company in excess of this target amount, the agreement permitted the company to declare and pay a “special dividend” of any excess funds prior to closing.

Since the vendors’ accountant required more time to calculate the amount of the company’s excess working capital as the closing date approached, the vendors prepared, signed, and delivered to the purchasers’ lawyers a resolution for a special dividend which indicated a dividend payable on the day prior to closing but the amount of the dividend was left blank. The purchaser’s lawyers did not object to this approach. Several months later, the vendors’ accountant finally calculated the amount of the excess working capital, but when the vendors requested that the special dividend be paid out, the purchasers refused on the basis that the special dividend had to be declared and paid prior to the closing.

The vendors then brought an action in the Ontario Superior Court of Justice to recover the amount of the special dividend or, alternatively, to rectify the purchase agreement to deal with the special dividend payment. The purchasers then countered with a motion for summary judgment, but the Court dismissed the motion, holding that the issues required a trial to achieve a fair and just determination. However, the Court [at para. 65] found that despite the vendors’ non-compliance with the agreement, the purchasers’ failure to object to the vendors’ approach could establish that the parties agreed to the payment of the special dividend after closing, as follows:

In my view, the Vendors’ claim could succeed on the basis that the Purchasers did not object to or raise an issue that the special dividend could and would be declared and paid after the August 8, 2013 [closing] date despite the non-compliance with the [purchase agreement]. The facts could establish that the parties agreed to the payment of the special dividend after closing. In any event, the Purchasers’ inaction to respond to the communications from the Vendors’ lawyer or failure to object to the special dividend being paid after closing or apparent agreement to the special dividend being paid after closing, may very well result in an implied term or variation of the [purchase agreement], an estoppel claim to prevent the Purchasers denying entitlement to the special dividend or rectification.  Any or all of these result[s] may be possible and are consistent with what appears to be the clear understanding and intention of the parties on August 8, 2013.

In light of the foregoing, it seems that litigation could have been avoided in De Santis if the share purchase agreement required that the excess working capital be paid to the vendors following a post-closing audit, which is the process reflected in most working capital adjustment clauses.  

The De Santis case illustrates the consequences of inserting into a share purchase agreement a working capital adjustment clause that fails to clearly address the timing issues associated with the preparation of a closing balance sheet and payment of a purchase price adjustment. While the vendors in De Santis may have wanted to receive a special dividend of all of the company’s excess cash prior to closing, their proposed “solution” may have created more problems than it solved. To dividend out the excess before closing, they would have had to finalize the balance sheet weeks or months in advance, or rely instead on an estimate. Either way, the financial information used could have been outdated and inaccurate upon closing, thereby defeating the purpose of a working capital adjustment. After all, the calculation of excess working capital as of a particular point in time requires looking at a number of things, including outstanding cheques and uncollected receivables and refunds, all of which takes time to complete.

As described in much greater detail in our February 8, 2016 blog post entitled “Working Capital Adjustments on the Sale of a Private Company”, a working capital adjustment is commonplace in share purchase transactions. At closing, if the working capital of the company falls below a target amount, the purchase price is reduced to recognize the purchaser’s need to inject additional cash into the business. If the working capital at closing is greater than the target amount, the purchase price is increased to prevent the purchaser from receiving a windfall.

But as our previous blog post points out, calculating working capital can be a complicated process when deciding what accounts should be included or not, or what accounts should be “normalized” for the purposes of determining the target amount.

Ordinarily a closing balance sheet needs to be prepared to form the basis of a working capital adjustment, but it can seldom be finalized immediately on the date of closing. The parties therefore agree to make the adjustment post-closing once the closing balance sheet is finalized, often between thirty and ninety days following closing. There may be either a single adjustment, or a two-part adjustment involving an initial adjustment based on estimated information at closing and a follow-up adjustment when the finalized information becomes available.

Other questions relating to the adjustment process may also be addressed in the purchase agreement. Should the vendor’s accountant or purchaser’s accountant prepare the closing balance sheet? Should there be certain exceptions to the use of generally accepted accounting standards when the closing balance sheet is being prepared? Should the purchaser be permitted to hold back some of the purchase price payable at closing, or place some of it in escrow, pending the final determination of the adjustment amount?

Although the parties in the De Santis case may have wanted the excess working capital to be paid out on the closing date, their departure from normal practice by failing to prescribe a post-closing audit and payment in their purchase agreement unfortunately resulted in litigation.

A board’s refusal to act on a shareholder requisition for a shareholder meeting because of the “personal grievance” exception is overturned by the Court.

The case of Koh v. Ellipsiz Communications Ltd., 2017 ONSC 3083, provides guidance to boards refusing to call a shareholder meeting because the meeting is requisitioned by a shareholder to redress alleged personal grievances.

In the Koh case, a shareholder holding approximately 42 per cent of a company’s outstanding shares submitted a requisition proposing that a shareholder meeting be convened to consider two resolutions, one to remove three directors, and if approved, the other to elect three new directors identified in the requisition. The company refused to act on the requisition on the basis that it was for the primary purpose of redressing a personal grievance against the company or its directors. Section 105(3)(c) of the Business Corporations Act (Ontario) allows a board to refuse to call a requisitioned meeting when it clearly appears that the primary purpose of the requisition is to redress a shareholder’s personal grievance. Among the personal grievances the board attributed to the shareholder were his desire to be chairman of the company and to negotiate a potential transaction and financing.

The shareholder then commenced litigation to compel the company’s directors to call the requisitioned meeting, but the Ontario Superior Court held that the requisition was sought to redress personal grievances and declined to order the meeting. On appeal, the Divisional Court agreed with the shareholder, holding that the alleged personal grievances predominantly related to his legitimate differences of opinion regarding the business actions that should be taken by the company, and ordering the company to call a shareholder meeting to vote on the shareholder’s resolutions. The Divisional Court stated [at para. 37 and 40] as follows:

It seems to me that one of the indicators of a person[al] grievance is that the subject matter of that grievance bears no real or direct relationship, nor is it otherwise integral, to the business and affairs of the company, or, for that matter, to the griever’s role as a shareholder. In other words, while the grievance may bear some connection to the business and affairs of the company, that is not at the heart of the grievance. … In this case, the three main complaints are directly related to the business and affairs of the respondent [company]. They also directly affected the [shareholder] appellant’s position as a shareholder. The complaints involve who should be directors, who should occupy corporate positions, and whether a significant transaction should be entered into.

In emphasizing that the shareholders have a substantive right to requisition a meeting that should not be lightly interfered with, the Divisional Court stressed [at para. 45] the following:

That point, coupled with the high threshold that must be met for the exception to apply, and that the onus rests on the Board of Directors to satisfy the court that the exception applies, all suggest quite strongly that any doubt regarding the application of the exception should be resolved in favour of the meeting being held. On that point, it must be remembered that all that is being determined, through this application, is whether a meeting of the shareholders should be held.  No determination as to the proper outcome of the dispute is being made. That is a matter for the shareholders to decide, if a meeting is held.

In light of the foregoing, the Koh case should be taken as authoritative guidance to a board on what constitutes a shareholder’s “personal grievance”, and whether a board is permitted to decline a shareholder requisition. As stated [in para. 16], prior to the Koh case, “there was no case law directly on point regarding the interpretation or determination of what constitutes a personal grievance”.

Courts will not defer to the business judgment of directors who refuse a shareholder requisition by relying on an exception. As stated [in para. 15], “In deciding on the application of the exception, a Board of Directors is not making a business decision and, accordingly, the business judgment rule does not apply” to protect their decision. The right of shareholders holding not less than five per cent of a company’s voting shares to requisition a shareholder meeting continues to be a substantive legal right afforded under Ontario’s Business Corporations Act and the courts will be cautious when asked to deny the exercise of that right.

Oppression remedy is not designed to relieve minority shareholder from limited liquidity attached to shares in the absence of oppressive or unfair conduct.

In the case of Wilfred v. Dare, 137 O.R. (3d) 512, a minority shareholder in a closely held private company could not use the oppression remedy to obtain relief from the limited liquidity attached to her shares or provide her a means of exiting the corporation without proving oppressive or unfair conduct. She did not have a reasonable expectation of liquidity for her shares. The case is a useful reminder of just how limited the rights of a minority shareholder really are but how beneficial a comprehensive shareholder agreement can be.     

In Wilfred, a sister and her two brothers were the only shareholders of a private company involved in the manufacture of cookies, crackers, fine breads and candy. Their father, who had previously gifted the company shares to them in an estate freeze, wanted to keep the shares in the family over the longer term and provide a disincentive for his children to sell their shares to a third party. The sister and her brothers entered into a shareholder agreement that required any shareholder wishing to sell company shares to first offer them to the other two shareholders at fair market value. If the others declined the offer, the shares could then be sold to a third party on equal or better terms. When the sister offered to sell her shares to her brothers, they rejected her offer, and she was unable to find a third party purchaser.

She then brought an oppression action in the Ontario Superior Court of Justice, specifically seeking a court-ordered sale of her shares to her brothers and appointment of a third party valuator to determine the value of her shares upon which the sale price would be based.

The action was dismissed. In summarizing the governing legal principles for the oppression remedy [at para. 59], the Court stated that it needed to make the following two inquiries in deciding an oppression case:

(1) Does the evidence support the reasonable expectation asserted by the claimant? (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?

The Court held [at para. 60 to 63] that the sister did not have a reasonable expectation of liquidity for her shares, as follows:

The primary issue in this case is whether [the sister] Carolyn has proven that she has a reasonable expectation of liquidity for her [holding company] Serad shares – namely, that the defendants will purchase her shares of Serad when she wishes to sell them.  In my view, she has not. … Carolyn received a gift of her interest in [operating company] Dare Foods when Carl transferred the future growth of Dare Foods to his three children through the estate freeze in 1980.  Carl’s intention was to try to keep the shares in the Dare family in the long term and to provide a disincentive for his children to sell to a third party. … Carl did that through the right of first offer in the Second Shareholders Agreement.  However, he did not require his children to purchase shares from one another.  The agreement does not contain a shotgun buy-sell clause.  It does not contain a put right.  It does not require any family member’s shares to be purchased by the others depending on his or her life circumstances.  It creates no obligation on his children.  It only provides them with the opportunity to purchase one another’s shares at fair market value before those shares are offered to a third party. … That is the basis on which Carolyn received her shares of Serad.  It is difficult to see how she could have an expectation that her brothers would purchase her shares when she received her shares on those terms.  She agreed to this provision at the time of the estate freeze in 1980. She agreed to it again when the Serad shares were transferred to her personally in 2001.  Indeed, she was aware of the mechanics of the Second Shareholders Agreement when she tried to sell her shares to her brothers in 2001, 2004 and 2014.  She knew that if they did not accept her offer (which she admits they were not required to do), her option was to try to market the shares to a third party. 

The Court [at para. 66] bluntly described the sister’s position:

The reality is that Carolyn was gifted a minority interest in a closely held private family business.  Her interest has inherent limited liquidity.  Her reasonable expectations must take into account the nature of her position as a minority shareholder.

Therefore, the Court was not prepared to grant an oppression remedy in the circumstances, holding [at para. 70 and 71]:

In my view, the oppression remedy … is not designed to relieve a minority shareholder from the limited liquidity attached to his or her shares or to provide a means of exiting the corporation, in the absence of any oppressive or unfair conduct.  Carolyn has not suggested that there has been any mismanagement of the corporation, improper dealing or any unfair conduct. … I reject Carolyn’s submission that the refusal of the defendants to purchase her shares is itself a basis for relief. … Further, to the extent that Carolyn is seeking to have Serad use its resources to purchase her shares, she is putting her own interests ahead of those of the corporation.  The uncontradicted evidence of [brothers] Bryan and Graham, both directors of Dare Holdings and Serad, is that the business has significant capital needs in order to maintain its competitive position.  They testified that Dare Foods has begun a series of investments which is unprecedented.  The business has embarked on a phased investment project for new equipment that for the first time will involve the business going into significant debt.  One of its projects – a new line to make cookies – will cost $62 million.  Their evidence is that Dare Foods’ resources are better allocated for these business purposes than to buy Carolyn’s shares.  As the directors with duties to do what is in the best interests of the corporation, they are entitled to make that determination.

In the Court’s view [at para 72], there was no evidence to suggest that purchasing the sister’s shares was necessary for the good of the company:

This is not a case where any difficulties in shareholder relations or irreconcilable differences among family members have had any adverse effect on the underlying Dare Foods business.  Nor is it the case of an “incorporated partnership” where a shareholder has contributed sweat equity to build a business and has been improperly excluded.  Carolyn has never played a role in the Dare Foods business.  She simply wants out. 

In light of the foregoing, the Wilfred case confirms that the oppression remedy is not designed to relieve a minority shareholder from the limited liquidity attached to his or her shares or to provide a means of exiting the corporation, in the absence of any oppressive or unfair conduct.

But the shareholder agreement in the Wilfred case did not require the shareholders to purchase shares from each other. It did not contain a shotgun buy-sell clause or put right. Had it done so, the outcome for the sister may have been different. While shotgun clauses or put rights may not be appropriate for the shareholders of every closely held private company, especially when there may be a great disparity in the personal needs and financial resources of the individual shareholders, or when the company itself may lack sufficient liquidity or solvency, a shareholder agreement providing mechanisms for shareholder exit may help deter the kind of litigation that took place in Wilfred.

Private company minority shareholders have, in the absence of a shareholder agreement, relatively few rights or reasonable expectations. Such rights or expectations were summarized in the following excerpt from the decision in Senyi Estate v. Conakry Holdings Ltd., found at para. 67 of the Wilfred case:

(1) that the directors and officers will conduct the affairs of the corporation in accordance with the statutory and common law duties required of them in such capacities; (2) that the shareholder will be entitled to receive annual financial statements of the corporation and to have access to the books and records of the corporation to the limited extent contemplated by the Act; (3) that the shareholder will be entitled to attend an annual meeting of the corporation for the limited purposes of receiving the annual financial statements and electing the directors  and auditor of the corporation, or will participate in the approval of such matters by way of a shareholder resolution; (4) that a similar approval process will be conducted in respect of fundamental transactions involving the corporation for which such approval is required under the Act; and (5) that the shareholder will receive the shareholder’s pro rata entitlement to dividends and other distributions payable in respect of the common shares of the corporation as and when paid to all of the shareholders.

Even though the sister in the Wilfred case could not “cash out” since she was unable to sell her shares to her brothers or to the company, or find a third party purchaser, she nonetheless continued to be entitled to receive her pro rata entitlement to dividends and other distributions when paid to all of the shareholders, a result that seems far from oppressive or unfair.

 

Vendor is allowed to retain a large deposit even when suffering no actual damages as a result of the purchaser’s failure to close a transaction. 

In the case of Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, the Ontario Court of Appeal overturned a decision granting partial relief from forfeiture of a purchaser’s deposit after the purchaser failed to close a real estate transaction, and set out the factors to consider when determining whether it would be unconscionable to require a purchaser to forfeit its deposit.

The transaction in Redstone involved the purchase of a warehouse in Brantford, Ontario for $10,225,000. The purchaser planned to use the warehouse to start a marijuana grow-op business, but first required financing and a license from Health Canada. In addition to the initial deposits of $300,000 paid under the agreement of purchase and sale, the purchaser paid a further deposit of $450,000 to secure an extension of the closing date when the Health Canada license took longer than expected. The purchaser could not get the necessary financing or Health Canada license, and failed to close the transaction. When the purchaser refused to agree to a release of the deposits being held in trust by a third party, the vendor brought an application before the Ontario Superior Court for a declaration that the vendor was entitled to be paid the deposits.

Although a court has discretion to grant relief against penalties and forfeitures under the Ontario Courts of Justice Act, a purchaser claiming relief from forfeiture must meet a two-part test. Firstly, the proposed forfeited sum must be out of proportion to the damages suffered by the vendor, and secondly, it would be unconscionable for the vendor to retain the deposit paid. The trial judge found that there was no evidence before the court as to whether the vendor suffered any damages, and was therefore unable to determine whether the $750,000 deposits were proportional to damages suffered. However, the trial judge concluded that $750,000 in deposits reached a level where complete forfeiture became unconscionable, in the absence of any evidence concerning damages suffered by the vendor, and consequently granted partial relief, ordering that only $350,000 of the purchaser’s total deposit be forfeited to the vendor.

When the vendor appealed, the Court of Appeal of Ontario found that a lack of evidence of any damages suffered by the vendor did not render forfeiture of the deposits unconscionable. While a disproportionately large deposit may be unconscionable in some circumstances, the Court of Appeal [at para. 25 to 26] stated as follows:

I would agree that the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case. … Can unconscionability be established purely on the basis of a disproportionality between the damages suffered and the amount forfeited? While in some circumstances a disproportionately large deposit, without more, could be found to be unconscionable, this is not such a case.

The Court of Appeal continued to discuss [at para. 28 to 30] what might make a deposit “disproportionately large” or “unconscionable”:

I would be reluctant to specify a numerical percentage, since much turns on the context. I note, however, that in this case the deposit was slightly more than 7%. There is no evidence that this was a commercially unreasonable deposit. … Where, as here, there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability. This is an analysis the application judge did not undertake. By failing to do so, then he erred in law. … The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.

While the Court of Appeal suggested that there may have been hard bargaining between the parties, it concluded [at para. 32 to 36] that there was no unconscionability in this case after it looked at a variety of factors, as follows:

This was a straightforward commercial real estate transaction undertaken in the expectation of profit by both sides, who were previously strangers. There was no inequality of bargaining power between them. There was no fiduciary relationship. Both parties were sophisticated. … The effect of fixing a price for the property created some risk for both parties because of the possibility of fluctuation in the market value of the property over a long closing period. The initial deposit demonstrated the buyer’s commitment to the property. That commitment was increased when the buyer waived the conditions inserted in the Agreement of Purchase and Sale for its benefit, requiring it to increase the amount of the deposit. … Later, when it appeared that the buyer needed an extension of the closing date, it sought that extension offering an additional $200,000 deposit, demonstrating it knew the seller would be concerned about the buyer’s ability to close the transaction and would seek to hedge against that risk. Further, by extending the closing date, the seller would lose any opportunity to sell the land for the then market price, which could change at a later date. Negotiations resulted in the additional deposit being set at $450,000, higher than the $200,000 figure the buyer initially offered. The total deposit at slightly more than 7% was not in an unfair range. … As the closing date approached, the buyer attempted to escape from the transaction by raising spurious complaints, which led to the application. The application judge rightly found that there was no merit to the complaints. At the same time, the seller remained ready and willing to close and was prepared to extend without additional payment. … In my view, nothing in this sequence suggests that the seller unconscionably abused its bargaining power. Perhaps its position might be described as hard bargaining, but it was not unconscionable in the commercial context.

Although the Court of Appeal noted the general rule that an amount subject to forfeiture resulting from a breach of contract is unlawful, unless that amount represents a pre-estimate of damages suffered, it emphasized that deposits paid pursuant to a contract for the sale of land are an exception. Accordingly, a deposit may be forfeited, even if the deposit amount has no reference to the vendor’s anticipated damages.

In light of the foregoing, the Redstone case makes it clear that where there is no evidence of gross disproportionality in the size of a deposit, the court must consider the full commercial context when assessing whether forfeiture of a deposit is unconscionable. In Redstone, the Court of Appeal considered a variety of factors, including any inequality of bargaining power between the parties, their level of sophistication, the existence of any fiduciary relationship between them, and the willingness of the parties to close

In short, a finding of unconscionability will only be made in exceptional circumstances. Even though a vendor may drive a hard bargain in its request for deposits, such circumstances do not constitute unconscionability, and the vendor will likely be entitled to keep the deposits should the purchaser fail to close regardless of whether the vendor suffered any damages. After all, possible forfeiture of the deposits was part of the bargain struck by the parties in the first place.

 

The Supreme Court of Canada has clarified the criteria to be used when imposing personal liability upon directors for corporate oppression.

In the case of Wilson v Alharayeri, 2017 SCC 39, the Supreme Court of Canada affirms the decisions of the lower courts holding two directors personally liable to pay compensation to a minority shareholder in an oppression claim brought under section 241 of the Canada Business Corporations Act (“CBCA”).

The Wilson case involved a wireless technology company that issued a private placement of convertible notes which substantially diluted the proportion of common shares held by any shareholder who did not participate in it. Prior to the private placement, the company’s board of directors refused to convert into common shares the Class A and B convertible preferred shares held by a former director even though his shares were convertible based on the financial tests laid out in the company’s articles of incorporation and its audited financial statements. Yet the board accelerated the conversion of the Class C convertible preferred shares held by the company’s President despite doubts expressed by the auditors over whether the test to convert these shares into common shares had been met. The private placement substantially reduced the former director’s proportion of common shares and their value, causing him to initiate an oppression claim.

The trial judge held the President and the chair of the company’s audit committee, as the only two members of the audit committee, personally liable for the board’s refusal to convert the former director’s Class A and B convertible preferred shares into common shares, and for the failure to ensure that the rights of the former director as a shareholder were not prejudiced by the private placement. Both directors advocated before the board against the conversion of the former director’s shares. When the trial judge’s decision was upheld on appeal, the case went before the Supreme Court, which was essentially asked when personal liability for oppression may be imposed on corporate directors.

In confirming that section 241 of the CBCA gives a trial court broad discretion to make any interim or final order it thinks fit and enumerates specific examples of permissible orders, the Supreme Court held that some of the examples show that the oppression remedy contemplates liability not only for the company but also for other parties, although the CBCA’s wording goes no further to specify when it is fit to hold directors personally liable under the section.

The Supreme Court stated at least four general principles should guide courts in fashioning a fit remedy under section 241, and the question of director liability cannot be considered in isolation from them. These general principles are summarized by the Supreme Court [at para. 49 to 55] as follows:

First, the oppression remedy request must in itself be a fair way of dealing with the situation. … Where directors have derived a personal benefit, in the form of either an immediate financial advantage or increased control of the corporation, a personal order will tend to be a fair one. Similarly, where directors have breached a personal duty they owe as directors or misused a corporate power, it may be fair to impose personal liability. Where a remedy against the corporation would unduly prejudice other security holders, this too may militate in favour of personal liability. … But personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct. … Where there is a personal benefit but no finding of bad faith, fairness may require an order to be fashioned by considering the amount of the personal benefit. In some cases, fairness may entail allocating responsibility partially to the corporation and partially to directors personally.

Second, as explained above, any order made under s. 241(3) should go no further than necessary to rectify the oppression…. This follows from s. 241’s remedial purpose insofar as it aims to correct the injustice between the parties.

Third, any order made under s. 241(3) may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. … Accordingly, remedial orders under s. 241(3) may respond only to those expectations. They may not vindicate expectations arising merely by virtue of a familial or other personal relationship. And they may not serve a purely tactical purpose. In particular, a complainant should not be permitted to jump the creditors’ queue by seeking relief against a director personally. The scent of tactics may therefore be considered in determining whether or not it is appropriate to impose personal liability on a director under s. 241(3).

Fourth — and finally — a court should consider the general corporate law context in exercising its remedial discretion under s. 241(3). … Director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances.

In applying these four general principles, the Supreme Court agreed with the trial judge in holding the two directors personally liable for the oppression. As the only members of the audit committee, they played the lead roles in board discussions resulting in the non-conversion of the prior director’s A and B shares, and were therefore implicated in the oppressive conduct. In addition, the President derived a personal benefit from the oppressive conduct since he increased his control over the company through the conversion of his C shares into common shares (which was not the case for the C shares held by others), allowing him to participate in the private placement despite issues as to whether the test for conversion had been met. This was done to the detriment of the former director, whose own stake in the company was diluted due to his inability to participate in the private placement. The remedy went no further than necessary to rectify the former director’s loss, as the amount awarded corresponded to the value of the common shares prior to the private placement, and vindicated his reasonable expectations that his A and B shares would be converted if the company met the applicable financial tests laid out in its articles and that the board would consider his rights in any transaction affecting his A and B shares.

In light of the foregoing, the Wilson case illustrates that directors may be held liable for acts of corporate oppression so long as the circumstances satisfy the above tests outlined by the Supreme Court. Any director who has acted in bad faith and has derived a personal benefit in connection with oppressive corporate conduct is likely to be personally liable for it.

Owners and managers of private companies are often faced with the challenge of re-opening negotiations which have stalled. Whether they are trying to complete a contract or transaction, or resolve an ongoing business dispute, their frustration with being unable to get a deal will likely lead to their search for ways to break the deadlock. While not every strategy or technique they might consider will be available to them, or will work if tried, there are at least a number to choose from. This blog post will explore the options.

It’s helpful for those owners and managers considering the options to first reflect upon the possible causes of the deadlock. If a conflict between the negotiating companies has escalated and become more difficult to resolve, has the group psychology changed? Since such negotiations are often conducted by their respective teams of company employees, have some members of each team become more competitive or dominant, or have members with more moderate views been pressured into more extreme positions, or have cohesiveness and solidarity become the team’s overriding goal?

Or has the individual psychology changed? Have individual members become more inclined to blame those on the other team, or even those on their own team? Have the members of both teams lost respect and empathy for the others, or concluded that the negotiation is necessarily a zero-sum game with no prospect for a “win-win” outcome?

While the psychology at play may seem to be an obstacle, the team members may eventually come to accept that continuing the conflict is more unpleasant than settling it, and that they should attempt to re-open the negotiations by using some of the methods described below.

One of the first avenues they might choose to explore is the appointment of an intermediary to intervene, preferably someone perceived by both sides as being impartial and objective, and perhaps regarded as wise, with at least some moral authority. Often used in dispute mediation prior to embarking on arbitration or litigation, such a “neutral” shuttles back and forth between the parties in search of a resolution, acting as a facilitator to encourage the parties to brainstorm and generate various problem-solving ideas. Even if the intermediary is not impartial when intervening and personally desires a certain negotiated result, his behind-the-scenes conversations may be enough to loosen hardened positions if he has the respect of both sides.

Another approach, somewhat related to the appointment of a neutral mediator and useful when the parties recognize the problem causing the deadlock, is the appointment of a team of experts who will study the problem and recommend ways of solving it. Providing a “cooling-off period” and allowing those involved in the negotiations to step aside for a while, the experts bring a fresh perspective and the potential to learn new information and come up with creative solutions. Even if the recommendations of the experts are eventually rejected by the negotiating parties, they will provide a focus for the re-opening of the negotiations with possibly different dynamics. Whether the expert teams consist of tax accountants, software programmers, environmental engineers, business valuators or other specialists, the compromise solution they arrive at may well be enough to get the negotiations back on track, especially if it is regarded as an objective, commonly held benchmark.

While engaging outsiders to come up with a solution to break a negotiation logjam may be an acceptable course to take for some negotiating parties, others will not want any third parties to be involved at all. Whether they are concerned about possible loss of privacy and confidentiality of their affairs or loss of control of the process, or they are afraid of having an imperfect solution imposed upon them, or are wary of the expense and delay incurred by involving an outsider to obtain an uncertain result, they may prefer to keep the negotiations to themselves and exercise more “self-help” in overcoming the deadlock.

Either side might then simply try to “break the ice” by engaging in acts of kindness or making polite gestures to the other side, perhaps by way of a small gift or an apology, indicating their willingness to the other side to be more co-operative. They might even admit that their communication style could be better.

Or if the other side does something helpful, they might express thanks or be helpful in return. This promotes repetition of co-operative acts, sending conciliatory signals without conveying any message of weakness.

Often negotiations can be re-opened by a proposal to discuss procedural matters or rules, such as suggesting a neutral location for a meeting, the agenda for such a meeting, the time limits for discussion, or the method for keeping records.

Following procedural suggestions with suggestions as to which issues should be given priority whenever the parties resume their discussion may provide an incentive to return to the negotiating table. While this option requires the parties to acknowledge their deadlock, it at least forces them to list the various issues from those most important to those least important from their perspective, and encourages them to return with their list of priorities in the hope that there might be enough trade-offs to eventually arrive at a bargain. Creating the list allows each party to clarify what it is asking for and why, and reminds each party that it will seldom achieve everything it wants and that it must give up a few things to be realistic.

If setting such priorities does not seem possible for the parties, they may instead be able to identify a few things they each have in common. Despite their many differences, they may both share a couple of overriding goals, or have a mutuality of interest in certain things, such as their reputation among customers and suppliers within their industry, or the need for them to work together in the future. Reminding each other of these may be sufficient to get the parties to resume their negotiations.

If finding something in common between them is difficult, it may still be possible for each party to generate one or more acceptable solutions as a means of indicating their flexibility in the process even though their original demand will remain entrenched and unsatisfied. For example, instead of continuing to insist upon a specific dollar amount, one of the parties might suggest a generally accepted range of dollar amounts appropriate for the issue being addressed.

One technique often used to restart negotiations is for one party to acknowledge the other’s interests, demonstrating that those interests have been heard. By listening and re-stating what the other party has said, a willingness to understand the other’s interests and feelings is indicated. Any ambiguity may be clarified as well.

When each party states its own interests, it allows that party to move off its initial, perhaps hardened, position so long as whatever solution the parties may arrive at, their solution will incorporate those interests. While one party may oppose the initial position taken by the other, it will be difficult to oppose the interests of the other. The parties may then be prepared to carry on with their negotiations by surrendering their initial positions without surrendering their interests.

For a party that has always insisted that its solution towards arriving at an agreement is the only solution, and that it will not unilaterally make any concessions, it is difficult to get that party to move off that position. It may be necessary for the other party to offer something in return, asking whether they have something of value they might exchange. This approach is often called “tit for tat” negotiating, or even “haggling”, although it not normally regarded as an acceptable alternative to other methods which reflect the view that negotiation is essentially an exercise in problem solving, or at least an exercise in focusing on party interests, not positions.

But the tit for tat method may work when other methods have failed in getting a party to budge from its initial position. When a conflict is quite entrenched or longstanding, a minor unilateral concession by one party may motivate a positive response from the other, possibly encouraging a series of small, trust-building exchanges. The smaller concessions may lead to concessions on the bigger issues so long as trust between the parties is maintained.

Depending upon the group psychology mentioned above, another strategy which a party may use to break the stalemate involves identifying the division within its own negotiating team between “hawks” and “doves” and the need to satisfy both of them before a solution can be proposed. That party may say that it has to please its whole team, including those who vehemently oppose giving up on the initial position, namely the hawks, as well as those who are prepared to explore a number of possible solutions, namely the doves. The intention here is to convey a message that the team is not being belligerent, but is just divided, and the other party should understand that division and help to jointly find a way to placate the hawks.

Sometimes the refusal of the parties to talk about solutions proposed in the past makes them more receptive to talk about other things, softening their resistance to further negotiations. By rejecting past proposals as being totally unacceptable and possibly inflammatory, they may then invite each other to search for answers among the alternative solutions which are available. While expressing their frustration caused by recycling rejected solutions, they display some flexibility towards generating new ideas.

While many of the foregoing techniques often succeed in breaking negotiation logjams, there are times when they fail, and tougher measures may have to be tried instead.

Sometimes it may be necessary for one of the parties to threaten unpleasant consequences for both parties in order to get them to work harder to find a solution. While this approach can make things worse if it simply repeats threats that have been made in the past, it can cause the parties to get serious if the threat is presented without hostility and expresses a concern of mutual harm that might be painful though not catastrophic. By suggesting that the harm is inevitable and systemic, rather than chosen and intended, it removes any inference that the threat is vindictive or malicious.

If threatening an undesirable consequence fails to get a reaction, it may be necessary to resort to litigation. Preparing and filing a claim with a court against a party refusing to negotiate tends to get the attention of the refusing party. Often the purpose of such an action is not to ultimately obtain a decision of the court but to impose a process upon the parties to deal with their differences.

The various procedures flowing from a court claim offer a number of advantages in getting the parties to engage each other. Ordinarily the imposition of specific deadlines for exchanging information is enough to get the parties to act. Having to complete court forms requiring clear statements of positions, alleged facts and evidence generally causes the parties to rethink the approach they have previously taken. The time, cost and inconvenience they will incur in following along the court mandated path may provide a sufficient deterrent from proceeding further and instill an earnest want to settle.

The relatively slow pace and inevitable delays frequently associated with court actions tend to provide the parties a significant cooling-off period and afford ample time to reflect upon the costs and benefits of proceeding. The rules of court procedure require a certain level of integrity and civility, and the involvement of lawyers can offer the parties a different perspective on how disputes can be resolved.

But resorting to litigation as a means of breaking a stalemate in negotiations can backfire. Filing and serving a claim can be interpreted as not just confrontational but the “last straw” in an already difficult relationship which quickly becomes poisonous, turning the parties into sworn enemies bent on destroying each other.

Although litigation may not have such dire consequences, there is always looming the ultimate deadline on the courtroom steps when the procrastination stops, the negotiations conclude, and the court then takes over in steering the parties. If the court takes an aggressive case management approach, the parties lose control over the timing of their negotiations and may find themselves facing an actual hearing. Their conflict is then resolved by a judge or other third party.

Given these negatives, each party is likely to regard litigation as a last resort, to be initiated only when all of the other strategies to remove the negotiation deadlock fail.

While there is no guarantee that the strategies discussed above will work in any particular situation to get disputing parties back to the negotiation table, they are at least worth trying, either alone or in combination, to motivate the parties to try again to find a solution.

But there will be times when the parties cannot find merit in completing their contract or transaction, or in resolving their differences, and it may be better for each of them to recognize their own opportunity costs and pursue other arrangements with the potential for even greater reward. They may have to admit that the time and emotional energy they have spent arguing with each other hasn’t been worth it and decide to just simply move on.