Doing Business With Family And Friends—What Could Possibly Go Wrong? Family Feud #4

Doing business with family and friends

“This high-conflict case arises out of the breakdown of a 20-year friendship and business relationship between Michael Price (“Mr. Price”) and Farrukh David Robson (“Mr. Robson”).

[2]             In addition to their business and personal relationships, both Mr. Price and Mr. Robson suffer from significant life‑altering illnesses. The emotion engendered as a result of these factors led to a difficult and “hotly disputed” trial; particularly the factual matrix. Both sides accused the other of lies and fabrications. Within this context, the factual reality must be distilled.”

Two court cases illustrate what can go wrong.  In both cases the employer had a binding contract that limited the employee’s rights, but were found liable for damages for negligent misrepresentations that occurred at the hiring stage.

Price v 481530 B.C Ltd 2016 BCSC 1940

 

In 2010 I wrote a blog on an interesting case involving a fight between two brothers who jointly owned a very successful company along with other companies they owned individually.  One brother had laid off an employee from his own company and had him hired by the jointly owned company.  The other brother strongly objected to the hiring and refused to pay him.  The employee brought a complaint before the E S branch and was awarded a significant amount of wages.  The court in a separate application broke the tie between the two brothers in the management of the company by referencing the articles but not after a huge amount of money had been wasted on legal fees. 

Since then I have done two more blogs on similar cases while I sit in amazement on how much acrimony can develop with family or friends owned businesses:

Family Feud (weilerlaw.ca)

Family Feud #2 – Family Businesses, Take Note (weilerlaw.ca)

Family Feud Gets Downright Nasty (And Expensive)

Many of these problems could have been solved by careful planning at the outset.  When I read the recent case of Dubois v Milne 2020 BCCA 216 I couldn’t help think it was “déjà vu all over again”.

Dubois v Milne

The Plaintiff and his spouse bought a 5% share interest in L Inc. a small, closely held company founded and owned by C. The Plaintiff and C were longtime friends.  M convinced the Plaintiff to join the company as general manager and subsequently the Plaintiff became a 45% shareholder.  The Plaintiff’s role increased and M’s role decreased over time.  The Plaintiff was paid $100,000 and M’s salary remained at $60,000. M went into the hospital in 2009 and when her returned a year later he expressed a wish to reassert control over the business to which the Plaintiff acquiesced. However M had a deep negative attitude towards the Plaintiff for no apparent reason. In January 2011 M caused the company to terminate the Plaintiff.  The wrongful dismissal action that ensued was settled.  But that was not the end of the matter.

 M as sole director appointed himself CFO at an annual salary of $100,000.  He also approved for himself an annual salary of $50,000 as President and appointed himself Director of Purchasing at an annual salary of $75,000. 

Most importantly he caused the company to stop paying dividends in 2010 and 2011 notwithstanding the dividend history of the company. 

On August 1st 2021 the Plaintiff commenced an action in the form of a Petition claiming relief from oppression under section 227 of the Business Corporation Act.  He sought an order that M purchase or redeem his shares for an amount determined by a valuator.  The matter was placed on the trial list.  The trial judge held in the Plaintiff’s favour finding that M had oppressed the Plaintiff and that M, not the company, should be ordered to purchase the Plaintiff’s shares.  Given the excessive amounts M took in salary and the company’s current economic condition he ordered that the appropriate date to value the shares was the date of the Petition August 1st 2012.  It is noteworthy that the company did start to pay dividends again in 2014.  The appeal of the trial judge’s decision was dismissed with concurring reasons:  Dubois v Milne 2020 BCCA 216.

Section 227(2) of the BCA is a powerful tool that is frequently used by disgruntled shareholders especially in small closely held companies.  And there are many cases where the plaintiff/petitioner is also a key employee:

[30]         Section 227(2) of the BCA establishes the oppression remedy:

(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.

The Supreme Court of Canada in the seminal decision on oppression cases in BCE Inc v 1976 Debentureholders 2008 SCC 69, at paragraphs 56-62 gave a broad and liberal interpretation to these provisions

[56] In our view, the best approach to the interpretation of s. 241 (2) is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in s. 241 (2) of the CBCA.

[57] We preface our discussion of the twin prongs of the oppression inquiry by two preliminary observations that run throughout all the jurisprudence.

[58] First, oppression is an equitable remedy. It seeks to ensure fairness-what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair: Wright v. Donald S. Montgomery Holdings Ltd. (1998), 39 B.C.L. (2d) 266 (Ont. Ct. (Gen. Div.)), at p. 273; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R. (4th) 368 (Alta. C.A.), at p. 374; see, more generally, Koehnen, at pp. 78-79. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities: Scottish Co-operative Wholesale Society, at p. 343.

[59] Second, like many equitable remedies, oppression is fact specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in the relationships at play. Conduct that may be oppressive in one situation may not be in another.

[60] Against this background, we turn to the first prong of the inquiry, the principles underlying the remedy of oppression. In Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 (H.L.) at p. 379, Lord Wilberforce, interpreting s. 222 of the U.K. Companies Act, 1948, described the remedy of oppression in the following seminal terms:

The words [”just and equitable”] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.

[61] Lord Wilberforce spoke of the equitable remedy in terms of the “rights, expectations and obligations” of individuals. “Rights” and “”obligations” connote interests enforceable at law without recourse to special remedies, for example, through a contractual suit or a derivative action under s. 238 of the CBCA. It is left for the oppression remedy to deal with the “expectations” of affected shareholders. The reasonable expectations of the shareholders is the cornerstone of the oppression remedy.

[62] As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular shareholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.

The trial judge had a very unfavourable view of the credibility of M in contrast to the Plainfiff who the judge found was “a forthright and credible witness”.  In the result the trial judge held that where the evidence of M is in conflict with evidence of the Plaintiff he accepted the evidence of the Plaintiff.  In my view that finding in a case of equity and fairness indicated the eventual outcome.

Applying these broad principles the trial judge held that the Plaintiff had reasonable expectations that

[269]    Dubois’ reasonable expectations that he would participate in the management of Lucid and that he would have employment with Lucid as long as he was a shareholder were contravened by the actions of Milne in wrongfully terminating Dubois’ employment.

[270]    Wrongful dismissal by itself will not justify a finding of oppression. It is only where the interests of the employee are closely intertwined with his interest as a shareholder, and where the dismissal is part of a pattern of conduct to exclude the complainant from participation in the corporation, that the dismissal can be found to be an act of oppression: Krynen v. Bugg (2003), 64 O.R. (3d) 393 (S.C.J.) at para. 74.

[271]    Milne wanted not only Dubois’ money in purchasing the shares in Lucid, but also his ability and skills. Dubois considered himself on an equal footing to Milne and I infer, based on the evidence, that up until 2010, Milne shared the same view.

[272]    Dubois’ interests as an employee were closely intertwined with his interest as a shareholder. Dubois worked long hours and conducted himself as an owner would.

[273]    In my view the wrongful dismissal of Dubois establishes a finding of oppression on its own.

[274]    Further, Milne tripled his salary after Dubois was terminated. This was contrary to the Agreement and there was no precedent in the operation of Lucid to justify this. Based on the evidence, I find that Milne increased his salary for the specific purpose of depriving Dubois of the dividends he was entitled to.

[275]    Milne wrongfully withheld dividends from Dubois, again for the purpose of forcing Dubois out of Lucid.

[276]    In my view, these two further grounds would establish a finding of oppression on their own. However, I am confident that the cumulative effect of these actions by Milne clearly establishes oppression on his part against Dubois.

The decision of the trial judge was upheld on appeal. 

The Honourable Chief Justice Bauman dismissed the appeal.  However he disagreed with the trial judge’s last comment that a wrongful dismissal alone could constitute an act of oppression.  As the Chief Justice noted:

I do note the error in the judge’s statement that, in his opinion, “the wrongful dismissal of Dubois establishes a finding of oppression on its own” (at para. 273). I emphasize again that the oppression remedy is distinct from contractual remedies: just as oppression relief does not require the breach of a contractual right to be available, so does a breach of contract not mandate oppression. To reiterate Justice Newbury’s statement from 1043325 Ontario Ltd. v. CSA Building Sciences Western Ltd., 2016 BCCA 258 at para. 54, quoted above:

[W]here the complainant is able to show an entire course of oppressive conduct which includes another cause of action (in Naneff, wrongful dismissal), that cause may also be remedied under the oppression provision.

[Emphasis in original.]

[79]         Or, as Justice Blair stated in the trial decision in Naneff v. Con-Crete Holdings Ltd., [1993] B.C.J. No. 1756 at para. 25 (Ont. Gen. Div.), var’d with respect to remedy [1994] O.J. No. 1811 (Ont. Div. Ct.), rev’d [1995] O.J. No. 1377 (Ont C.A.):

[A] claim for wrongful dismissal is not, in itself, a proper claim to be asserted by way of oppression remedy. Where the dismissal is part of an overall pattern of oppression, and where the complainant’s position of employment is closely connected with his or her rights as a shareholder, officer and director of the company, or companies, in question, the dismissal may properly be considered as part of that pattern of conduct . . .

[80]         Oppressive conduct can encompass other legal wrongs, but cannot be contingent on a finding of a separate legal wrong: see also BCE at para. 71, making this point. To the extent it suggested otherwise, the judge’s statement at para. 273 was incorrect. Yet given that the judge’s finding of oppression did not indeed rest on wrongful dismissal alone, and was based on the existence of close connection between Dubois’s employment and his rights as a shareholder, there is no error in the result stemming from this misstatement. I note further that there is no suggestion that the settlement Dubois entered into for his wrongful dismissal resolved any claims he might have as a shareholder, or that the remedy in this case duplicates a remedy for wrongful dismissal. The relief in this case was specific to his shares, and there is no argument he has been overcompensated for the harm suffered.

[81]         The judge’s conclusion that Dubois’s employment expectations were reasonable in the circumstances betrays no error.

Mr. Justice Groberman would likewise have dismissed the appeal but he gave separate reasons concurred in by Madame Justice Fisher.   The main point of disagreement with the Chief Justice appears to be the argument that the expectation of employment was tied to the Plaintiff’s interest as a shareholder:

Where shares have been issued on the clear understanding that investors will, as a consequence of holding shares, be entitled to employment, termination of that employment can constitute oppressive conduct against those investors qua shareholders.

[118]     The mere fact that an employee is a shareholder does not mean that an oppression action will lie when the employee is wrongfully dismissed: Mohan v. Philmar Lumber (Markham) Ltd. (1991), 50 C.P.C. (2d) 164 (Ont. General Division). An action for oppression is concerned with the reasonable expectations of a shareholder qua shareholder. The onus was, therefore, on Mr. Dubois to show that he reasonably expected to continue to be employed by the company as a function of him being a shareholder.

[119]     The judge accepted Mr. Dubois’s testimony, that he anticipated that he would continue to be employed by Lucid so long as he had shares in the company. He found that Mr. Dubois’s expectations were reasonable, but does not appear to have considered whether the expectations were expectations qua shareholder, or merely expectations qua employee.

[120]     It is clear that the court must determine, in an oppression action, whether a shareholder’s expectations qua shareholder, are objectively reasonable. In my view, the evidence in this case was not capable of sustaining such a finding.

Notwithstanding these findings the justices would have likewise dismissed the appeal.

 

Feldstein v 364 Northern Development Corp (BCCA)

In this remarkable and troubling case the BC Court of Appeal upheld a damage award of $83,337 for a former employee for lost benefits due to a negligent misrepresentation made in the context of pre-employment discussions.

Mr. Feldstein had cystic fibrosis and at the hiring interview he claimed he disclosed his CF which was denied by the company.  He asked about the company’s LTD plan.  He asked about a monthly benefit limit of $1,000 apparent in the plan and he claimed he was told he would qualify for the full benefits of $4,677 if he worked 3 months without illness as that would satisfy the “Proof of Good Health” requirement in the plan.  Again the employer denied it made these statements.  After some months his health declined.  When he applied for LTD he was told while he was entitled to LTD he was only eligible for $1,000 a month not the full benefit of $4,667 per month.  His benefits were reduced because he had not filled out a medical questionnaire that was required to establish “Proof of Good Health”.

The court held the company liable for negligent misrepresentation. Its assurances at hiring were misleading and inaccurate because the insurer’s more stringent requirements were inconsistent with what had been represented at hiring.  The court found that an implied representation may give rise to a claim for negligent misrepresentation.  It stated:

“Mr. Nizker’s duty of care with respect to representations made during pre-contractual negotiations included not only a duty to be honest in making those representations, but also to exercise reasonable care in ensuring that the representations made were accurate and not misleading.”

An honest but mistaken belief did not relieve the employer of liability.

The court held that if he had been properly informed he would not have accepted employment with 364.

Finally the court ignored the fact that Mr. Feldstein, with legal advice, signed a written employment agreement that contained an “entire agreement” clause that was intended to avoid claims for representations made prior to the contract being signed.

This is an important case for HR specialists. For a more detailed discussion of this case I invite you to see my blog article at: Troubling Decision Of The Court Of Appeal On Negligent Misrepresentation

Michael J. Weiler has more than 35 years experience in the ever evolving world of employment, labour and human rights law. And experience in this area is critical to protect our clients—this is where law is not just a science but most often an art.  Judgment is critical for our clients and that is what we bring to the table based on our years of experience. This means first and foremost knowing the law—keeping updated and current. Experience also means knowing the players in the game and their processes—the LRB, the Employment Standards branch, WorkSafeBC, the courts etc.

Note to our Readers: This is not legal advice. If you are looking for legal advice in relation to a particular matter, please contact our Employment & Labour Group.

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