Many businesses are started by friends or family with an initial similar interest and vision. Unfortunately, relationships can sour over time, particularly when the goals and interests of the individuals change. The oppression remedy can be used by either or both of the dissatisfied business founders. While it allows many orders to be made by the court, frequently, the result is a wind-up or sale of the company or its assets. The recent decision of Vastis v. Kommatas, 2022 ONSC 1366 (CanLII) is a prime example.
The two litigants were part of the same Greek community, met at a social event, and then became friends. One invited the other to join him in a business that involved acquiring land to build gas stations. In 1984, they incorporated Calldron Gas Bars Ltd., and each became a 50% shareholder, an officer, and a director of the company. Shortly afterward, their children married, and they became family. Between 1985 and 2009, Calldron acquired five parcels of land with gas stations on three of the parcels, all of which had a total estimated value in excess of $90 million.
Unfortunately, when one of the litigants was diagnosed with cancer in 2017 and wanted to proceed with succession planning, the other was unwilling to do so. So, they started a contentious discussion about the termination of their business relationship. They ended up in court as “bitter adversaries.” The tension between the families was described as “extremely high,” with threatened violence and allegations of being denied access to grandchildren.
Each brought an application in which they alleged that the other, as an officer and director, engaged in oppressive conduct prejudicial to the other. The applications were converted into an action and proceeded to trial. After a trial, each were found to have made allegations of oppression in respect of various conduct, some of which were found not to have been oppressive, while other conduct was oppressive. Both were found to have carried on certain affairs of the business in ways that were oppressive, unfairly prejudicial, or that unfairly disregarded the interests and reasonable expectations of the other.
What types of conduct were found to be oppressive? One of them accusing the business’ bank was in breach of the Code of Conduct, which resulted in the business accounts being made ‘deposit only.’ One litigant refused to release a minute book to allow it to be regularized for the purposes of trying to make progress toward a division of the assets. Credit cards were cancelled by one individual while the other was on a family vacation. Payments were made towards a litigant’s own personal vehicle but not the other’s, resulting in repossession. Other acts that were deemed oppressive included making business decisions unilaterally, which previously had been made jointly, failing to make distributions of cash reserves, unlike in previous years, and refusing to consent to share transfers by Deeds of Gift as part of succession planning. Even though there was no legal obligation to provide consent, the individual would have known that by refusing to consent, the effect on succession planning would be unfairly prejudicial and serious. The trial judge specifically pointed out that conduct that disregards the interests of the other does not need to breach any legal right to be oppressive.
What conduct was not of concern? The acts of asking a tenant for a copy of a lease when the business partner refused to give ready access to leases, refusing to enter into a shareholders’ agreement, and objecting to the cancellation of credit facilities and cancelling letters of credit.
Ultimately, the court held that the appropriate remedy was a wind-up and liquidation of the assets by a receiver, allowing both individuals to participate in the bidding process for the sale of the assets. It was clear, and not disputed by the litigants that the “fracture” in their relationship was irreparable. The mutual trust and confidence in each other had devolved into a lack of cooperation, distrust, and spiteful conduct.
There are many steps that can be taken to avoid a deadlock or such a breakdown in the relationship that it moves to litigation, in which frequently some or much of the business value is lost or spent on litigation. The longer it lingers, the worse it can be in terms of cost and loss of value. Good governance and shareholder agreements are two of many preventative measures that can be utilized to avoid litigation. However, when the best of friends become the worst of enemies, the oppression remedy or a wind-up for a deadlock may be the best or the only available option to allow the broken relationship to end while salvaging as much of the business value as possible.