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Bulletin

Sovell : Clear and Ambiguous Clauses, Commercial Reality and Oppression

Fasken
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Overview

Litigation and Dispute Resolution Bulletin

In contract law, when a clause is clear, it must be enforced, not interpreted.[1] Ordinarily, the court should abide by what is written in black and white. It is not up to the court to judge the merits or logic of what the parties freely agreed to. While our law provides a series of rules of interpretation for determining the intention of the parties,[2] application of those rules is ordinarily reserved for contract terms that are considered to be ambiguous.

On the other hand, our corporate law provide forequitable remedies centred on the stakeholders’ reasonable expectations in particular theoppression remedy provided for by section 241 of the Canada Business Corporations Act and section 450 of the Business Corporations Act (Quebec).[3] Tremedy gives the Court broad discretion to resolve issues or disputes between the stakeholders of a corporation.[4]

Inevitably, there will be collisions between these two principles. Shareholders regularly enter into contracts among themselves, starting with a shareholders agreement that is at the heart of this relationship. If the terms of a shareholder’s agreement are clear, can such agreements nevertheless be set aside, rewritten or revised by a court that thinks it should intervene in the context of an oppression remedy?

Depending on the circumstances, the answer may be yes, as the Court of Appeal of Quebec recently illustrated in Sovell.[5]

Sovell: Take 1

The relationship between the parties may be summarized as follows:

  • Sovell and 2727 each held 50% of the shares of C-IN2 Clothing Co. Inc. (“C-IN2”), a company engaged in the sale of men’s underwear;
  • 2727 was controlled by Choueke;
  • To facilitate operations and the transfer of merchandise between Canada and the United States, Sovell and Choueke created an American company called C-IN2 USA whose shares were held in the same percentage; and
  • Choueke and his wife also owned two companies, Ruby and Memphis, that provided services to C-IN2.

Sovell and 2727 were governed by  C-IN2’s shareholder agreement, which  includes a forced purchase and sale clause commonly called a  “shotgun clause”. Under such clause, one shareholder could make an offer to the other shareholder at a particular price and the other shareholder is required either to buy or to sell on the same terms.  

In April 2015, 2727 triggered the shotgun clause by offering $300,000 for the shares in the company held by Sovell, stating in the same notice that a $1.9 million debt was owed by C-IN2 and would have to be repaid at the time of the transaction.

Sovell disputed the existence of the debt and initially obtained an interim order from the Superior Court suspending the purchase and sale mechanism until a forensic accountant had clarified the issue of the money allegedly owed to 2727. Then, on the merits of the case, the Superior Court found that nothing was owed to 2727, but that C-IN2 owed a total of $329,034 to Ruby and Memphis.

The court did not quash the shotgun notice sent by 2727, but ordered that it be corrected to reflect the amounts actually owed by C-IN2. In these new circumstances, and based on the corrected notice, Sovell exercised the option of purchasing 2727’s shares.

The case was appealed and the relationship between the parties appears to have deteriorated.The Court of Appeal affirmed the Superior Court judgment.

Sovell: Take 2

The saga continued after the first decision of the Court of Appeal.

Since Sovell had chosen to purchase and not to sell, 2727 took the position that the shotgun notice and the $300,000 price associated with it related only to the shares of the Canadian company, C-IN2, and not to the shares of the American company incorporated in Delaware, C-IN2 USA.

That question and several other issues were submitted to the Superior Court. The Court, per the Hon. Danielle Turcotte, found in favour of Sovell and refused to exclude the shares of the American company from the transaction. The Superior Court essentially concluded that:

  • Not only was there an ambiguity, but the ambiguity was purposely created by Choueke who, in the Court’s view, had “intentionally chosen to be vague in his notice” in order to preserve his options depending on whether Sovell decided to buy or sell;
  • Although the two entities were separate legal persons, the parties had never in fact made any differencebetween them; and
  • The reference in the notice to the “GripAthletic” brand of products was revealing as to the intention to include C-IN2 USA, since that brand was owned by the American company.

In short, the Superior Court interpreted the notice and concluded that it related to the shares of both companies.

On appeal, 2727 argued against the trial judge’s interpretation exercise. The Court of Appeal summarized its argument as follows:

[28] The appellants argued that the judge should not have interpreted the notice that was sent in order to determine the intention of the parties, when the clause was so clear that it did not need to be interpreted. They were also of the opinion that the judge had erred in law by relying on section 241 of the Canada Business Corporations Act to decide the case and include C-IN2 USA in the offer by 2727 under the shotgun clause in the C-IN2 shareholders’ agreement.

The Court of Appeal rejected that argument entirely. It declined the appellants’ invitation to limit the exercise to concepts in the civil law of contracts and placed the emphasis on the context before the trial judge: an action in oppression in which all appropriate remedies necessary to put an end to an abuse should be applied. The Court of Appeal wrote:

[29] The judge clearly understood that it was up to him to put an end to the abuse by such remedies as would ensure the exercise of the intervention requested. The reasons he set out in his judgment are clear.

[30] The evidence established that neither of the shareholders wanted to continue the business; that the two corporations were dependent on each other; that their financial statements were combined and their banking documents kept in Montreal, and that they were under the authority of the same persons; and that the assets of C-IN2 were security for C-IN2 USA’s debt to the Toronto-Dominion Bank.

[31] It would have been surprising, to say the least, to acknowledge that in all the circumstances of the case and of the abuses found by the judge, Mr. Choueke wanted to continue his business and shareholder relationship with Sovell only in C-IN2 USA, while wanting to permanently end their shareholder relationship in C-IN2.

[32] This Court recently observed, following the guidance of the Supreme Court, that actions in oppression arising from abusive conduct on the part of a company director is “an equitable remedy and, accordingly, what must be taken into account is not merely narrow legalities, but the reality of the business relationship between the parties”.

[33] The trial judge took into consideration the specific context of the case and the desire of Sovell and Choueke to permanently end their business relationship. The appellant did not show any error of law, or any palpable and overriding error that could justify intervention by the Court. (Emphases added)

The Court of Appeal therefore rejected that argument and found that there had been no error of law.

Conclusion

Sovell involved a specific fact pattern that undoubtedly played a decisive role both at trial and on appeal. The comments of the Court of Appeal are another reminder that when it comes to shareholder disputes, and in an action in oppression, the strict civil law concepts may have to sometimes give way to considerations of equity and business fairness.


[1] Jean-Louis BAUDOUIN and Pierre-Gabriel JOBIN, Les obligations, 7th ed., Montréal, Yvon Blais, 2013, No. 413.
[2] See articles 1425 to 1432 of the Civil Code of Québec.
[3] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, para. 58
[4]Paul MARTEL, La société par actions au Québec: les aspects juridiques, vol. 1, Montréal, Wilson & Lafleur, 2021, para.  31-309.
[5] 2727901 Canada Inc. v. Sovell, 2021 QCCA 1971.

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