Much to Carolyn Dare Wilfred’s chagrin, everything, as it turns out. The result in Wilfred v. Dare is a cautionary tale for the commercial litigation bar and for corporate commercial solicitors and their shareholder clients. For the litigators, do not launch your client on an expensive[1] romp through the court system claiming relief under s. 248 of the Business Corporations Act (the “OBCA”) without, you know, bona fide oppressive conduct to complain of. For corporate commercial solicitors, get a unanimous shareholder agreement up-front that provides a mechanism to compel the purchase or sale of your shareholder client’s shares so he or she does not have to seek statutory relief when (not if) he or she wants to pull the ripcord

Background in Brief

The facts of this case, as in many intra-corporate disputes, are both sordid and convoluted. You can read all the gory details in the trial decision.

For my purposes, this is what you need to know:

Dare Foods was founded in 1889 and has always been controlled by the Dare family. It manufactures cookies, crackers, fine breads, and candy. Annual sales at the time of the hearing in February 2017 were approximately $300 million and it employed 1,200 people.

Carl Dare (“Carl”), the grandson of the founder, took over the business in the early 1940s and successfully managed it for over 50 years. Carl had three children: Bryan, Graham and Carolyn. By the time of the hearing, they were 71, 69, and 65 years old, respectively.

In 1980 Carl decided to freeze his estate, which resulted in the creation of Serad Holdings Limited (“Serad”) to hold the common shares in the various operating companies then existing. The common shares in Serad were issued to the newly created Dare Family Trust, with Bryan, Graham, and Carolyn as beneficiaries. At that time, Bryan, Graham, and Carolyn signed a shareholder agreement with the Dare Family Trust that contained a restriction on the transfer of Serad’s common shares.

This restriction was in the form of a right of first offer, which provided that if Bryan, Graham, or Carolyn wanted to sell their Serad common shares, they had to first offer the shares to the other two siblings. If both siblings declined the offer, the shares could be sold to any third party, but only upon the same terms.

Prior to the 21^st anniversary of the Dare Family Trust, the common shares of Serad were distributed equally to Bryan, Graham and Carolyn Dare. Each received 140 common shares. At the time of the share transfer, Bryan, Graham and Carolyn confirmed and re-executed the shareholder agreement with the benefit of legal advice and agreed that their Serad shares could be held in personal holding companies.

In 2001, Carl redeemed 25% of Carolyn’s shares (35 shares) for $5 million and it was agreed that she would receive dividends of $335,000 on her remaining shares for five years. For her part Carolyn agreed not to try to sell her remaining shares for five years. By 2009 CRA issued a $15 million Requirement to Pay against Carolyn in connection with the 2001 share redemption and her emigration to New Zealand with her new spouse later that same year. Between 2013 and 2015, Carolyn’s efforts to earn an income separate from Dare Foods in New Zealand were floundering. One business was sold for $1.4 million, but the rest were eventually placed into liquidation and became the subject of litigation.

Carl died in 2014. Carolyn made an offer to her brothers for them to buy out her remaining stake in Serad for the price of $55 million. When they refused, she made an unsuccessful effort to sell her shares to a third party. She again made an offer to her brothers to buy her out, again at the price of $55 million. When that was also rejected, she commenced her oppression application.

The Trial Decision

Carolyn was of the view that her brother’s conduct was unfairly prejudicial to or unfairly disregarded her interests as a shareholder of Serad in two respects. First, the absence of a third-party market for her shares meant her brothers could, and were in her mind, holding her shares hostage in her time of financial need, presumably in an effort to avoid paying her what she deemed to be a fair market price. Second, Carolyn complained that she had no input on Serad’s dividend policy and that while the loan back program from Serad to Dare Holdings may have made good business sense, it privileged her brothers’ interests over hers as they drew other sources of income from the business.

Her brothers defended on the basis that neither of Carolyn’s complaints amounted to conduct that was unfairly prejudicial to or unfairly disregarded her interests as a shareholder of Serad and, therefore, did not engaged the equitable relief contemplated by s. 248 of the OBCA.

The court agreed and, following what appears to be the trial of the issue, dismissed the application. In putting its decision in context, the court specifically noted that this was not a case:

1. of an “incorporated partnership” where Carolyn contributed sweat equity and was now being excluded;
2. where irreconcilable differences among family members was hurting the business; or
3. where her financial circumstances were attributable to her brothers’ conduct.

Instead the court reduced Carolyn’s position to its essence when it concluded: “She simply wants out”.

Relying on the seminal decision in BCE Inc., Re, the court posed a simple question: did Carolyn have a reasonable expectation of liquidity for her Serad shares?

The equally simple answer was: no.

The court found that Carolyn received her interest in Serad as a gift from the late Carl, who structured the shareholder agreement specifically to disincentivise his children from divesting their gift to third parties. Specifically, that agreement provided his children the opportunity to sell their own shares to the others, but it imposed no reciprocal obligation to buy them. Which is to say, it did not contain a shotgun or put right clause. Nor did it oblige the shareholders to have regard to each other’s personal financial circumstances in organizing the corporation’s affairs.

These facts, together with her execution of the shareholder agreement not once, but twice, and her prior efforts to market her shares to a third party when her earlier offers to sell her shares to her bothers were rebuffed, satisfied the court that her expectations would have to be tempered by the clear effect of the binding agreement.

Indeed, her reasonable expectations must include an account of her minority status. In this regard, the court noted that Carolyn’s minority interest in a closely held private corporation was, and always had been, of inherently limited liquidity. Relying on Senyi Estate v. Conakry Holdings Ltd., the court concluded that in the absence of a shareholder agreement that required the purchase of Carolyn’s shares, her reasonable expectations were limited to expecting:

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.

As was observed in Miklos v. Thomasfield Holdings Ltd., the minority shareholder’s wish to sell her shares at the highest price possible is not the same as her interest in the other shareholders not interfering in her ability to sell those shares for the highest possible price. 

In short, the court held 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.”

On Appeal

In a unanimous decision authored by the Associate Chief Justice of the Superior Court, the Divisional Court dismissed Carolyn’s appeal.

The gist of the reasons for the dismissal is neatly summarized in the Associate Chief Justice’s observation that:

It was open to the application judge, after drawing this conclusion from the uncontradicted evidence, to conclude that the appellants had not demonstrated why it was just, fair or equitable for the court to order Bryan and Graham Dare to purchase Carolyn’s shares and to disregard what they believe to be the best interests of Serad Holdings Limited and Dare Holdings Limited and the long-term best interests of Dare Foods and its 1,200 employees.

Conclusion

The bottom line is this: the default position in Ontario is that there is no such thing as a ‘no fault’ divorce in an incorporated business. It is not good enough that you hate your business partner (I get it, holding monthly management meetings at 8:30 a.m. on Fridays is inhuman) or that you want to cash out when you see a more attractive franchise opportunity come along.

Instead, if you want to ask the court to extricate you and your capital from your bad shareholder relationship by forcing the other shareholders to buy you out, you are going to have to point to unfair or prejudicial action(s) on the part of the corporation or those other shareholders. That might be easier where you have sweat equity invested in the business and it is not being properly valued or where the corporation is akin to an incorporated partnership and there has been a relationship breakdown that harms its business operations, but all such oppression still has to be shown.

Of course, if you want a ‘no fault’ option (and who doesn’t?), then put yourself in a position to ask the court to enforce the shotgun clause, the put option, or the redemption rights that are clearly laid out in your unanimous shareholder agreement. You (and your new Starbucks franchise) will thank us.

---

[1] The partial indemnity costs claimed by the defendant brothers and their holding corporations after the trial was $333,872, inclusive of taxes and disbursements. The plaintiff’s own partial indemnity costs weighed in at $145,243. The trial judge ordered Wilfred to pay $270,000, inclusive. On the appeal, Wilfred and her holding corporation were stung with another $15,000 cost award.

The cost decision for the trial can be read here.

Tags: CBCA, OBCA, oppression, shareholder, shareholder agreement, USA