Shefsky et al. v. California Gold Mining Inc. et al., (2016) 616 A.R. 290

• Judge: Costigan, Slatter and Schutz, JJ.A.
• Court: Court of Appeal (Alberta)
• Case Date: February 05, 2016
• Citations: (2016), 616 A.R. 290;2016 ABCA 103

Shefsky v. California Gold Mining (2016), 616 A.R. 290; 672 W.A.C. 290 (CA)

MLB headnote and full text

Temp. Cite: [2016] A.R. TBEd. AP.051

Martin Shefsky and 2350183 Ontario Inc. (appellants/applicants) v. California Gold Mining Inc., Michael Churchill, Kevin Cinq-Mars, Patrick Cronin, R.W. Tomlinson Limited, John Doe #1-50, and ABC Corporation #1-50 (respondents/respondents)

(1503-0001-AC; 2016 ABCA 103)

Indexed As: Shefsky et al. v. California Gold Mining Inc. et al.

Alberta Court of Appeal

Costigan, Slatter and Schutz, JJ.A.

April 14, 2016.

Summary:

Shefsky and his solely owned holding company (referred to collectively as Shefsky), brought an oppression application against the respondents, California Gold Mining Inc. (CGMI), its directors and some shareholders. Shefsky asserted that the respondents breached his reasonable expectations that in return for raising at least $5 million in investment he would control CGMI. In particular, he would be entitled to name three of five directors on the board and would retain control through the shares owned by him and the investors he introduced to CGMI. He asserted that some of the respondents engaged in oppressive conduct, including a secret placement of shares which diluted his voting powers. The respondents asserted that Shefsky did not raise the agreed upon $5 million within the agreed upon deadline. Further, they asserted that he could not rely on an agreement with them (described as the Term Sheet) to evade shareholder democracy by determining who would be elected to the board. As to control, the respondents asserted that Shefsky never had control of CGMI before the additional share issue, and therefore their actions could not have deprived him of control.

The Alberta Court of Queen's Bench, in a decision reported at [2014] A.R. Uned. 740, held that while Shefsky had a reasonable expectation that the Term Sheet would be complied with and that he could name a third candidate to the management slate of directors, those expectations were not breached. He did not name a third candidate and the respondents therefore never refused to add his nominee to the management slate. Further, there was no evidence, beyond Shefsky's belief, that he had sufficient votes to control CGMI before the alleged secret placement. In the result, the court dismissed the application. Shefsky appealed.

The Alberta Court of Appeal, Slatter, J.A., dissenting, dismissed the appeal.

Company Law - Topic 2170

Shareholders - Shareholders' rights - To rectify oppressive or unfairly prejudicial act - The Alberta Court of Appeal reviewed the analytical framework applied to oppression claims and remedies as stipulated in Aegon Capital Management Inc. et al. v. BCE Inc. et al. (2008, S.C.C.) - See paragraphs 22 to 31.

Company Law - Topic 2170

Shareholders - Shareholders' rights - To rectify oppressive or unfairly prejudicial act - Shefsky and his solely owned holding company (collectively Shefsky) brought an oppression application against the respondents, California Gold Mining Inc. (CGMI), its directors and some shareholders - Shefsky asserted that the respondents breached his reasonable expectations that in return for raising at least $5 million in investment he would control CGMI - In particular, he would be entitled to name three of five directors on the board and would retain control through the shares owned by him and the investors he introduced to CGMI - He asserted that some of the respondents engaged in oppressive conduct, including a secret private placement of shares which diluted his voting powers (the Secret Placement) - The chambers judge in dismissing the application, held that there was no evidence, beyond Shefsky's belief, that he had sufficient votes to control CGMI before the alleged Secret Placement - That finding was fatal to the suggestion that Shefsky had a reasonable expectation that he could control CGMI or that his alleged expectation was defeated by the Secret Placement - Shefsky appealed, asserting that judge mischaracterized his submissions regarding the Secret Placement - He asserted that his argument was not that the Secret Placement was oppressive because it resulted in him losing control of CGMI, but rather that it resulted in losing the opportunity to gain control of the CGMI - The Alberta Court of Appeal stated that the essential difficulty with Shefsky assertion was that a finding of oppression required objective evidence that there was oppression - A mere speculation or hope or an "aspirational belief" was insufficient - An expectation based on a loss of an opportunity, without proof that such opportunity was more than merely speculative, was insufficient to ground an oppression claim because causation and compensable injury had not been established - The chambers judge did not err in failing to find that the loss of an opportunity to gain control of CGMI was a reasonable expectation violated by the Secret Placement - See paragraphs 32 to 38.

Company Law - Topic 2170

Shareholders - Shareholders' rights - To rectify oppressive or unfairly prejudicial act - Shefsky and his solely owned holding company (collectively Shefsky) brought an oppression application against the respondents, California Gold Mining Inc. (CGMI), its directors and some shareholders - Shefsky asserted that the respondents breached his reasonable expectations that in return for raising at least $5 million in investment he would control CGMI - In particular, he would be entitled to name three of five directors on the board and would retain control through the shares owned by him and the investors he introduced to CGMI - He asserted that some of the respondents engaged in oppressive conduct, including a secret private placement of shares which diluted his voting powers (the Secret Placement) - The chambers judge, in dismissing the application, held that there was no evidence, beyond Shefsky's belief, that he had sufficient votes to control CGMI before the alleged Secret Placement - Shefsky appealed, asserting that the judge erred by limiting his complaint about the Secret Placement to being an issue about control and failing to consider, regardless of control, that he had a reasonable expectation that the Secret Placement would not proceed in the circumstances - The Alberta Court of Appeal, in dismissing the appeal, stated that the difficulty with this argument was that Shefsky had failed to identify any specific expectation, apart from the expectation of control, which was violated by the Secret Placement - The oppression remedy was a personal claim and required the complainant to identify a personal interest that was alleged to have been violated - Shefsky asserted that a shareholder did not have to prove control to establish that the act of issuing shares to a select group of investors well below market value was oppressive, and that every shareholder, including himself, had a reasonable expectation that directors would not do that - However, it was insufficient to allege that shareholders generally had an expectation that directors generally would not act oppressively - In any event, the chambers judge did not find that the Secret Placement was below market value, nor was there any evidentiary foundation for that assertion - The judge found that the Secret Placement was intended to raise money to replace money that had been wasted on improper exploration work - Even if the effect was dilutive, Shefsky's only reasonable expectation was that the directors would act in CGMI's best interest, despite that so acting might not have coincided with Shefsky's personal interests - The directors were duty bound to protect CGMI's interests - Assuming that there was some evidence to support Shefsky's theory that the CGMI board was acting to buttress the existing management slate of directors through the Secret Placement, contrary to Shefsky's personal interests, that was insufficient - Shefsky was required to prove that the board's actions were contrary to the best interests of CGMI - Directors were entitled to consider who was seeking control and why - If the board believed there would be substantial damage to the company's interests if CGMI was taken over, then the exercise of their powers to defeat those seeking a majority would not necessarily be categorized as improper - See paragraphs 39 to 52.

Company Law - Topic 2170

Shareholders - Shareholders' rights - To rectify oppressive or unfairly prejudicial act - Shefsky and his solely owned holding company (collectively Shefsky) brought an oppression application against the respondents, California Gold Mining Inc. (CGMI), its directors and some shareholders - Shefsky asserted that the respondents breached his reasonable expectations that in return for raising at least $5 million in investment he would control CGMI - In particular, he would be entitled to name three of five directors on the board and would retain control through the shares owned by him and the investors he introduced to CGMI - He asserted that some of the respondents engaged in oppressive conduct, including a secret private placement of shares which diluted his voting powers - The chambers judge, in dismissing the application, held that while Shefsky had a reasonable expectation that the agreement with the respondents would be complied with and that he could name a third candidate to the management slate of directors, those expectations were not breached - He did not name a replacement third candidate after his initial candidate refused to accept the position, and the respondents, therefore, never refused to add his nominee to the management slate - Shefsky appealed, asserting that the judge erred by concluding that the issue of his reasonable expectation that he would be permitted to appoint a third director was moot - The Alberta Court of Appeal, in dismissing the appeal, held that, contrary to Shefsky's assertion, the chambers judge did not find that Shefsky had a continuing right to appoint a third member to the board until the January 2014 annual shareholder's meeting - The judge found it unnecessary to decide the point and the evidence did not support Shefsky's position - The record showed that any reasonable expectation Shefsky might have had to appoint a third board member was extinguished by the April 2013 annual meeting, because any expectation to control the board's composition past that date was inconsistent with CGMI's public statements, its statutory disclosure obligations, and the basic rights of its shareholders as a whole to choose the board of directors of their publicly-traded company - Prior to the April 2013 annual meeting, Shefsky had an opportunity to comment on the draft circular but did not propose any changes to the slate of directors - At the April 2013 meeting he voted for the slate nominated and set out in the circular - If there had been an arrangement whereby Shefsky retained a unilateral power after the April 2013 shareholders' vote to compel one of the elected directors to resign in favor of an unidentified nominee of his choice, that would have been contrary to the voting shareholders' wishes and would have been material information that required disclosure in the circular - Failure to disclose constituted an offence under the Ontario Securities Act, the commission of which would not have been in CGMI's best interests - Moreover, the board has a fiduciary interest to act in CGMI's best interests, which included an obligation not to fetter its discretion absent a unanimous shareholders' agreement - The expectation alleged by Shefsky was inconsistent with his own obligations as a director, and was not reasonable - See paragraphs 53 to 61.

Company Law - Topic 2170

Shareholders - Shareholders' rights - To rectify oppressive or unfairly prejudicial act - Shefsky and his solely owned holding company (collectively Shefsky) brought an oppression application against the respondents, California Gold Mining Inc. (CGMI), its directors and some shareholders - Shefsky asserted that the respondents breached his reasonable expectations that in return for raising at least $5 million in investment he would control CGMI - In particular, he would be entitled to name three of five directors on the board and would retain control through the shares owned by him and the investors he introduced to CGMI - He asserted that some of the respondents engaged in oppressive conduct, including a secret private placement of shares which diluted his voting powers - The chambers judge, in dismissing the application, held that while Shefsky had a reasonable expectation that the agreement with the respondents (the Term Sheet) would be complied with and that he could name a third candidate to the management slate of directors, those expectations were not breached - He did not name a replacement third candidate after his initial candidate refused to accept the position, and the respondents, therefore, never refused to add his nominee to the management slate - Shefsky appealed, asserting that the judge erred by concluding that the issue of his reasonable expectation that he would be permitted to appoint a third director was moot - The Alberta Court of Appeal agreed with the respondents that Shefsky's reasonable expectation to appoint a third director found in the Term Sheet, or grounded in the various representations that were made, were not made by, or to, Shefsky in his capacity as a shareholder, director or officer of CGMI - The Term Sheet was simply a sui generis contract made between CGMI and Shefsky in his capacity as a potential financier, promoter or underwriter in relation to the $5,000,000-8,000,000 private placement to be arranged for CGMI - The respondents correctly argued that a prospective shareholder did not have standing to seek an oppression remedy - However, Shefsky' acceptance of the Term Sheet conferred upon him a legal entitlement to acquire shares - It did not confer on him a right to enjoin any further share placements - An existing shareholder could not complain about subsequent share offerings even if it had the effect of diluting that shareholder's shares, provided the share offering was done in the best interests of the corporation - No shareholder had the right to acquire additional shares and no corporation was obliged to offer additional shares to existing shareholders - The essential difficulty with Shefsky's invocation of the oppression remedy in respect of the Term Sheet was that he was attempting to gain access to the court's equitable oppression remedy jurisdiction for a personal claim for breach of contract - The claims that were derivative of the Term Sheet were contractual in nature and fell outside the legal and jurisdictional boundaries of an oppression remedy - See paragraphs 62 to 76.

Company Law - Topic 2170

Shareholders - Shareholders' rights - To rectify oppressive or unfairly prejudicial act - Shefsky and his solely owned holding company (collectively Shefsky) brought an oppression application against the respondents, California Gold Mining Inc. (CGMI), its directors and some shareholders - Shefsky asserted that the respondents breached his reasonable expectations that in return for raising at least $5 million in investment he would control CGMI - In particular, he would be entitled to name three of five directors on the board and would retain control through the shares owned by him and the investors he introduced to CGMI - He asserted that some of the respondents engaged in oppressive conduct, including a secret private placement of shares which diluted his voting powers - The chambers judge, in dismissing the application, held that while Shefsky had a reasonable expectation that the agreement with the respondents would be complied with and that he could name a third candidate to the management slate of directors, those expectations were not breached - The judge held that Shefsky had not met the burden of showing that he had suffered oppression, unfair prejudice or unfair disregard, because he did not name a replacement third candidate after his initial candidate refused to accept the position, and he did not seek to call, or actually call a shareholders' meeting, or propose a different slate directors - Shefsky appealed, challenging the judge's finding based a letter from his lawyer to the respondents demanding that a director resign so that he could be replaced with a named candidate selected by Shefsky - The Alberta Court of Appeal dismissed the appeal - The demand letter did not amount to Shefsky naming a replacement, seeking to call, or actually calling a shareholder's meeting himself, not did it equate to him proposing a different slate of directors - The letter was not an exercise of Shefsky's right to appoint a third board member, nor was it sufficient to controvert the chamber judge's finding that Shefsky took no steps to appoint a third director - Further there was no evidence that Shefsky's expectation that he could appoint a third director was violated in a manner that oppressive, unfairly prejudicial, or that unfairly disregarded his protected interests - See paragraphs 77 to 85.

Company Law - Topic 2170.1

Shareholders - Shareholders' rights - Oppressive acts - Remedies - [See first Company Law - Topic 2170 ].

Company Law - Topic 4311

Directors - Duty to company and shareholders - Duty to act in best interest of the corporation - [See third and fourth Company Law - Topic 2170 ].

Company Law - Topic 9781

Actions against corporations and directors - Action for oppressive conduct - When available - [See all Company Law - Topic 2170 ].

Company Law - Topic 9783

Actions against corporations and directors - Action for oppressive conduct - Persons entitled - [See fifth Company Law - Topic 2170 ].

Company Law - Topic 9784

Actions against corporations and directors - Action for oppressive conduct - Conditions precedent - [See first Company Law - Topic 2170 ].

Company Law - Topic 9785

Actions against corporations and directors - Action for oppressive conduct - Oppression, prejudice or disregard of interests - [See sixth Company Law - Topic 2170 ].

Practice - Topic 9012

Appeals - Restrictions on argument on appeal - Issues or points not previously raised (incl. new theory of the case) - Shefsky and his solely owned holding company (collectively Shefsky) brought an oppression application against the respondents, California Gold Mining Inc. (CGMI), its directors and some shareholders - Shefsky asserted that the respondents breached his reasonable expectations that in return for raising at least $5 million in investment he would control CGMI - In particular, he would be entitled to name three of five directors on the board and would retain control through the shares owned by him and the investors he introduced to CGMI - He asserted that some of the respondents engaged in oppressive conduct, including a secret private placement of shares which diluted his voting powers (the Secret Placement) - The chambers judge in dismissing the application, held that there was no evidence, beyond Shefsky's belief, that he had sufficient votes to control CGMI before the alleged Secret Placement - That finding was fatal to the suggestion that Shefsky had a reasonable expectation that he could control CGMI or that his alleged expectation was defeated by the Secret Placement - Shefsky appealed, asserting that judge mischaracterized his submissions - He asserted that his argument was not that the Secret Placement was oppressive because it resulted in him losing control of CGMI, but rather that it resulted in him losing the opportunity to gain control of the CGMI - The respondents asserted that the court should not entertain this new issue raised for the first time on appeal where the interests of justice did not require it and there was not a sufficient evidentiary record - The Alberta Court of Appeal held that despite the fact that Shefsky's position was not clearly articulated before the chambers judge, the record showed that he made submissions effectively asserting that the true intention of the Secret Placement was to dilute his shares and prevent him from winning a proxy war that, absent the Secret Placement, would have been a possibility - The issue was sufficiently canvassed on the record for the court to address it on appeal - See paragraphs 35 to 37.

Counsel:

A.G. Formosa, for the appellants;

S.M. Robinson and M.J. Diskin, for the respondents.

This appeal was heard on February 5, 2016, by Costigan, Slatter and Schutz, JJ.A., of the Alberta Court of Appeal. The court filed a memorandum of judgment at Edmonton, Alberta, on April 14, 2016, with the following opinions:

Costigan and Schutz, JJ.A. - see paragraphs 1 to 86;

Slatter, J.A., dissenting - see paragraphs 87 to 160.