Lexpert Magazine

LEXPERT MAGAZINE | NOVEMBER/DECEMBER 2016 35 A LOOK AT THE BRITISH COLUMBIA COURT OF APPEAL DECISION, 1043325 ONTARIO V. CSA BUILDING SCIENCES, WHICH WAS DESCRIBED BY JUSTICE MARY NEWBURY AS "A CAUTIONARY TALE FOR SHAREHOLDERS OF CLOSELY-HELD CORPORATIONS WHO PROCEED WITHOUT A CLEAR UNDERSTANDING OR WRITTEN AGREEMENT THAT SETS OUT THEIR MUTUAL EXPECTATIONS" | RECENT LITIGATION OF IMPORTANCE | BIG SUITS 1043325 ONTARIO V. CSA BUILDING SCIENCES DECISION DATE: JUNE 15, 2016 CSA was a small engineering firm in British Columbia with two shareholders. 1043325 Ontario — the holding company of Chris Skene — held 44 per cent of the is- sued shares. Ralph Jeck held 56 per cent and was the sole director. Skene was a long-time engineer but he was not based in BC and was a largely absentee owner. Ralph Jeck ran the business in Van- couver but he was not an engineer. In the early years of the company Jeck would ask Skene to review and sign engineering reports as needed, but these requests diminished over time and ceased by about 2004, as CSA took on other professional staff. In 2006, two former CSA employees made a complaint to the Association of Professional Engineers and Geoscientists of British Columbia (APEGBC) that Ralph Jeck was forging Chris Skene's signature on engineering reports. When Skene asked Jeck about these allegations, Jeck denied them — he said they were "sour grapes" — and Skene believed Jeck. Skene did not otherwise inves- tigate the allegations. APEGBC did investi- gate but took no action. Over the years, Jeck told Skene that CSA was "muddling along" and only able to "keep its head above water." Skene received no divi- dends or other benefits for his 44 per cent stake in CSA. No shareholder meetings were held, and no financial statements were pro- vided from 2003 to 2010, when Jeck wrote to Skene and offered to buy out 104 Ontario for $10,000. Skene asked for the financial state- ments and discovered that CSA had made significant profits between 2004 and 2011, almost all of which were paid to Jeck as man- agement fees. 104 Ontario commenced proceedings for relief from oppression. During the course of the proceedings, it became clear that Ralph Jeck had forged Skene's signature on engi- neering reports as alleged in the 2006 com- plaint to APEGBC. As a result of this infor- mation, 104 Ontario amended its pleadings to seek relief related to these forgeries. e trial judge, Justice Jon Sigurdson, found that 104 Ontario had been oppressed by Jeck and CSA, by the suppression of fi- nancial information and the payment of very high management fees to Jeck. e trial judge ordered Jeck to buy 104 Ontario's shares for $508,000, which represented 44 per cent of the value of CSA. However, the trial judge declined to award any compensation for the very high manage- ment fees paid to Jeck. e trial judge reject- ed the expert evidence (of both sides) on mar- ket rates for compensation for someone in Jeck's position, which the trial judge said did not address the fact that Jeck was an owner as well as a manager; and dismissed the claim in relation to the forgeries, which he reasoned were both barred by the Limitation Act and were the personal claim of Skene — not a claim of 104 Ontario as shareholder. 104 Ontario appealed. e British Co- lumbia Court of Appeal allowed the appeal in part, in a decision that was released on June 15, 2016. On the management fees, the court con- cluded that most shareholders make their in- vestment in the hope of a financial return in the event that the company is a success, and that the indoor management rule could not insulate the management fees from review because Jeck did not withhold dividends for any corporate purpose, but only siphoned profits to himself. On the back of this conclusion the court re-evaluated the expert evidence on manage- ment fees, and ordered Jeck to compensate 104 Ontario for all management fees paid in excess of the mid-range of what the de- fence expert said was the market rate. Since Jeck had been paid $566,000 more than the market rate between 2007 and 2011, he was ordered to pay 104 Ontario 44 per cent of that amount, which represented a further $249,000 award to 104 Ontario. However, the Court of Appeal agreed with the trial judge that the forgeries claim was a "personal" claim of 104 Ontario, not a claim qua shareholder, and dismissed this aspect of the appeal. Interestingly, the court did not base its analysis on the fact that Skene was not a party personally — it accepted that because the BC Business Corporations Act al- lows "beneficial owners" of shares to apply for oppression relief, the court could grant a rem- edy in relation to a claim of Skene's. However, even while treating Skene and his holdco — 104 Ontario — as equivalents for the purpose of her analysis, Justice Mary Newbury concluded that the forgeries claim was a personal claim, not a claim qua share- holder, and based this conclusion in part on the fact that 104 Ontario/Skene had a sepa- rate tort claim in relation to the forgeries, which did not need to be addressed by way of oppression under the BCA. (Having come to this conclusion, the court did not address 104 Ontario's appeal in rela- tion to the Limitation Act). From the petitioner's perspective, this is a curious result even if it is supported by some authority. Producing engineering reports — signed by an engineer — are the sine qua non of an engineering company like CSA. Skene's contribution to the business was his qualifi- cation and expertise. From the petitioner's perspective, it is highly formalistic to treat the forgery claim as separate from Skene/104 Ontario's investment in CSA. Maintaining oppression claims as a water- tight box separate from other causes of action is not good public policy and is inconsistent with the trend of the common law in other fields, where the old forms of writs have long since been abandoned in favour of a general objective to obtain the "just, speedy, and in- expensive determination of every proceeding on its merits." e appellant, 1043325 Ontario Ltd., was represented by Robert Fleming of Robert Fleming Lawyers. e respondents, CSA Building Sciences Western Ltd., Ralph Jeck and Maria Jeck, were represented by Michael Morgan and Lauren Cook of Lawson Lundell LLP.

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