Lexpert Magazine

LEXPERT MAGAZINE | JUNE 2018 27 | RECENT LITIGATION OF IMPORTANCE | Sino-Forest used its apparent success to raise approximately $3 billion through debt and equity financing. e Demise of Sino-Forest On June 2, 2011 a short seller, Muddy Wa- ters Research, published a report describing Sino-Forest as a "multibillion dollar Ponzi scheme ... accompanied by substantial the." Among other things, the report alleged that Sino-Forest did not hold the full amount of timber assets that it reported, that it over- stated its revenue, and that it had engaged in undisclosed related-party transactions. e same day that the Muddy Waters report was released, Sino-Forest's Board appointed an Independent Committee to investigate the allegations contained in the report. In turn, the Independent Commit- tee retained professional firms to assist with the investigation. Aer eight months of in- vestigation, the Independent Committee released its final report on January 31, 2012, disclosing that the issues it examined, includ- ing timber asset verification and related party transactions and relationships, "proved very difficult to definitively resolve." Also following the Muddy Waters report, the Ontario Securities Commission (OSC) commenced an investigation into Sino-For- est. On August 26, 2011, the OSC issued an order containing allegations including that Chan, the CEO of the company, and other certain directors and officers "appear to be engaging or participating in acts, practices or a course of conduct related to its securi- ties which it and/or they know or reasonably ought to know perpetuate a fraud." Among other things, the order cease-traded Sino- Forest's securities and required Chan and other members of management to resign. e OSC delivered a Statement of Allegations on May 22, 2012, alleging that Chan and other members of management "engaged in a com- plex fraudulent scheme to inflate the assets and revenue of Sino-Forest". In March 2012, Sino-Forest filed for pro- tection under the Companies' Creditors Ar- rangement Act, which led to the approval of a Plan of Arrangement by the Court. e Plan, among other things, transferred certain of Sino-Forest's litigation rights to a Litiga- tion Trust to pursue for the benefit of Sino- Forest's creditors. On March 31, 2014, the SFC Litigation Trust commenced an action against Chan alleging fraud and breach of fiduciary duty. e Mareva Proceedings against Chan On August 28, 2014, the SFC Litigation Trust obtained a worldwide Mareva order freezing all of Chan's assets. Chan appealed the Mareva order to the Divisional Court, arguing that the Litigation Trust failed to es- tablish that Chan had assets in Ontario. In a split decision released on March 28, 2017, the Divisional Court dismissed Chan's appeal, holding that Mareva orders are justified by the Court's in personam jurisdiction over the defendant, and not whether the defendant has assets in the jurisdiction. Chan obtained leave to appeal the Divi- sional Court's decision to the Court of Ap- peal on the issues of whether it was an error to grant a worldwide Mareva injunction where the defendant does not have assets in the jurisdiction, and whether it was an error not to require the plaintiff to post security to fortify its undertaking to the court and as se- curity for costs, where it does not have assets in the jurisdiction. e appeal was scheduled to be heard March 28, 2018; however, the is- sues became moot once Justice Penny's trial decision was released and Chan abandoned the appeal. e Decision of Justice Penny e trial was held in March, April and May 2017, with closing argument taking place over a week in July 2017. ree weeks of the trial were held in Hong Kong with Justice Penny sitting as commissioner to take the evidence of witnesses who resided in Hong Kong and mainland China. Justice Penny released his decision find- ing in favour of the SFC Litigation Trust on March 14, 2018. In the decision, Justice Penny found that Chan secretly controlled many of Sino- Forest's counterparties (i.e. its suppliers and customers) through a complex network of relationships with third parties. e third parties acted as Chan's "nominees," holding positions as directors, officers, and sharehold- ers on his behalf. Justice Penny found that Sino-Forest's pri- mary business model under which it claimed to buy and sell forestry plantations within China was a fraud and that "Sino-Forest lacked the requisite documentation to find the standing timber assets, much less prove that it had any ownership interest in them." Justice Penny also found that Chan defraud- ed Sino-Forest by causing it to fund deposits and advance payments to entities that Chan secretly controlled. In the result, Justice Penny held that Chan was liable for US$2.6 billion in damages for fraud and breach of fiduciary duty, as well as punitive damages of Cdn. $5 million. Damages recovered from Chan will go to the beneficiaries of the SFC Litigation Trust, being the creditors of the now de- funct Sino-Forest. On April 7, Chan served and filed a notice of appeal of Justice Penny's decision. e ap- peal is pending. Bennett Jones LLP was counsel to Sino- Forest Corporation and the SFC Litigation Trust, with a team including Robert Staley, Alan Gardner, Jonathan Bell, Preet Bell, Ja- son Berall and William Bortolin. A llen Chan was represented by Ruet- ers LLP, with a team including Robert Rueter, Sara Erskine, Malik Martin and David Barbaree. RAIBEX CANADA LTD. V. ASWR FRANCHISING CORP. DECISION DATE: JANUARY 25, 2018 On January 25, 2018, the Ontario Court of Appeal released its decision in Raibex Can- ada Ltd. v ASWR Franchising Corp., provid- ing clarity on the pre-contractual disclosure obligations imposed on franchisors under the Arthur Wishart Act (Franchise Disclo- sure), 2000 (the "Wishart Act"). In late 2016, the Ontario Superior Court granted the franchisee's rescission claim con- cluding that it would be "premature" for a franchisor to provide disclosure and enter into a franchise agreement if potentially ma- terial facts about the franchise, such as the location, had yet to be determined. e Court of Appeal granted the franchi- sor's appeal and set aside the rescission of the franchise agreement. In its decision, the Court clarifies that the disclosure obligations under the Wishart Act must be interpreted practically and with reference to the terms of the franchise agreement. e post-agreement location selection process employed by the

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