A shareholders’ agreement is a contract entered into by some or all of the shareholders of a corporation. It governs the relationship between the parties and can also regulate how the company’s business is managed.
In a recent Ontario Court of Appeal decision, the court found that one part of a complex litigation arising out of a shareholders’ agreement had not been appropriate for summary judgment.
Shareholders Engaged in Complex Litigation
The appellant and respondent are real estate developers. In 2007, they entered into a joint venture agreement through their respective numbered companies to develop a project in Waterloo, Ontario. Shortly after entering into the joint venture agreement, they formed a corporation to pursue other development opportunities in Waterloo, London and Oshawa.
Under a shareholders’ agreement dated April 2, 2008, they became shareholders of the corporation through their respective corporations, with the appellant holding 55% of the common shares and the respondent holding 45% of the common shares. The parties were the corporation’s only directors. The shareholders’ agreement contained a non-competition clause.
Shortly after the shareholders’ agreement was executed and development on the lands commenced, the parties’ business relationship deteriorated and they became engaged in sustained and hard-fought litigation.
In 2010, the respondent commenced an action in which he claimed over $30 million in connection with the joint venture project and the development project.
In 2012, the appellant commenced a companion action to the respondent’s action, which was based on a claim for damages arising out of an alleged breach of the non-competition clause.
In 2014, the parties consented to an order that the two actions be tried together.
However, in May 2017, the respondent brought a motion for summary judgment to dismiss the appellant’s action on the ground that the non-competition clause was an unenforceable restrictive covenant. The motion judge agreed with this submission, holding that the non-competition clause was unenforceable, and granting judgment dismissing the action.
The appellant appealed, claiming that the motion judge erred by granting summary judgment. The appellant argued that the motion judge effectively granted partial summary judgment because of the existence of the other action and the factual linkage between the two.
In response, the respondent contended that summary judgment was appropriate because the only issue before the motion judge was the enforceability of the non-competition clause. The respondent also argued that the motion judge granted full summary judgment because it disposed of the appellant’s action.
Court of Appeal Sets Aside Summary Judgment
The Court of Appeal began by noting that the motion judge did not undertake an analysis as to whether this was a proper situation in which to consider summary judgment, although that preliminary question was argued before him. Instead, the motion judge merely alluded to the issue in one paragraph of his reasons. The court then stated:
“It would seem, at first blush, to be unusual to consider summary judgment in one action that has already been ordered to be tried together with another action, along with an order for common examinations for discovery. Indeed, the order directing that the actions be tried together refers to the fact that the actions are “related”. It is even more unusual given that it appears that the facts underlying the two actions are inextricably intertwined. […]
[I]t is difficult to see what saving of time and expense was accomplished by dealing with this issue separately, when the main parties are locked in other litigation that is still ongoing and has been for some time. The issue of the enforceability of [the non-competition clause], by itself, could have been easily dealt with at the trial, if the issue was as narrow as the [respondent contends]. Purporting to deal with it through a summary judgment motion has only caused further delay, distraction, and expense, all in the context of litigation that has been going on for far too long as it is.”
The court found that the respondent was correct in arguing that the motion judge had granted full summary judgment on the non-competition issue, but only in the most technical sense. The court explained that the principles surrounding partial summary judgment are not to be so narrowly construed nor applied. The court found that the two actions were factually intertwined.
Additionally, the court found the motion judge made a number of findings about the non-competition clause that demonstrated that summary judgment was not, in fact, an appropriate route to take in this action because all of his findings required a factual foundation, and yet he failed to refer to any factual foundation for any of these findings.
Finally, the court found that the motion judge had erred in rejecting the legitimacy of the clause as a mere “agreement to agree”, which suggested that the motion judge had misunderstood the proper application of the principle.
The court therefore concluded that the matter was not one that ought to have been dealt with by way of summary judgment. As a result, the appeal was allowed, the summary judgment was set aside and the action was reinstated. Finally, the court found that the appellant was entitled to his costs of the appeal, fixed at $50,000.
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As with any other legal contract, a shareholders’ agreement should be drafted by knowledgeable legal counsel. In the case of a shareholders’ agreement specifically, assistance should be sought from a lawyer with significant experience advising clients on corporate and commercial matters, including corporate governance and business succession. At Baker & Company, we have this experience, and we are here to help.
At Baker & Company, we regularly review and update existing shareholders’ agreements, and draft new shareholders’ agreements for clients of all sizes and in all industries. We also represent clients in shareholder disputes. We are known for being the firm that handles the “complicated stuff”. We do not shy away from the most complex of legal scenarios and regularly help clients through their most challenging corporate law issues. Call us at 416-777-0100 or contact us online for a consultation.