B.C. – shareholders waive arbitration to resolve management deadlock – #179

In No. 20 CR Ventures Ltd. v Andrex Developments (1985) Ltd., 2019 BCSC 405, Mr. Justice John J. Steeves distinguished the requirements for establishing oppression and deadlock and, having concluded that deadlock existed, issued a series of orders leading to the liquidation of the corporation.  Despite having initially included an agreement to arbitrate deadlock, the shareholders opted to pursue their disagreement in court. For a recent case considering whether arbitration is an appropriate format to operate a business, see the Arbitration Matters note “Québec – arbitration not appropriate to conduct business or resolve operating disagreements”. 

No. 20 CR Ventures Ltd.  (“CR Ventures”) and Cottyn Construction Ltd. (“Cottyn Construction”) each own 50% of the shares in Andrex Developments (1985) Ltd. (“Andrex”).   The purpose of Andrex is to develop and sell off individual lots from 77 acre parcel of land acquired by Andrex in 1985.  Approximately 195 lots have been developed and sold since 1985.

In addition to a restriction on the transfer of shares, Andrex’ articles of incorporation include a section on Proceedings of Directors and a clause entitled “Arbitration to Decide Deadlock”:

15.14 In any case where there shall be an equality of votes at any meeting herein referred to in these Articles and further if the individuals at the meeting at which the said equality of votes arises cannot settle their differences, then in that event, the matter over which the equality of votes arises shall be settled pursuant to the Arbitration Act, R.S.B.C. 1960, Chapter 14 and amendments thereto”.

Steeves J. recorded the status of the shareholders and their respective representatives to Andrex’ Board of Directors:

[7] The shares of the petitioner are owned by Diane Coburn. Mrs. Coburn personally held the petitioner’s current 50% share interest in Andrex prior to the petitioner’s incorporation. Mrs. Coburn’s husband Rex Coburn is her representative for the affairs of the petitioner, and is also one of Andrex’s two directors.

[8] The shares of Cottyn Construction are owned by Andre Cottyn and his wife Helen Cottyn. Mr. Cottyn appears to be the sole directing mind of Cottyn Construction. He is also one of Andrex’s two directors.

Andrex’ business ran “with little difficulty” from 1985 to 2013 by which time 150 lots has been developed and sold.

Disagreements arose starting in 2013 regarding certain actions alleged to have been taken unilaterally by one party and other opportunities available to Andrex but for which the Directors could not agree. At paras 15-25, Steeves J. sketches the key milestones in the disagreements.  In the most recent events dating from June 18, 2018, the Directors narrowed their decisions to a short list of four (4). 

CR Ventures proposed a list of those decisions as the agenda for a Directors meeting, reproduced at para. 22, including the 4th which proposed arbitration for the corresponding decision:

1. Agreement to complete the development of the 69 lot property and bring each lot to market as quickly as reasonably possible;

2. Alternatively, agreement to bring to market as expeditiously as possible all the company’s real estate holdings, including the large lot for which 69 lot sub-division has been granted PLA by Colwood; and market and sell all of the construction equipment owned by Andrex.

3. Agreement to place the monies held in the Andrex current account (approximately $4,000,000) into an interest bearing GIC account.

4. Agreement to refer the issue of Mr. Cottyn’s shareholder loan balance to arbitration in 45 days if not resolved in the interim. Any imbalance in the shareholder loan accounts is to be rectified within 60 days. Each party is to select an accountant, with the accountants then to choose by agreement a third accountant to act as arbitrator, with the arbitrator’s decision to be final and binding on the parties.

Steeves J. reproduces the minutes of the Directors’ meeting held to discuss and vote on the proposed list of decisions:

Item #1 was brought forward by Mr. Penner. Discussion was invited, but declined. The matter was then put to a vote, with Mr. Cottyn voting “No”, with Mr. Coburn voting “Yes”.

Item #2 was brought forward by Mr. Penner. Discussion was invited, but declined. The matter was then put to a vote, with Mr. Cottyn voting “No”, and Mr. Coburn voting “Yes”.

Item #3 was brought forward by Mr. Penner. Discussion was invited. Mr. Aiyadurai stated the company should obtain the benefit of an opinion from its accountant as to whether to invest the funds. On further discussion, it appeared the company may be at present without an acting accountant. The matter was then put to a vote, with Mr. Cottyn voting “No”, and Mr. Coburn voting “Yes”.

Item #4 was brought forward by Mr. Penner. Discussion was invited. Certain without prejudice comments were exchange by the parties. The matter was then put to a vote, with Mr. Cottyn voting “No” and Mr. Coburn voting “Yes”.

Mr. Penner then asked if there was any further business to be raised. Mr. Cottyn and Mr. Coburn expressed dissatisfaction with positions taken by the other.

By agreement, the meeting was then adjourned.

At the June 18, 2018 meeting, Cottyn Construction’s Director voted “no”, including the proposal to arbitrate but, in court, asserted that it was open to arbitration on the issue identified.

Following notice on July 3, 2018 of its intention to do so, JR Ventures applied November 6, 2018 to the B.C. Supreme Court for a number of declarations and orders under sections 227 and 324 of B.C.’s Business Corporations Act, SBC 2002, c 57 (“BCA”).  JR Ventures alleged oppressive behaviour by Cottyn Construction and alleged deadlock justifying the liquidation of Andrex.

Steeves J. considered the terms of both sections of the BCA, contrasting each.  At para. 38, he summarized certain distinctions made by Mostyn v. Schmiing, 2011 BCSC 275, S.G. & S. Investments (1972) Ltd. v. Golden Boy Foods Inc., 1991 CanLII 5720 (BC CA) and Golden Pheasant Holding Corp. v. Synergy Corporate Management Ltd., 2011 BCSC 173  See also Oakley v. McDougall, 1987 CanLII 2658 (BC CA), cited at para. 58 of Golden Pheasant Holding Corp. v. Synergy Corporate Management Ltd.  One of those distinctions concerned whether the court required a finding of wrongful conduct for both oppression and for deadlock.  Despite that both sections 227 and 324 gave access to similar remedies, oppression requires a finding of wrongful conduct and deadlock does not.

At paras 42-85, Steeves J. evaluated the facts in support of CR Ventures’ claim of oppression and, for the reasons set out in those paras, concluded that there had been no violation of section 227.

Regarding deadlock under section 324 of the BCA, Steeves J. analysed the facts at paras 86-94 and concluded that deadlock existed.  

[91] The meeting on June 18, 2018 is, in my view, of considerable importance: the directors simply could not agree on anything. The agenda items were significant, including the proposal by Mr. Coburn to develop Lot 69 as quickly as reasonably possible or, in the alternative, bring to market the assets of Andrex as expeditiously as possible (agenda Items 1 and 2). The issue of the shareholders loans was also an important one (Item 4) as is the issue of the current account earning interest (Item 3). The directors could not even agree on the prudent idea of hiring an accountant. In my view, this meeting demonstrates that the operations of Andrex are deadlocked and the directors are unable to make even basic decisions about its operations.

[92] Item 4 of the agenda and minutes would have been an opportune time to address the arbitration provision in s. 15.14 of the articles of incorporation, set out above. As above, Mr. Coburn proposed that the issue of shareholder loans be referred to arbitration, but Mr. Cottyn voted against this. I acknowledge the general value of arbitration, but it seems to me that the parties had the opportunity to proceed that way at the June 2018 meeting, at least with respect to the balance of shareholder loans. The fact that Cottyn Construction opposed it then (after it was proposed by the petitioner) does not assist Cottyn Construction in asserting it now. It is, in fact, another example of deadlock and I do not see how arbitration could now be conducted with much credibility.

Neither party insisted on undertaking arbitration, despite Cottyn Construction’s change of position. 

The wording of the arbitration agreement required only “an equality of votes” in order to trigger the directors’ rights to undertake arbitration provided they “cannot settle their differences”.  It is unclear how the arbitrator would be asked to resolve the “differences” and the “equality of votes”.  Taken alone, the arbitration agreement at 15.14 cited above does not set out the law, rules, or set of rights and obligations by which the arbitrator can measure the appropriate resolution, unless the arbitrator is to apply the general guidelines set out elsewhere in the articles of incorporation or, more specifically, in the Part 15 “Proceedings of Directors”.

For a recent case involving deadlock and in which arbitration was not favoured as an appropriate format to operate a business, see Naimer v. Naimer, 2018 QCCS 5210 paras 154-160 and the Arbitration Matters note “Québec – arbitration not appropriate to conduct business or resolve operating disagreements”.  In particular, commenting on the efficacy of arbitration to take business decisions, Mr. Justice Steven W. Hamilton observed:

[160]   Arbitration is not an appropriate way to resolve conflicts as to business decisions. On what basis is an arbitrator to decide whether the company should expand into the U.S. market, whether it should do business with one supplier rather than another, or whether it should fire an employee? These issues by their nature are not arbitrable. Moreover, the delay involved in instituting the arbitration process each time there is a dispute at the level of the board is not appropriate.

In Naimer v. Naimer, Hamilton J. gave one of the directors a majority on the Board of Directors and thereby enabled the corporate entity to continue to operate.

In contrast, based on the facts before him involving CR Ventures and Cottyn Construction as shareholders in Andrex, Steeves J. issued a series of orders leading to an orderly liquidation of Andrex, as set out at para. 126.