In Ford v. GMP Securities LP, 2024 ONSC 271, the Court partially dismissed an action for issue estoppel, relying on a 2022 arbitral award that had been rendered as a result of a dispute between a group of shareholders (of which the plaintiff was a part) and an entity that the defendants (investment dealer and senior investment banker) had represented in a reverse take-over process. The defendants were found to be privies of the parties to the previous arbitration, even though they were not parties themselves. The only claims remaining in the Ontario action were the ones that had not been raised or decided in the previous arbitration.
Background to dispute – The plaintiff, Mr. Ford, was one of a number of minority shareholders in Double Road Holdings LLC (“DRH”). In 2016, Curaleaf Inc. (“Curaleaf”) acquired a 51% interest in DRH and thereby became the majority shareholder. The minority shareholders sought to exchange their shares in DRH for shares in Curaleaf, which ignited a dispute over the applicable exchange ratio between the DRH shares and the sought-after Curaleaf shares. In these negotiations, Mr. Ford represented the minority shareholders, as he held the largest investment among them.
In 2018, while these negotiations were ongoing, the minority shareholders learned that Curaleaf was planning a reverse take-over (“RTO”) of a publicly-traded cannabis company, and it required full control of DRH in order to do so. GMP Securities LP (“GMP”) was Curaleaf’s lead agent for the RTO, and Mr. Ottoway was the lead investment banker for GMP.
Curaleaf and the minority shareholders came to an agreement to resolve the exchange ratio dispute, as part of which it was agreed that Curaleaf would issue its shares to the DRH minority shareholders, so that they could participate in the benefits of the RTO (the “Stipulation of Settlement”). Part of the deal struck was a Lock-Up Agreement, which prohibited the minority shareholders from selling or disposing of their new shares in Curaleaf for a 180-day period after the RTO closed without GMP’s consent (the “Lock-up Period”). This deal was reached through negotiations in which Mr. Ford (for himself and the other DRH minority shareholders) and Mr. Ottoway (for Curaleaf) were directly involved.
A number of issues arose with the deal, including with the Lock-up Agreement. Some minority shareholders, including Mr. Ford, sought to sell their Curaleaf shares during the Lock-up Period, which GMP denied. Mr. Ford and the other minority shareholders opposed GMP’s refusal to consent to the sale of their shares. Mr. Ford argued that, as a result of GMP’s refusal to lift the lock-up, Mr. Ford had to sell his Curaleaf shares as soon as he could after the Lock-Up Period Lifted, for less than the prevailing market price, resulting in losses.
The Ontario action and arbitration – Mr. Ford commenced an action in Ontario in 2019 against GMP and Mr. Ottoway, alleging breach of contract, negligence, negligent misrepresentation, breach of fiduciary duty, and breach of trust. The parties exchanged pleadings and productions, but the action stalled in early 2022.
The minority shareholders, including Mr. Ford, also commenced an arbitration against Curaleaf in the US in early 2020, alleging fraudulent intent, breach of the Stipulation of Settlement and Lock-Up Agreement, and breach of the covenant of good faith. GMP and Mr. Ottoway were not parties to the arbitration. Mr. Ford was deposed and testified as a key witness. GMP and Mr. Ottoway were also deposed and testified at the hearing. The arbitrator issued an award in 2022, dismissing the minority shareholders’ claims against Curaleaf (the “Award”).
After the Award was issued, Mr. Ford filed a motion in the Ontario action to amend the statement of claim to add GMP’s parent company as a defendant. GMP and Mr. Ottoway filed a motion to amend their defence to plead issue estoppel and abuse of process, and to dismiss the action on the basis of issue estoppel and abuse of process.
In the decision at issue, the Court addressed all three motions.
(1) Defendants’ motion to amend defence to include issue estoppel and abuse of process – The Court granted the motion to amend the defence. The Court found that there was no evidence of prejudice to the plaintiff if the amendments were permitted.
(2) Defendant’s motion to dismiss the action for issue estoppel and abuse of process as a result of the Award – The Court applied the test for issue estoppel, citing Angle v. MNR, [1975] 2 SCR. 248, at p. 254:
(a) the same question has been decided;
(b) the judicial decision which is said to create the estoppel was final; and
(c) the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies.
The defendants’ motion to dismiss the action turned on the first and third steps of this test. The Court turned first to determining whether Mr. Ford was a party to the US arbitration, and whether GMP and Mr. Ottoway were parties or privies to Curaleaf in the US arbitration.
The Court found that Mr. Ford was a party in the arbitration. While he argued that he did not have any authority in the litigation decisions, any say in the litigation strategy, or any meaningful voice in the proceedings, the Court found that Mr. Ford had admitted that all minority shareholders, himself included, were parties in the US arbitration. Mr. Ford had claimed damages in that US arbitration and would have shared in any success with the other minority shareholders, if the arbitration had been successful. The Court found Mr. Ford bound to the result of the Award.
With respect to GMP and Mr. Ottoway, it was clear that they were not parties to the US arbitration. However, they were found to be privies of Curaleaf in the context of the US arbitration. Mr. Ottoway was the lead investment banker for GMP, which itself was Curaleaf’s agent on the RTO. Mr. Ottoway held a central role in the negotiations at issue in the US arbitration, and his evidence played a critical role in the Arbitrator’s reasoning and conclusions. Further, had the Arbitrator made any findings that Mr. Ottoway had made material misrepresentations, this would have bound Mr. Ottoway and GMP in these Ontario proceedings.
The Court then determined whether the facts and questions at issue in the Ontario action were the same as those decided in the US arbitration. The Court found that the US arbitration and the Ontario action pleaded the same material facts. The minority shareholders claimed in the US arbitration breach of contract, fraudulent misrepresentation and breach of the implied covenant of good faith. Mr. Ford claimed in the Ontario action breach of contract, negligence, negligent misrepresentation and breach of fiduciary duty/breach of trust. The Court reviewed each cause of action and found: (i) the breach of contract claims in both proceedings were founded on the same material allegations, and so issue estoppel applied; (ii) the negligence and negligent misrepresentation claims shared the material facts common to the claim for fraudulent misrepresentation raised in the US arbitration, and was barred by issue estoppel; and (iii) the claims for breach of fiduciary duty and breach of trust, and the material facts underlying them, were not resolved in the Award.
In the result, the only issues remaining to be decided in the Ontario action were breach of fiduciary duty and breach of trust.
(3) Plaintiff’s motion to add the parent company – The Court dismissed the motion to add GMP’s parent company as a defendant, which Mr. Ford argued was necessary because of a perceived insufficiency of assets of GMP to pay a judgment rendered against it. The Court found there was insufficient evidence to support this allegation and the motion was premature, given there was no judgment against GMP. The Court also found this motion was untenable in light of the foundational principle that the identity of a corporation is distinct from its shareholders.
Contributor’s Notes
This case highlights the risks of parallel proceedings between same or similar parties, where the material facts underlying the proceedings are the same.
While it is not clear in the case, there appears to have been some sort of arbitration agreement in effect as between the minority shareholders and Curaleaf, but no such arbitration agreement as between Mr. Ford and GMP. Despite the fact that GMP and Mr. Ottoway were not named as parties in the arbitration, this directly impacted Mr. Ford’s ability to proceed against them because the doctrine of issue estoppel broadly captures previous judicial decisions as between parties and their privies.
This serves as a reminder that parties must carefully determine the proper parties, and proper forum, for their claims, as multiple parallel proceedings may impact the ability of one or some of those claims to be heard.