



COURT OF APPEAL FOR ONTARIO

CITATION: König v. Hobza, 2014 ONCA 691

DATE: 20141009

DOCKET: C57156

Hoy A.C.J.O., Gillese and Lauwers JJ.A.

BETWEEN

Klaus-Peter König

Plaintiff (Respondent)

and

Antonin Hobza, John Douglas Laine, Kim H. Dobson,

John
    Anthony Chisholm also known as Jack Chisholm,

TJK Enterprises Limited
    and
1669051 Nova Scotia Limited

Defendants (
Appellants
)

Sarit E. Batner and Justin H. Nasseri, for the
    appellants

Ronald Flom, for the respondent

Heard: July 18, 2014

On appeal from the judgment of Justice Laurence A.
    Pattillo of the Superior Court of Justice, dated May 10, 2013, with reasons
    reported at 2013 ONSC 1060, and from the costs judgment, dated November 20,
    2013, with reasons reported at 2013 ONSC 5531.

Hoy A.C.J.O.:


I.

INTRODUCTION

[1]

The respondent, Klaus-Peter König, was a silent investor in the
    successful 1669051 Nova Scotia Limited, formerly East West Plastics &
    Electric Products Limited (East West). He was the only shareholder of East
    West not involved in its management and operation.

[2]

Among other things, the respondent claimed that Antonin Hobza, John
    Douglas Laine and Kim H. Dobson, and Jack Chisholm (the Managing Directors) 
    as officers and directors of East West and, through TJK Enterprises Limited
    (TJK), shareholders  awarded themselves excessive compensation over a period
    of 22 years. The respondent argued that this conduct breached his reasonable expectations
    and warranted an oppression remedy.

[3]

The trial judge agreed. He found the appellants East West, Hobza, Dobson
    and Laine (but not Chisholm, who had ceased to be involved with East West in
    November of 1997) jointly and severally liable for damages in the amount of
    $250,000 and prejudgment interest in the amount of $49,793.83. The trial judge
    also concluded that the appellants conduct warranted costs on a substantial
    indemnity scale, and awarded costs on that scale in the amount of $413,000,
    inclusive of disbursements and taxes.

[4]

The appellants main arguments on appeal are that the trial judge erred:
    (1) by fixing a precise amount as the total fair market value compensation for
    the Managing Directors in each year, in the face of what they say was unanimous
    expert evidence, which the trial judge accepted, that there is always a range
    of fair market compensation, and by failing to provide a basis or methodology
    for doing so; and (2) by failing to calculate the over-compensation on a net
    basis over the entire 22-year period at issue. Had the trial judge properly
    accepted that compensation at any point within the range was fair, and
    considered the Managing Directors compensation on a net basis over the entire
    22-year period, he would have concluded that the appellants had been overpaid
    by a much lesser amount. Indeed, when properly averaged over the full 22-year
    period at issue, the excess pay would have been so little that it would not
    have unfairly prejudiced or unfairly disregarded the respondents interests. Alternatively,
    it would have resulted in a much reduced damages award.

[5]

The appellants also argue that the trial judge erred in finding that the
    appellants conduct regarding financial disclosure was oppressive and in fixing
    costs on a substantial indemnity scale. Finally, they submit that if costs were
    properly assessed on a partial indemnity scale, judgment would not be more
    favourable than the appellants Rule 49
[1]
offer to settle the action for $300,000, inclusive of interest, plus partial
    indemnity costs. Accordingly this court must give effect to the cost
    consequences of Rule 49.10.

[6]

For the reasons that follow, I conclude that the trial judge erred by
    not calculating the Managing Directors over-compensation on a net basis over
    the entire 22-year period at issue and would accordingly reduce damages to $187,453.51,
    and prejudgement interest thereon to $37,336.12.  I would not interfere with
    the trial judges award of costs on a substantial indemnity scale. However,
    because I would reduce the quantum of damages, I would return the questions of
    the quantum of those costs and the cost consequences of Rule 49.10 to the trial
    judge for reconsideration. I would otherwise dismiss the appeal.

[7]

Below, I first outline the background of the respondents claim, the
    trial judges principle findings and the process by which the trial judge
    determined what fair market compensation would have been. I then address the
    appellants arguments in turn.

II.

BACKGROUND

[8]

The respondent König lives in Germany. He and Hobza became friends in
    1978, when Hobza worked in Germany at the respondents fathers company for a
    few months. After Hobza returned to Canada, they remained in touch and the
    respondent expressed interest in being involved in any business that Hobza
    might establish.

[9]

In 1985, Hobza, Dobson, Laine and Chisholm founded East West, a sign
    supply distribution company. They held their shares in East West through TJK.

[10]

The
    respondent and Hobza agreed that the respondent would invest $100,000 in East
    West and be entitled to a 10% interest in it. Hobza told the respondent that
    when East West made a profit, it would remain in the company or the respondent
    would receive a 10% share. The respondent asked that his name not appear on any
    papers showing his investment: the respondents father had friends at East
    Wests competitor. Accordingly, TJK held the respondents shares in trust for
    him. Dobson, Laine and Chisolm agreed to the respondents investment in East
    West.

[11]

Although
    there had been no discussion of the respondents money being a loan, the
    $100,000 he provided to Hobza was provided to East West as a shareholder loan 
    as were the lesser amounts advanced by the Managing Directors. The Managing
    Directors also guaranteed the payment of the operating loan in the range of
    $400,000 to $500,000 made to East West by its bank.

[12]

East
    West never held a shareholders meeting (until the sale of the business in
    2007) or a formal directors meeting. From the outset, Hobza, Dobson, Laine and
    (until he left East West in November of 1997) Chisholm ran East West. They
    spoke with each other daily and agreed on all major decisions.

[13]

The
    Managing Directors set their compensation yearly, in arrears, following the end
    of the fiscal year. In doing so, they considered revenues and expenses in the
    prior year, as well as East Wests tax position and bank covenants. By
    agreement, each received the same amount of compensation in each year. Total
    actual compensation paid ranged from $40,000 in 1986 ($10,000 to each of Dobza,
    Hobson, Laine and Chisholm) to a high of $1,650,000 in 2006 ($550,000 to each
    of Hobza, Dobson and Laine). As well, during the first few years of operation,
    East West repaid the shareholder loans advanced by the Managing Directors.

[14]

In
    1988, the Managing Directors signed a directors resolution (the 1988
    Resolution) declaring a bonus payable in the amount required to reduce the
    active business income of East West to $200,000 for the then fiscal year and
    all subsequent fiscal years. This ensured that East West would be taxed at the
    lower, small business rate of taxation.

[15]

From
    1986 to 1990, and in the 2003, 2006 and 2007 fiscal years, East Wests
    financial statements were audited. In the remaining years, its accountants
    provided a review engagement report only.

[16]

From
    1986 to 1992, East Wests financial statements disclosed the total compensation
    paid to the Managing Directors as a line item. Beginning with the year ended
    November 30, 1993, East West adopted a different practice, to avoid disclosing
    sensitive information to suppliers who requested copies of the financial
    statements. For the years ended November 30, 1993 and November 30, 1997, and
    for the three-month period ended February 28, 1998, compensation paid to the
    Managing Directors was instead detailed on a separate schedule, entitled
    Statement of Warehouse, Selling and Administrative Expenses, and not broken out
    in the financial statements. For the fiscal years ended November 30 1994, 1995
    and 1996, and fiscal years ended February 28, 1999, 2000 and 2001, a portion of
    the Managing Directors compensation was set out in the financial statements,
    and the balance was disclosed in the Statement of Warehouse, Selling and
    Administrative Expenses. For the fiscal years ended February 28, 2002 to 2006
    (February 29 in 2004), the entirety of the compensation was set out in the
    financial statements.

[17]

The
    respondent received the separate Statement of Warehouse, Selling and
    Administrative Expenses only for the fiscal years ended February 28, 2001 and
    2002. The trial judge found that the respondent only received financial
    information concerning the full compensation received by the Managing Directors
    for the period from 1993 to December 2000.

[18]

In
    November of 1997, Chisholm left East West, and East West purchased his interest
    in TJK and East West. As a result, the remaining shareholders percentage
    interests in East West increased  in the case of the respondent, from 10% to
    12.25%.

[19]

At
    para. 45 of his reasons, the trial judge found that:

[A]lmost from the time [the respondent] first received East
    Wests financial information, he asked questions of Hobza concerning the nature
    of his interest in East West and monies paid by East West to the Managing
    Directors. Further, as time went by and East West became more profitable, in addition
    to questions about what the Managing Directors were being paid, [the
    respondent] questioned why the profits of East West were not being distributed
    to the shareholders.

[20]

The
    respondent learned in 1990 that his $100,000 investment was being characterized
    as a loan, and not equity, but that he was nonetheless entitled to a 10%
    interest in East West. And, while some information was provided by East Wests
    accountant in 2000 regarding compensation in 1999 and 2000, it was not until
    March 2007 that East Wests auditors provided the respondent with a breakdown
    of the total compensation paid by East West to the Managing Directors from 1986
    to 2006. In response to his queries about why no dividends had been declared,
    the respondent was always told that East Wests bank would not permit it to pay
    dividends.
[2]

[21]

In
    early 2001, the respondent requested that East West repay his $100,000 loan,
    and by March 2002 it was repaid, without interest. The respondent also asked to
    transfer his shares to his company, König GmbH. His request was refused.

[22]

In
    late 2004, the respondent took issue with the level of compensation paid to the
    Managing Directors in the year ended February 29, 2004. The response was
    abrupt: he was advised that East West was a private company and it was not [his]
    business. The dialogue did not end. As noted above, it was not until March
    2007 that East Wests auditors provided the respondent with a complete
    breakdown of the total compensation paid by East West to the Managing Directors
    from 1986 to 2006.

[23]

East
    West was successful. Its revenues and gross profit grew in every year except
    1991. Between 1985 and 2007, it expanded from three branches and 13 employees
    (including the Managing Directors) to six branches and 130 employees. For the
    fiscal year ended February 28, 2007, sales were approximately $50.6 million,
    gross profit was $13,953,136 and net after-tax income was $1,544,125.

[24]

By
    early 2007, the parties had retained litigation counsel.

[25]

In
    June of 2007, East West sold its business to an arms length purchaser. The
    respondent received approximately $1.5 million in respect of his 12.25%
    interest. As a condition of the sale, Laine entered into an employment contract
    with the purchaser to be its president at an annual base salary of $170,000
    plus a discretionary bonus of up to 50% of base salary.

[26]

The
    respondent commenced this action against the appellants in 2008. He invoked the
    oppression remedy provisions of East Wests incorporating statute, the Nova
    Scotia
Companies Act
, R.S.N.S. 1989, c. 81 (the Act),
[3]
alleging that East Wests
    profits were stripped to the benefit of the Managing Directors and that such
    conduct was oppressive, unfairly prejudicial and unfairly disregarded the
    respondents interests as a shareholder of East West. He also alleged breach of
    trust, third-party breach of trust based on knowing receipt, and breach of
    fiduciary duty.

III.

THE TRIAL JUDGES KEY FINDINGS

[27]

The
    trial judge provided thorough reasons, 227 paragraphs in length. Here, by way
    of overview, I set out the trial judges key findings. Further below, I provide
    detail about how the trial judge determined fair market compensation for the
    Managing Directors.

[28]

The
    trial judge dismissed the respondents claims in breach of trust, third-party
    liability for breach of trust, and breach of fiduciary duty. However, he agreed
    that two aspects of the appellants conduct  the lack of financial disclosure
    and the excessive compensation  warranted an oppression remedy.

[29]

On
    financial disclosure, the trial judge found that from the outset of the
    relationship through to 2007, there was a pattern of non-disclosure or worse,
    wrong information by East West and Hobza towards [the respondent] as a
    shareholder (para. 87). There was no issue concerning financial disclosure
    from 1986 to 1992: the financial statements for those years included a
    breakdown of the compensation paid to the Managing Directors (para. 118).
    However, the failure to disclose the Managing Directors compensation to the
    respondent for the years between 1993 and 2000 constituted a breach of the
    respondents reasonable expectations as a shareholder by East West and the
    Managing Directors that was oppressive, unfairly prejudicial or unfairly
    disregarded the respondents interests as a shareholder (para. 121).

[30]

With
    respect to excessive compensation, the trial judge found that it was a
    reasonable expectation that the Managing Directors be paid a fair salary and
    bonus for the work they did, and that any net income remaining would either be
    retained in the corporation to be used for corporate purposes or paid to
    shareholders by way of dividend (para. 123). In the following chart (which
    refers to market survey evidence regarding executive compensation compiled by
    executive compensation experts Morneau Shepell, explained below) the trial
    judge  set out what he found the total fair market value compensation for the
    Managing Directors in each of the years in question to be as follows:



East West Fiscal
          Year

Total

Actual
          Compensation ($)

Morneau Shepell

50%

Morneau Shepell

75%

Total Fair
          Market Compensation ($)



1986

40,000

283,562

389,661

300,000



1987

200,000

271,414

401,884

325,000



1988

385,600

330,000

410,000

350,000



1989

192,000

342,215

423,941

360,000



1990

302,000

337,582

398,388

365,000



1991

240,000

351,506

416,809

375,000



1992

270,000

418,056

502,712

425,000



1993

312,000

399,568

481,421

425,000



1994

599,600

407,919

486,522

450,000



1995

672,000

431,107

521,474

500,000



1996

502,000

600,850

773,025

625,000



1997

556,000

542,300

653,250

650,000



1998

(3 months)

129,000

98,856

118,682

110,000



1999

980,500

414,475

514,725

500,000



2000

875,000

513,025

623,275

550,000



2001

743,700

525,475

734,050

625,000



2002

525,000

432,525

605,475

625,000



2003

630,000

552,625

767,333

650,000



2004

1,200,000

512,625

688,067

675,000



2005

1,500,000

559,800

703,550

700,000



2006

1,650,000

522,875

714,600

700,000



2007

807,150

564,700

802,267

750,000



Totals

13,311,550



11,035,000



[31]

On
    a net basis, the total amount paid by East West to the Managing Directors from
    1986 to 2007 exceeded the total fair market compensation for the period by
    $2,276,550 (para. 165). In the trial judges view, whether this constituted a
    breach of the respondents reasonable expectations and was oppressive, unfairly
    prejudicial or unfairly disregarded his interests, should be determined on a
    net basis, taking into account the deficiencies in compensation received as
    well as the excesses over the 22-year period at issue, consistent with the
    parties approach (paras. 168 and 171).

[32]

On
    the evidence, the trial judge determined that the claim should be broken into
    two periods: 1986-1992 and 1993-2007 (para. 172).

[33]

He
    concluded that the Managing Directors actions in setting compensation in the
    period between 1986 and 1992 was not a breach of the respondents reasonable
    expectations, and was not oppressive or unfairly prejudicial, and did not unfairly
    disregard his rights as a shareholder (para. 173). First, their compensation
    was only in excess of what was reasonable in 1988, and then only by $35,600
    (para. 175). On a net basis for 1986-1992, the Managing Directors received
    significantly less than the fair market compensation over that period. Second,
    the remuneration that the Managing Directors received was clearly set out in
    East Wests financial statements, which the respondent received (para. 176). Finally,
    the oppression remedy provisions in the Act did not come into force until July
    1991, and its provisions are not retrospective (para. 177).

[34]

However,
    the trial judge concluded that the excess compensation the Managing Directors
    received over the period between 1993 and 2007 was a breach of the respondents
    reasonable expectations as a shareholder and was unfairly prejudicial and
    unfairly disregarded the respondents interests as a shareholder (para. 186). The
    trial judge found that it was significantly in excess of what was fair and
    reasonable during the period (para. 180). And because the Managing Directors were
    shareholders, when they paid themselves excess compensation, it effectively
    amounted to a dividend (para. 182). The sole criteria they considered were
    reducing East Wests tax rate and East Wests covenants with its bank. No
    consideration was given to whether their compensation was fair and reasonable
    for the work they were doing (para. 183).

[35]

The
    trial judge indicated that he accepted the methodology of Steve Ranot, a
    partner with Marmer Penner Inc., business valuators and litigation accountants,
    for calculating damages (para. 194). On that methodology, the after-tax amount
    to East West of each excess or deficit in compensation for each year over the
    22-year period should be determined using the applicable tax rate. The
    respondent would be entitled to 10% of the net amount overpaid up to November
    30, 1997, when Chisholm left, and 12.25% thereafter, either in the form of
    dividends or as his share of retained earnings (para. 192).

[36]

However,
    the trial judge applied Mr. Ranots methodology with respect to the last 15
    years of the 22-year period, and used 12.25% for the entire period, on the
    basis that the net after-tax amount for the five years prior to 1997
    (Chisholms departure) results in a small deficit. On that basis, he concluded
    that the respondents damages were $250,000 (para. 195).

[37]

The
    trial judge found East West, Hobza, Dobson and Laine jointly and severally
    liable for the damages. Chisholm, however, was not liable: during the five
    years of the 15 year period between 1993 and 2007 that Chisholm was still with
    East West, the Managing Directors conduct in setting compensation was not
    oppressive or unfairly prejudicial (para. 196). On a net basis, total
    compensation for that five-year period was less than the total fair market
    compensation for the same period (para. 197).

IV.

HOW THE TRIAL JUDGE DETERMINED TOTAL FAIR MARKET COMPENSATION FOR THE
    MANAGING DIRECTORS

[38]

The
    appellants and the respondent called executive compensation experts to
    establish whether the amounts that East West paid the Managing Directors
    constituted fair market compensation.

[39]

While
    the appellants only take issue with the final step in the trial judges
    determination of fair market compensation  fixing specific amounts rather than
    accepting that anything within the 50th to 75th percentile range of the Morneau
    Shepell market survey was fair market compensation  an understanding of the
    process undertaken by the trial judge sets the stage for this final step in his
    analysis. It also demonstrates that the trial judge considered the experts
    evidence in a careful and balanced fashion.

[40]

The
    parties experts compiled market survey evidence about what organizations paid
    individuals in comparable positions. The trial judge preferred the market
    survey evidence of the respondents expert, Michel Dubé of Morneau Shepell,
    over that of the Managing Directors expert: Mr. Dubé specifically compiled the
    survey data for each year utilizing companies that had similar sales to East
    West for each year in question (para. 153).

[41]

The
    trial judge considered whether long-term incentive programs (LTIPs) should be
    included in determining total compensation. Including LTIPs in the comparators
    would justify higher cash compensation for the Managing Directors. He accepted
    the evidence of Mr. Dubé over that of the appellants experts, Paul Gryglewicz
    and David Crane, that it was not appropriate to include LTIPs in determining
    total compensation for the Managing Directors.

[42]

The
    trial judge rejected the evidence of the respondents expert, Mr. Ranot, that
    Dobson and Chisholm should be classified as middle management for the purpose
    of determining compensation. He concluded that all of the Managing Directors
    should be treated as holding executive level positions (paras. 155 and 156).

[43]

He
    also rejected the evidence of Mr. Ranot that, based on the compensation that
    the purchaser was to pay Laine, which fell between the 25th and 50th
    percentiles, an average of the 25th and 50th percentiles should be used to
    determine fair market value compensation. The trial judge reasoned that Laines
    compensation is only one data point and not indicative of the market. Moreover,
    his compensation did not arise out of a traditional employee/employer
    negotiation (paras. 150, 159-60).

[44]

Instead,
    the trial judge accepted the evidence of the appellants expert, Mr. Crane,
    that fair market value compensation for the Managing Directors should fall
    somewhere between the 50th and 75 percentile of Morneau Shepells survey
    results for each year (para. 161).

[45]

The
    trial judge then made the determination with which the appellants take issue.
    He wrote that what, within that range, constitutes fair market compensation will
    depend in part on the internal equities of East West, and outlined factors
    (discussed below) that he considered in fixing a point within that range.

V.

ISSUES ON APPEAL

(1)

Did the trial judge err by fixing fair market compensation for each
    year?

[46]

The
    appellants argue that the trial judge erred by generating precise figures for
    fair market compensation for each year, instead of following what the
    appellants say was the unanimous opinion of the experts, which he accepted,
    that there is always a range for fair market compensation. They say that as
    long as the Managing Directors compensation was at some point within the 50th
    to 75th percentile in Morneau Shepells market survey  the range and survey
    accepted by the trial judge  it was reasonable. Further, they say the trial
    judge compounded his error in principle by failing to provide any basis or
    methodology for his determination of what fair and reasonable compensation
    would have been.

[47]

I
    reject both arguments.

[48]

As
    to the first argument, it cannot fairly be said that the experts unanimously
    testified that compensation is reasonable simply if it falls anywhere within
    the identified percentile range of the accepted market survey results for the
    benchmarked position (in this case, the Morneau Shepell survey utilized by Mr. Dubé)
    for a year. The trial judges approach of treating the range merely as a
    starting point in determining fair compensation is supported by the record.

[49]

Mr.
    Dubé testified that market is by far not the only factor to consider in
    considering appropriate compensation for an executive. Internal equity is
    just as important. And Mr. Ranot  whom the trial judge accepted as an expert
    in business valuation, noting that business valuation included the assessment
    of fair market compensation for executives  similarly testified that the
    market survey results are only one factor in assessing the appropriateness of
    executive compensation.

[50]

The
    trial judge had evidence before him as to what internal equity meant, and what
    other relevant factors were.

[51]

The
    trial judge accepted Mr. Ranots evidence on the methodology for the
    calculation of damages. Given that, the following exchange in the
    cross-examination of Mr. Ranot, coupled with Mr. Dubés and Mr. Ranots evidence
    referred to above, is in my view dispositive of the appellants first argument:

Q. And will you agree with me that the concept of market
    compensation and executive compensation is just really not that precise?

A. Yes.

Q. And that there is a broad range of what is fair and
    appropriate in any give case for the compensation of an executive?

A. Yes, theres a range. We tried to take the midpoint of that
    range to arrive at a conclusion.

Q. I understand that, but in taking the midpoint of the
    range what you are saying is to the extent the directors in this case had a
    different place in the range, they are wronged and the excess is damages?
    Thats your opinion, right?

A. Yes.
[Emphasis
    added.]

[52]

In
    other words, the trial judge had before him expert evidence that he should not
    simply accept a range and should make a specific determination of fair market
    compensation.

[53]

Nor
    do I accept that the trial judge provided no analysis as to how he reached the
    numbers within the 50th and 75th percentile of Morneau Shepells survey results
    for each year that he did, and that his determinations accordingly cannot
    stand. He did so at paras. 161-163 of his reasons:

Where exactly the compensation will fall in that range for each
    year will depend in part on the internal equities in respect of East West which
    include the financial success of East West compared to the year prior and
    overall and the compensation paid to the Managing Directors in the prior year.
    I have also had regard to the compensation information for East Wests senior
    employees for the years 2004 to 2007 as contained in Exhibit 17 [the answer to
    undertakings].

In considering prior years compensation, it is apparent from
    the Morneau Shepell survey results that in some years the compensation numbers
    are less than the prior year. In such situations, where East Wests gross
    profit increased over the prior year, it is my view that the Managing
    Directors compensation should not fall below that of the previous year.

Further, while total compensation paid by East West to the
    Managing Directors will decrease beginning in 1998 as a result of Chisholms
    departure, in my view it does not mean that it should increase by an amount
    equal to Chisholms full compensation. The remaining three Managing Directors
    are entitled to some additional compensation over and above what they would
    otherwise have been entitled to given that they assumed Chisholms
    responsibilities. While Laine assumed many of Chisholms responsibilities, the
    increase is split equally between the three Managing Directors given their
    agreement.

[54]

All
    agreed that setting executive compensation is a complex and imprecise exercise:
    as Mr. Ranot testified, it is an art and not a science. In my view, the trial
    judge provided satisfactory reasons as to how, in conducting this imprecise
    exercise, he arrived at specific amounts for each year.

[55]

As
    I note below, this is not a case of a trial judge supplanting directors
    business judgment as to what, within a range, was fair and reasonable executive
    compensation. Here, effectively no business judgement was exercised. The trial
    judge engaged in the exercise that the Managing Directors had failed to
    undertake.

(2)

Did the trial judge err by not approaching the calculations on a net
    basis over the full 22-year period?

[56]

As
    the trial judge acknowledged at para. 124 of his reasons, the central issue in
    [the] action was whether the compensation paid to the Managing Directors from
    1986 to 2007 was fair and reasonable. The respondent and his expert, Mr. Ranot,
    calculated the respondents claim on a net basis over the entire 22-year
    period. I agree with the appellants that the trial judge erred in principle by
    not calculating whether, and by what amount, the Managing Directors were
    over-compensated by reference to the entire 22-year period at issue. By not
    doing so, the trial judge failed to consider the payments in later years in
    light of the under-compensation and give the Managing Directors credit for the
    amount by which they were under-compensated in East Wests early years, and as
    a result, overstated the respondents damages.

[57]

East
    West began as a small start-up. Its Managing Directors were under-compensated
    in its early years. Their higher rates of compensation when East West matured
    would in part effectively have recompensed them for lack of compensation during
    the early years.

[58]

The
    trial judge appreciated this. Several passages in his reasons highlight the
    importance of calculating excess compensation on a net basis over the full
    22-year period:

[168] The remuneration of East Wests Managing Directors was
    tied to the companies cash flow. As can be seen from [the compensation table],
    in the early years of East Wests operation, reduced revenues resulted in
    compensation below fair market. The compensation received was what East West
    could afford at the time. Even as revenues grew, there were years when the
    Managing Directors compensation was below what I have concluded was the fair
    market compensation for that year. Where, as here, the company was otherwise well
    run and profitable year after year, in my view it is more appropriate to
    consider the issue on a net basis taking into account the deficiencies in
    compensation received as well as the excesses.



[175]  [O]n a net basis, for the years 1986 to 1992 the Managing
    Directors received significantly less compensation than the fair market
    compensation over the same period.



[185] [B]y approaching the issue of oppression in the way in
    which I have, I have taken into account the years the Managing Directors compensation
    was below fair market.



[192] Mr. Ranot presented [the respondents] damage claim on a
    cumulative or net basis for the entire 22 year period.



[194] While I do not accept Mr. Ranots determination of fair
    market compensation, I am of the view that his methodology in calculating
    damages is appropriate and should be followed in this case.

[59]

And
    Mr. Ranot explained that his methodology for calculating damages, which the
    trial judge indicated that he accepted, involved making up for the bad years.
    (TR, vol 1, p. 452).

[60]

Despite
    this, the trial judge ultimately calculated damages only over the 15-year
    period from 1993 to 2007, excluding the six-year period after East West was
    founded during which the Managing Directors were significantly under-compensated.

[61]

Respectfully,
    the trial judges reasons in this one respect are flawed. Essentially, he
    concluded that the Managing Directors conduct in relation to compensation
    during that period did not breach the respondents reasonable expectations 
    they were not over-compensated during that period and their compensation was disclosed
     and was not oppressive or unfairly prejudicial, and did not unfairly
    disregard the respondents interests as a shareholder. Moreover, he reasoned,
    the oppression remedy provisions of the Act did not come into force until July
    1991 and were not retrospective.

[62]

Focussing
    on whether the Managing Directors conduct in relation to compensation during
    the six-year period after East West was founded supports an oppression remedy
    is a red herring. This reasoning ignores the importance of assessing the
    respondents reasonable expectations, and the Managing Directors compensation,
    in the period from 1993 to 2007 in light of the Managing Directors
    acknowledged under-compensation during the prior period. It amounts to an error
    in principle. Accordingly, in my view, the trial judges damages calculation
    cannot stand.

[63]

Using
    the trial judges methodology for calculating damages (described at paras. 35
    and 36 above), but crediting the Managing Directors for their
    under-compensation prior to 1993, I would reduce the damages to $187,453.51. In
    doing so, I use the trial judges determination (in the chart at para. 164 of
    his reasons, reproduced at para. 30 above) of compensation paid and fair market
    compensation during each of the 22 years, and employ the tax rates used by him
    in Schedule A of his reasons to determine the after tax amount of the deficit
    or excess in compensation paid in each such year.  My calculation of this
    amount is reproduced at Schedule A of these reasons. It aligns with that
    included in Schedule D of the appellants factum.

[64]

The
    fact that I arrive at a lesser amount than the trial judge does not warrant
    disturbing his conclusion that the payment of the excess compensation breached
    the respondents reasonable expectations, and unfairly prejudiced or unfairly
    disregarded the respondents interests. Indeed, had damages been assessed in
    the manner that the appellants argue they should have, I would still conclude
    that the Managing Directors had breached the respondents reasonable
    expectations and that this breach justified an oppression remedy.

[65]

Both
    quantum and process are relevant. The trial judge clearly found that in fixing
    their compensation, the Managing Directors did not consider whether it was fair
    and reasonable for the work done. In other words, they did not consider the
    respondents interests. This is not a case of a trial judge supplanting directors
    business judgment as to what was fair and reasonable executive compensation for
    the work done. Here, effectively no business judgement was exercised.

(3)

Did the trial judge err in finding that the appellants failure to make
    financial disclosure warranted an oppression remedy, or in awarding substantial
    indemnity costs?

[66]

The
    appellants focus on whether their conduct regarding financial disclosure was
    oppressive because that conduct played a role in the trial judges subsequent
    decision to fix costs on a substantial indemnity scale. Because of the
    interplay between these two final issues, I consider them together.

[67]

As
    noted above, the trial judge found that the failure to disclose the Managing
    Directors compensation to the respondent for the period between 1993 and 2000
    constituted a breach of the respondents reasonable expectations as a
    shareholder by East West that was oppressive, unfairly prejudicial or unfairly
    disregarded the respondents interests as a shareholder.

[68]

The
    appellants advance two main arguments about the characterization of the
    appellants non-disclosure.

[69]

First,
    the appellants say that the trial judge mischaracterized the evidence of their
    non-disclosure when concluding that it breached the respondents reasonable
    expectations. They argue that the trial judge failed to have regard to his own
    findings that:

·

The respondent received financial statements from East West every
    year;

·

The respondent and Hobza corresponded regularly and met annually;

·

Discussions took place between East Wests and the respondents
    professional advisors;

·

East Wests accountant wrote to the respondents advisor in 2000,
    satisfying the respondents inquiries regarding 1999 and 2000; and

·

It was not the case that management compensation was not broken
    out in the financial statements with a view to concealing information from the
    respondent.

[70]

The
    appellants say that in light of these findings, the trial judge committed a
    palpable and overriding error in finding that the respondents reasonable
    expectations were breached.

[71]

I
    am not persuaded that the trial judge erred. In my view, the findings the
    appellants point to are not inconsistent with the trial judges conclusion
    that, in all of the circumstances, the respondent had a reasonable expectation
    that the financial information he was provided with would disclose the
    compensation paid to the Managing Directors. The respondent was the only
    shareholder who was not also a director and officer; he had been told that
    whenever East West made a profit, it would remain in the company or he would
    receive 10% of it; over the 22-year period no distributions had been paid to
    shareholders; the financial statements the respondent was provided with in the
    early years disclosed the Managing Directors compensation as a line item; the
    respondent had made inquiries about the level of compensation paid to the Managing
    Directors; and some of the financial statements he was provided with were
    misleading because they only disclosed part of the Managing Directors
    compensation. I reject this first argument.

[72]

Second,
    the appellants say that
BCE Inc. v. 1976 Debentureholders
, 2008 SCC 69,
    [2008] 3 S.C.R. 560, makes clear that the conduct required to ground a finding
    of oppression, unfair prejudice or unfair disregard are different, and the
    trial judge did not specify which of these he found. Moreover, they argue, the
    conduct at issue did not rise to any of those levels. At the highest, it only
    amounted to the appellants sometimes refusing to respond to the respondents
    requests for information during the last few years. And even if the appellants
    conduct were seen as unfairly disregarding the respondents interests, it did
    not result in compensable harm.

[73]

It
    can safely be said that the trial judge found the appellants conduct to be
    oppressive. In his costs endorsement following trial, the trial judge described
    his decision as finding that the appellants conduct in awarding themselves
    excess compensation during the period 1993 to 2007, coupled with their conduct
    towards [the respondent] was oppressive and unfairly prejudicial. He
    characterized that conduct as egregious, outrageous and reprehensible,
    justifying an award of substantial indemnity costs.

[74]

The
    conduct on which the trial judge focussed began in 2005:

[13] Beginning with Hobzas angry response in early 2005 to [the
    respondents] December 23, 2004 email that stated that the [appellants]
    compensation is not your business!, the [appellants] and particularly Hobza,
    along with East Wests lawyer [Robin] McDonald, deliberately took steps to
    prevent [the respondent] from receiving information about their salaries.



[14] When [the respondent] raised the issue, rather than deal
    with it, they refused to address it. They forced [the respondent] to retain
    legal counsel and ultimately start an action to recover from them monies that
    they improperly received.

[75]

I
    reject the appellants argument that because the trial judge did not invoke the
    descriptors egregious, outrageous and reprehensible in his trial reasons, his
    costs endorsement is inconsistent with his findings at trial, and his award of
    substantial indemnity costs accordingly cannot stand. Where on the range of
    conduct covered by the oppression remedy the non-disclosure fell became
    relevant only when faced with the task of fixing costs. Properly viewed, the costs
    endorsement supplements the trial reasons.

[76]

Moreover,
    it is clear from his costs decision that the trial judge considered the
    non-disclosure together with the payment of the excess compensation as
together
warranting substantial indemnity costs. It does not matter that the
    non-disclosure in and of itself did not result in compensable harm.

[77]

Therefore,
    the final  question, before turning to the costs awarded by the trial judge, is
    whether the trial judge erred in principle or made a palpable and overriding
    error of fact in concluding that the non-disclosure conduct at issue, combined
    with the payment of excess compensation in circumstances where the Managing
    Directors had no regard to whether the compensation paid was fair and
    reasonable, amounted to oppression. I am not persuaded that the trial judge
    erred. ,

[78]

At
    para. 104 of his reasons, the trial judge refers to
BCE
and properly
    instructed himself as to the varying scale of wrongful conduct reflected in the
    terms oppression, unfairly prejudicial and unfairly disregards  with
    oppression, a wrong of the most serious sort at one end, and unfair
    disregard at the other.
[4]


[79]

And
    as this court has held, whether a shareholder has a reasonable expectation, and
    whether the actions of a corporation are oppressive, unfairly prejudicial to or
    unfairly disregard the interests of a shareholder are essentially questions of
    fact:
Casurina Ltd. Partnership v. Rio Algom Ltd.
(2004), 40 B.L.R.
    (3d) 112 (Ont. C.A.), at para. 24. The trial judge makes a fully-supported
    finding of deliberate high-handed conduct: the refusal to provide information
    to the respondent about compensation paid to the Managing Directors when asked.

[80]

Nor
    am I persuaded that there is a basis to interfere with the trial judges award
    of costs on a substantial indemnity scale.  This court will interfere with an
    award of substantial indemnity costs only if it is satisfied that the trial
    judge erred in principle or that the costs award is plainly wrong:
Ford
    Motor Co. of Canada v. Ontario (Municipal Employees Retirement Board)
(2006)
, 17 B.L.R. (4th) 169 (Ont. C.A.),
    at para. 12.

[81]

The
    trial judge properly instructed himself that a finding of oppression does not
    always attract substantial indemnity costs, and, having characterized the
    appellants conduct as outrageous, egregious and reprehensible, determined that
    their conduct was sufficient to justify an award of substantial indemnity
    costs.

[82]

The
    appellants argue that the trial judge failed to consider a number of
    significant factors that weighed heavily against a substantial costs award:

·

They made good faith efforts to settle the action, a factor taken
    into account in
Harmer v. McNeely Engineering Consultants Ltd
., [1997]
    O.J. No. 4886 (Gen. Div.) at para. 10;

·

The money that they improperly paid to themselves was overwhelmingly
    theirs, whether paid by dividend or executive compensation;

·

The respondent profited significantly overall from his investment
    in East West; and

·

As they say the trial judge found, their conduct was informed by
    advice from East Wests professional advisors.

[83]

I
    take no issue with the first three factors the appellants advance. However, I
    will comment on the final factor. As expressed, it suggests stronger reliance
    on professional advisors than the trial judge found. The trial judge did not
    find that East Wests professional advisors told the Managing Directors that
    they need not provide copies of the Statement of Warehouse, Selling and
    Administrative Expenses to the respondent, or respond to the respondents
    requests for information about compensation. And while East Wests accountants
    may have explained that its active business income could be reduced to a level
    that would be taxable at the small business rate by paying management bonuses,
    the trial judge did not find that East Wests professional advisors told the
    Managing Directors that, in the circumstances, this was a proper means for
    determining their compensation.

[84]

In
    any event, a trial judge cannot be expected to address every argument in his or
    her costs endorsement. The trial judges costs decision is 13 pages in length,
    and he set out the reasons why he determined that substantial indemnity costs
    were appropriate in this case. I am not satisfied that the trial judges decision
    to award substantial indemnity costs is plainly wrong.

[85]

Although
    I would not interfere with the trial judges award of costs on a substantial
    indemnity scale, I would order that the questions of the quantum of costs and
    the cost consequences of Rule 49.10 be remitted to the trial judge for
    reconsideration.

[86]

In
    fixing costs, the trial judge specifically considered the amount recovered by
    the respondent. The reasonableness of the quantum must be reconsidered in light
    of the reduced recovery. While this court may reassess the quantum of
    substantial indemnity costs awarded when it reduces the amount of damages (see
340812
    Ontario Ltd. v. Canadian National Railway Co.
(1997), 149 D.L.R. (4th) 575
    ;
Pirani v. Esmail
, 2014 ONCA 145, 94 E.T.R. (3d) 1), as I explain below,
    in this case the reduction may have cost consequences under Rule 49.10    At a
    minimum, it highlights the reasonableness of the appellants settlement offer (
Pirani
at para. 77).  For these reasons, I would return these questions to the
    trial judge.

[87]

As
    noted in the introduction to these reasons, the appellants made an offer to
    settle the action for $300,000 inclusive of interest, plus partial indemnity
    costs. The trial judges award of damages ($250,000) and prejudgment interest ($49,793.83)
    was in total very slightly less than $300,000. He rejected the appellants
    argument that the judgment was therefore not as favourable as or less
    favourable than the offer to settle, explaining at para. 22 of his Costs
    Endorsement that in comparing the terms of a judgment, all of the terms of the
    offer must be considered, including the provisions for costs:
Rooney
    (Litigation Guardian of) v. Graham
(2001), 53 O.R. (3d) 685 (C.A.).

[88]

The
    trial judge concluded, at para. 23 of his Costs Endorsement:

[the respondent] is entitled to substantial indemnity costs of
    the action. The [appellants] conduct which gives rise to the higher cost award
    occurred prior to the commencement of the action and therefore the higher cost
    scale should have been included as part of the Offer. Given the Offer was made
    on the eve of trial, the difference between partial indemnity and substantial
    indemnity costs was significant from a monetary perspective. In my view,
    therefore, the judgement was more favourable than the Offer and accordingly,
    the [appellants] cannot rely on the cost consequences of Rule 49.

[89]

A
    judgment that provides for substantial indemnity costs will not always be as
    favourable or more favourable than a settlement offer that provides for partial
    indemnity costs. As the trial judge notes, when the settlement offer was made
    is relevant. However, the difference between the principal amount in the offer
    and principal amount of the judgment is also relevant. One only need imagine an
    offer to settle for $100,000, plus prejudgment interest and partial indemnity
    costs, and a judgment for $10,000, and substantial indemnity costs. Here, as
    noted above, the amount of damages awarded by the trial judge, and prejudgment
    interest thereon, nearly equalled the amount of the settlement offer. The
    $300,000 settlement offer exceeds the damages that I would award ($187,453.51)
    and prejudgment interest thereon ($37,336.12) by approximately $75,000. This is
    an important factor.

VI.

DISPOSITION AND COSTS

[90]

I
    would accordingly allow the appeal, in part, and reduce damages to $187,453.51,
    and prejudgment interest thereon to $37,336.12 (3.3% per annum, for 2,203
    days). I would not disturb the award of costs on a substantial indemnity scale,
    but would return the questions of the quantum of those costs, and the cost
    consequences of Rule 49.10 to the trial judge for reconsideration, in light of
    the reduced damages award.

RELEASED:

OCT -9 2014                                    Alexandra
    Hoy A.C.J.O.

AH                                                   I
    agree E.E. Gillese J.A.

I
    agree P. Lauwers J.A.


Schedule A



Fiscal Year

Compensation Paid

Fair Market Compensation

Excess (Deficit) Before Tax

Tax Rate

Excess (Deficit)    After Tax



1986

$40,000.00

$300,000.00

-$260,000.00

44.69%

-$143,806.00



1987

$200,000.00

$325,000.00

-$125,000.00

42.98%

-$71,275.00



1988

$385,600.00

$350,000.00

$35,600.00

40.55%

$21,164.20



1989

$192,000.00

$360,000.00

-$168,000.00

39.08%

-$102,345.60



1990

$302,000.00

$365,000.00

-$63,000.00

38.82%

-$38,543.40



1991

$240,000.00

$375,000.00

-$135,000.00

38.25%

-$83,362.50



1992

$270,000.00

$425,000.00

-$155,000.00

38.11%

-$95,929.50



1993

$312,000.00

$425,000.00

-$113,000.00

36.55%

-$71,698.50



1994

$599,600.00

$450,000.00

$149,600.00

35.58%

$96,372.32



1995

$672,000.00

$500,000.00

$172,000.00

35.82%

$110,389.60



1996

$502,000.00

$625,000.00

-$123,000.00

35.89%

-$78,855.30



1997

$556,000.00

$650,000.00

-$94,000.00

35.89%

-$60,263.40



1998

(3 months)

$129,000.00

$110,000.00

$19,000.00

35.89%

$12,180.90



1999

$980,500.00

$500,000.00

$480,500.00

35.86%

$308,192.70



2000

$875,000.00

$550,000.00

$325,000.00

35.52%

$209,560.00



2001

$743,700.00

$625,000.00

$118,700.00

35.12%

$77,012.56



2002

$525,000.00

$625,000.00

-$100,000.00

34.12%

-$65,880.00



2003

$630,000.00

$650,000.00

-$20,000.00

34.00%

-$13,200.00



2004

$1,200,000.00

$675,000.00

$525,000.00

33.36%

$349,860.00



2005

$1,500,000.00

$700,000.00

$800,000.00

35.36%

$517,120.00



2006

$1,650,000.00

$700,000.00

$950,000.00

35.11%

$616,455.00



2007

$807,150.00

$750,000.00

$57,150.00

35.11%

$37,084.64



Total

$13,311,550.00


$2,276,550.00


$1,530,232.72



Respondents
          Share (12.25%)


$278,877.38


$187,453.51







[1]

Rules of Civil
    Procedure
, R.R.O. 1990, Reg. 194.



[2]
The trial judge expressed doubt that this was the case in the period beginning
    in the mid-1990s.



[3]
Section 5 of the Third Schedule of the Act provides the following:

(1) A
    complainant may apply to the court for an order under this Section.

(2) If,
    upon an application under subsection (1) of this Section, the court is
    satisfied that in respect of a company or any of its affiliates

(a) any act or omission of the company or any of its
    affiliates effects a result;

(b) he business or affairs of the company or any of
    its affiliates are or have been carried on or conducted in a manner; or

(c) the powers of the directors of the company or any
    of its affiliates are or have been exercised in a manner,

that it
    is oppressive or unfairly prejudicial to or that unfairly disregards the
    interests of any security holder, creditor, director or officer, the court may
    make an order to rectify the matters complained of.



[4]

BCE

explains, at para. 92, that
    oppression connotes harsh and abusive conduct and is reserved for wrongs of
    the most serious sort. On the other hand:

[93] Unfair prejudice is
    generally seen as involving conduct less offensive than oppression. Examples
    include squeezing out a minority shareholder, failing to disclose related party
    transactions, changing corporate structure to drastically alter debt ratios,
    adopting a poison pill to prevent a takeover bid, paying dividends without a
    formal declaration, preferring some shareholders with management fees and
    paying directors fees higher than the industry norm.

[94] Unfair disregard is
    viewed as the least serious of the three injuries, or wrongs. Examples include
    favouring a director by failing to properly prosecute claims, improperly
    reducing a shareholders dividend, or failing to deliver property belonging to
    the claimant. [Citations omitted.]


