



COURT OF APPEAL FOR ONTARIO

CITATION: Extreme Venture Partners Fund I LP
    v. Varma, 2021 ONCA 853

DATE: 20211201

DOCKET: C67057, C67062, C67364 & C67376

Hourigan, Huscroft and Coroza
    JJ.A.

BETWEEN

DOCKET: C67057

Extreme
    Venture Partners Fund I LP, EVP GP Inc.,

Ravinder
    Kumar Sharma, Imran Bashir, and Kenneth Teslia

Plaintiffs/Defendants by
    Counterclaim

(Respondents)

and

Amar
    Varma, Sundeep Madra, Varma Holdco Inc.,

Madra
    Holdco Inc.
,
Chamath Palihapitiya, El Investco I
    Inc.
,

Extreme
    Venture Partners Annex Fund I LP, and EVP GP Annex Fund I Inc.

Defendants/
Plaintiffs by
    Counterclaim

(
Appellants
/
Respondents
)

AND BETWEEN

DOCKET: C67062

Extreme
    Venture Partners Fund I LP, EVP GP Inc.,

Ravinder
    Kumar Sharma, Imran Bashir, and Kenneth Teslia

Plaintiffs/Defendants by
    Counterclaim

(Respondents/Appellants by
    Cross-Appeal)

and

Amar
    Varma, Sundeep Madra, Varma Holdco Inc.,

Madra
    Holdco Inc.
, Chamath Palihapitiya, El Investco I
    Inc.,

Extreme
    Venture Partners Annex Fund I LP,

EVP GP Annex
    Fund I Inc., Cassels Brock & Blackwell LLP, and

Seven
    Hills Group LLC

Defendants/Plaintiffs by
    Counterclaim

(
Appellants/Respondents by Cross-Appeal
)

AND BETWEEN

DOCKET: C67364

Extreme
    Venture Partners Fund I LP, EVP GP Inc.,

Ravinder
    Kumar Sharma, Imran Bashir, and Kenneth Teslia

Plaintiffs/Defendants by
    Counterclaim

(Respondents)

and

Amar
    Varma, Sundeep Madra, Varma Holdco Inc.,

Madra
    Holdco Inc.
, Chamath Palihapitiya, El Investco I
    Inc.,

Extreme
    Venture Partners Annex Fund I LP,

EVP GP Annex
    Fund I Inc., Cassels Brock & Blackwell LLP, and

Seven
    Hills Group LLC

Defendants/Plaintiffs by
    Counterclaim

(
Appellants
)

AND BETWEEN

DOCKET: C67376

Extreme
    Venture Partners Fund I LP, EVP GP Inc.,

Ravinder
    Kumar Sharma, Imran Bashir And Kenneth Teslia

Plaintiffs (Respondents)

and

Amar Varma,
    Sundeep Madra, Varma Holdco Inc.,

Madra Holdco
    Inc.,
Chamath Palihapitiya, El Investco I Inc.
,

Extreme
    Venture Partners Annex Fund I LP,

EVP GP Annex
    Fund I Inc., Cassels Brock & Blackwell LLP, and

Seven
    Hills Group LLC

Defendants (
Appellants
)

Jonathan Lisus, Crawford Smith, Nadia
    Campion, Vlad Calina and John Carlo Mastrangelo, for the appellants Amar Varma,
    Sundeep Mandra, Varma Holdco Inc. and Madra Holdco Inc.

Andrew Brodkin, David E. Lederman and
    Daniel Cappe, for the appellants Chamath Palihapitiya and El Investco 1 Inc.

Won J. Kim, Megan B. McPhee, Aris
    Gyamfi and Rachael Sider, for the respondents

Heard: October 4-5, 2021 by video conference

On appeal from the orders of Justice Barbara
    A. Conway of the Superior Court of Justice, dated May 14, 2019, July 24, 2019, and
    February 4, 2020, and the judgment of Justice Barbara A. Conway of the Superior
    Court of Justice, dated May 14, 2019.

Hourigan J.A.:

Part I - Introduction

[1]

After a five-week trial, the trial judge
    released thorough and compelling reasons that weaved a narrative of corporate
    malfeasance, avarice, and deceit in the technology sector. The appeals before
    this court raise important issues about remedies and, more fundamentally,
    acceptable standards of conduct in corporate Canada.

[2]

I begin with an introduction of the key players.
    Amar Varma and Sundeep Madra, along with their respective holding companies,
    Varma Holdco Inc. (Varma Holdco) and Madra Holdco Inc. (Madra Holdco), are
    the "Varma/Madra Appellants." Chamath Palihapitiya and his holding
    company, El Investco 1 Inc. (Investco), are the Palihapitiya Appellants.
    They are collectively referred to as the "Appellants". Extreme
    Venture Partners Fund I LP, EVP GP Inc., Ravinder Kumar Sharma, Imran Bashir
    and Kenneth Teslia are the "Respondents".

[3]

At trial, the Respondents asserted two central
    claims: (1) the Annex Fund Claim, alleging that the Varma/Madra Appellants
    were liable for breach of fiduciary duty and breach of contract regarding the
    establishment of a competing business, and (2) the Xtreme Labs Claim,
    alleging that the Varma/Madra Appellants were liable for breach of fiduciary
    duty, breach of contract, and conspiracy and that the Palihapitiya Appellants
    were liable in tort for knowing assistance in breach of fiduciary duty,
    inducing breach of contract, and conspiracy, all concerning the sale of Xtreme
    Labs Inc. (Xtreme Labs).

[4]

The trial judge found in favour of the
    Respondents and ordered that: (1) on the Annex Fund Claim, Varma and Madra are
    liable for $250,000 in punitive damages, and (2) on the Xtreme Labs Claim, the
    Palihapitiya Appellants and the Varma/Madra Appellants are jointly and
    severally liable for $3.36 million (U.S.) in damages and $12.33 million (U.S.)
    in disgorgement of profits. She also made additional orders regarding the
    applicable exchange rate and prejudgment interest.

[5]

The two groups of appellants take different
    approaches to this appeal. The Varma/Madra Appellants do not challenge the
    factual findings made by the trial judge. Instead, in their written materials,
    these appellants raise several alleged legal errors, which were narrowed in
    their oral submissions to two issues: (i) the calculation of damages on the
    sale of Xtreme Labs, and (ii) the validity of an amendment to the statement of
    claim to seek disgorgement regarding the sale of Hatch Labs Inc. (Hatch Labs)
    and the disgorgement order ultimately made by the trial judge.

[6]

In these reasons, I will explain why I am not
    persuaded by either of these arguments or the other grounds of appeal that were
    not addressed in oral argument. In summary, the trial judge made a sensible
    damages calculation, grounded in the evidence, which does not require appellate
    intervention. She also reasonably exercised her discretion in permitting the
    amendment of the claim and making the disgorgement order. There is also no
    basis to interfere with the trial judges conclusions on the issues raised by the
    Appellants in their written material but not addressed in their oral
    submissions.

[7]

The Palihapitiya Appellants adopt the legal
    arguments advanced by the Varma/Madra Appellants. They further submit that the
    trial judge erred in imposing joint and several liability for her disgorgement
    order. Relying on English authority, they say that a knowing assistant should
    not face the same liability as a faithless fiduciary. While that position is
    contrary to some Canadian jurisprudence, I am prepared to accept that there
    might be circumstances where a knowing assistant should have their liability
    limited. However, this is not such a case. Here, the Palihapitiya Appellants
    were active participants in the core wrongful conduct as well as its primary
    beneficiaries. There is no equitable reason why their liability should be
    limited.

[8]

The Palihapitiya Appellants also offer a
    double-barrelled attack on the trial judge's factual findings as part of their
    submission that she erred in finding that Palihapitiya had knowingly assisted
    in the breaches of fiduciary duty. First, they argue that she made a series of
    palpable and overriding errors of fact. Second, they submit that their conduct
    was well within the boundaries of ethical and legal corporate behaviour and
    that the trial judge's findings of misconduct are based on her own idiosyncratic
    moral values. These appellants argue that permitting the trial judge's
    findings to stand would result in confusion in the Canadian corporate world as
    business people would be held to unknowable standards of conduct that conflict
    with their legitimate business interests.

[9]

The principal problem with the first part of the
    Palihapitiya Appellants' position is that it is dependent upon the Appellants'
    credibility. The trial judge rightly found the Appellants to be incredible
    witnesses whose sworn testimony was routinely contradicted by the written
    record. Moreover, Palihapitiya had an unusual habit in his public and private
    communications of bragging about significant aspects of his alleged misbehaviour
    but then inexplicably denying any misconduct on the witness stand.

[10]

The second part of the submission is a straw man
    argument. The trial judge's conclusions were not grounded in her idiosyncratic
    moral values, nor did she require Palihapitiya to compromise his legitimate
    business interests. Instead, she applied well-established tort and corporate
    law principles to his conduct and made findings of illegality supported by the
    record. Counsel's submission that the Appellants' unethical and illegal
    behaviour should be excused as standard examples of corporate conduct is
    meritless. The trial judge, an experienced commercial judge, saw through this
    argument and reached the correct conclusion. In my view, if the Appellants'
    conduct was not the subject of adverse findings by her, the court would have
    communicated a message that there are few, if any, limits to corporate
    malfeasance. Such a message would have caused significant uncertainty in the
    Canadian business world.

[11]

The final legal issue is the cross-appeal. Ms.
    McPhee, on behalf of the Respondents, submits that the trial judge was correct
    in making an order for disgorgement. Further, she argues that the trial judge
    was right in finding that the order should act as a deterrent to similar
    behaviour in keeping with the prophylactic purpose of disgorgement. However,
    Ms. McPhee submits that the order made will have no deterrent effect because
    the Appellants are obliged to disgorge to the Respondents only what they would
    otherwise be entitled to receive had they not breached their fiduciary duty. I
    am persuaded by that argument and agree that the disgorgement order should be
    increased to achieve its deterrent purpose.

[12]

The question raised by the panel in oral
    argument was whether a prophylactic disgorgement order necessarily requires the
    disgorgement of all ill-gotten gains. The Respondents argue that it should.
    However, counsel for the Appellants chose to make no submissions on the point.
    My view is that courts should have flexibility in making a prophylactic
    disgorgement order, and thus there should not be an automatic rule for the
    disgorgement of all profits in all circumstances. However, on the facts of this
    case, where the Appellants have engaged in a litany of brazenly illegal acts and
    where their counsel elected not to offer any submissions on the point, I would
    order disgorgement of the total amount of the profits.

Part II  Background Facts

[13]

The following high-level factual overview will
    provide the necessary context to consider the issues in these appeals.

(a)

Fund I

[14]

Extreme Venture Partners Fund I LP (Fund I) is
    a venture capital fund that provides seed capital to start-up technology
    companies. It was established in November 2007 by the following parties in this
    litigation: Sharma, Bashir, Teslia, Varma and Madra.

[15]

Fund I was registered as a limited partnership,
    and its general partner, EVP GP Inc. ("EVP GP"), was incorporated.
    The shares of EVP GP were owned personally by Sharma, Bashir and Teslia, as
    well by Varma Holdco and Madra Holdco.

[16]

EVP GP managed the business of Fund I. The board
    of directors of EVP GP consisted of Sharma, Bashir, Teslia, Varma and Madra. In
    addition, Varma and Madra served as managing directors of EVP GP, were
    responsible for all aspects of the day-to-day operations of Fund I, and
    recommended companies for investment to the Investment Committee.

[17]

Fund I grew rapidly, but by late 2010, tensions had
    started to develop in the relationship between Sharma, Bashir and Teslia on the
    one hand and Varma and Madra on the other. Varma and Madra testified at trial
    that they were doing all the work to grow the businesses and were not being
    adequately recognized or compensated for their efforts.

(b)

Annex Fund

[18]

In November 2010, Madra was on a plane to
    California and ran into the managing director of Northleaf Capital Partners
    (Northleaf). They began talking about establishing a fund together, with
    Northleaf as the primary limited partner. Varma, who had been looking into
    pitching Northleaf for Fund I with Sharma, joined these conversations at a
    later meeting. Madra and Varma did not tell Sharma, Bashir or Teslia about the
    meetings.

[19]

In December 2011, Madra and Varma established a
    second fund named the Annex Fund. Madra and Varma did not tell Sharma, Bashir
    or Teslia about the establishment of the Annex Fund. Instead, Madra and Varma surreptitiously
    obtained $5 million in financing from Northleaf. After the Annex Fund was
    established, Madra and Varma provided Northleaf with confidential information
    about Fund I's portfolio and investment strategy. As a result, the Annex Fund
    invested in six of Fund I's most successful portfolio companies and operated
    for two years until it closed in 2013. The foregoing facts were the basis of
    the Annex Fund Claim.

(c)

Xtreme Labs

[20]

One of Fund Is investments was Xtreme Labs, a
    mobile software development lab business co-founded by Madra and Varma. The original
    equity of Extreme Labs, less 5% held by Go Pivotal Inc. (Pivotal), was split equally
    among Sharma, Bashir, Teslia, Varma Holdco and Madra Holdco. Fund I later acquired
    an interest in the company. Madra and Varma were also the managing directors
    and co-CEOs of Xtreme Labs and were responsible for its day-to-day operations.

[21]

By 2011, the parties had started to explore
    options to sell Xtreme Labs. Despite the prior years rapid growth, Madra and
    Varma presented projections that estimated the companys growth would slow,
    which surprised and disappointed the Xtreme Labs board. They advised the board,
    which included Sharma, Bashir and Teslia, that the projected revenues for the
    current fiscal year would be $12 million (U.S.).The initial efforts to sell
    Xtreme Labs were unsuccessful, and the board members had different opinions about
    the company's value.

[22]

On February 1, 2012, Palihapitiya contacted
    Madra to talk about buying Xtreme Labs. Palihapitiya is a prominent Silicon
    Valley entrepreneur, a founding senior executive at Facebook, and a good friend
    of Varma and Madra. On March 20, Palihapitiya, Varma and Madra had dinner
    together in Toronto and then went to Varmas apartment afterward. Together,
    they prepared an offer by Palihapitiya to purchase the company that would allow
    Varma and Madra to stay on with the company after the sale. The offer was
    forwarded to the rest of the board the next day, but Varma and Madra did not tell
    the board that they had been with Palihapitiya the previous evening, working on
    the offer.

[23]

After the offer and a counteroffer, as well as
    an independent valuation by Seven Hills Group LLC (Seven Hills) that Varma
    and Madra oversaw, the Respondents agreed to sell their shares in Xtreme Labs
    to Palihapitiyas holding company, Investco. The purchase price was based on an
    enterprise value for Xtreme Labs of $18 million (U.S.). The selling
    shareholders received $12 million (U.S.) for their shares of Xtreme Labs. Varma
    and Madra and the Xtreme Labs employees received $6 million (U.S.) in the
    ongoing equity of the company.

[24]

In October 2013, Palihapitiya negotiated the
    sale of shares of Xtreme Labs to Pivotal for $60 million (U.S.). Prior to the
    sale, Palihapitiya, Varma and Madra carved certain assets out of Xtreme Labs
    and transferred them to a holding company of which they were the sole
    shareholders, 2390184 Ontario Inc. (239 Ontario). One of those assets was a
    13% equity interest in Hatch Labs, which had developed the mobile dating app
    Tinder. In March 2014, 239 Ontario sold its stake in Hatch Labs to a large
    American corporation, InterActive Corp. (IAC), for $30 million (U.S.).

Part III  Proceedings Below

[25]

The Respondents sued the Appellants, asserting
    various causes of action, including breach of fiduciary duty, breach of
    contract, inducing breach of fiduciary duty and inducing breach of contract.

(a)

Standing

[26]

At trial, the Appellants noted that Varma and
    Madra were managing directors of EVP GP and not Fund I. Therefore, they
    submitted, Fund I had no standing to claim a breach of fiduciary duty. Further,
    they argued that EVP GP had no standing to assert such a claim because it had
    not suffered harm. In addition, the Appellants position was that in the Xtreme
    Labs sale, Varma and Madra were acting exclusively in their role as Xtreme Labs
    directors, not EVP GP directors. Thus, they argued that they owed no duty to
    any of the Respondents.

[27]

The trial judge rejected these submissions. She observed
    that "[i]n this case, Fund I is alleging that it suffered harm
as a
    result of
the breach of fiduciary duty owed by Amar and Sunny to its
    general partner, EVP GP, which was responsible for managing the business of
    Fund I. The trial judge also noted that EVP GP holds all the property of the
    limited partnership. Therefore, to the extent that EVP GP received any damages,
    those damages would be the property of Fund I. Under either rationale, the
    damages would be receivable by Fund I, the party that alleged the loss. Additionally,
    she found that Varma and Madra were directors of both EVP GP and Xtreme Labs,
    and as directors of EVP GP, owed fiduciary duties to that company in
    connection with the sale of Xtreme Labs."

(b)

Annex Fund Claim

[28]

Sharma, Bashir and Teslia testified that they
    trusted Varma and Madra as managing directors of Fund I. Their evidence was that
    the plan from the outset was to operate a series of funds under the Extreme
    Venture Partners brand, with Varma and Madra taking a lead role. If Varma and
    Madra started a new fund independently, the expectation was they would do so
    transparently and properly by buying out the Respondents interests in EVP GP
    under the EVP GP Shareholders' Agreement. Varma and Madra, on the other hand,
    testified they were entitled to pursue the second fund on their own, without
    the Respondents involvement.

[29]

The trial judge accepted the Respondents'
    account and found that Varma and Madra had breached their duties of honesty,
    loyalty, and confidentiality owed by virtue of being directors of EVP GP. However,
    the trial judge dismissed the Respondents passing off claim.

[30]

While the Respondents alleged reputational
    damages as part of the Annex Fund Claim, the trial judge ruled such damages were
    not made out. In addition, Fund I sought compensatory damages for lost opportunities,
    but the trial judge rejected that claim. However, the trial judge found that
    punitive damages were appropriate on the basis that Varma and Madras conduct
    was most deserving of sanction and required denunciation. Accordingly, she
    awarded $250,000 punitive damages against each of Varma and Madra, payable to
    Fund I.

(c)

Xtreme Labs Claim

(i)      General Findings

[31]

Palihapitiya, Varma, and Madra denied that they
    conspired on the Xtreme Labs acquisition. However, the trial judge rejected
    their evidence as incredible, in part because it was contradicted by the
    written record. Instead, she found that they worked together and coordinated
    their efforts to present Palihapitiya's offer to buy the company at the board
    meeting in March 2012. Further, Varma and Madra hid this coordination and
    pressured the board to accept the offer. They acted out of self-interest as Palihapitiyas
    offer to buy the company was their opportunity to increase their compensation
    and equity in the business.

[32]

The trial judge also found that Varma and Madra
    worked with Palihapitiya to facilitate his acquisition of Xtreme Labs at a
    discounted purchase price by: (a) understating the companys revenue
    projections, (b) advancing a low earnings multiple, and (c) concealing the
    companys equity interest in Hatch Labs.

(ii)     Causes of Action

[33]

The trial judge carefully considered each of the
    constituent elements of the causes of action asserted.

[34]

Regarding the claim of breach of fiduciary duty,
    Fund I alleged at trial that Varma and Madra breached their fiduciary duties as
    directors of Fund Is general partner, EVP GP, in connection with the Xtreme
    Labs sale transaction. The trial judge agreed. She found that they were in a
    conflict of interest and were not transparent with the EVP GP board. The board
    was entitled from the outset to know the role Varma and Madra were playing with
    respect to Palihapitiyas offer. In addition, Varma and Madra breached their
    duty of loyalty in various ways, such as by providing confidential information
    to Palihapitiya before the sale had closed.

[35]

On the claim of breach of contract/breach of
    warranty, the trial judge found that Varma and Madra breached their warranties
    in the Xtreme Labs sale contract. In addition, their conduct constituted a
    breach of contract by Varma Holdco and Madra Holdco of their confidentiality
    obligations.

[36]

Palihapitiya testified that he did not know what
    information was exchanged and what communications Varma and Madra had with
    other board members. Accordingly, he denied that he provided knowing assistance
    to any breach of fiduciary duty. His evidence was found to be contradicted by
    his email to Madra on March 16, instructing Madra what to tell the board about
    the multiplier on a recent sale regarding Pivotal. It was also contradicted by
    the ongoing communications between the co-conspirators as to what was
    transpiring among board members. The trial judge found that Palihapitiya worked
    together with Varma and Madra on an offer that included a Pivotal multiplier
    figure that they knew was understated. Palihapitiya sent this offer to Varma
    and Madra to present to the board and, by extension, knowingly participated in
    their advancing an understated multiplier figure to the board. Palihapitiya
    therefore assisted Varma and Madra in breaching their duty of honesty.

[37]

The trial judge also concluded that Palihapitiya
    knowingly assisted Varma and Madra in breaching their duty of honesty
    concerning Hatch Labs/Tinder. Varma and Madra did not disclose the existence of
    the equity interest in Hatch Labs or the launch of Tinder to Fund I before
    closing. Palihapitiya was found to have known about Hatch Labs/Tinder and,
    along with Varma and Madra, to have closed the transaction based on this
    concealed information. In so doing, Palihapitiya knowingly assisted Varma and
    Madra in the breach of their fiduciary duty.

[38]

The elements of the tort of inducing breach of
    contract were met as Palihapitiya induced Varma Holdco and Madra Holdco to
    breach their contractual obligations under the Xtreme Labs Shareholders
    Agreement. Palihapitiya intended to and did procure the breach of the Xtreme
    Labs Shareholders Agreement when he asked Varma and Madra to provide him with confidential
    information from Xtreme Labs before signing the letter of intent in May 2012.

[39]

Concerning the conspiracy claim, the trial judge
    relied on, among other things, Palihapitiya's talk at a Town Hall held with the
    employees of Xtreme Labs shortly after the sale and his speech at the Collision
    Conference in 2014 to find that Palihapitiya, Varma and Madra were acting in
    concert. The requisite unlawful conduct included the breaches of fiduciary
    duty, contract and warranty, as well as Palihapitiya's knowing assistance in
    the breach of fiduciary duties and his inducement of the breach of the Xtreme Labs
    Shareholders' Agreement. This misconduct was directed towards the Respondents
    and caused damages.

(iii)    Remedies

[40]

The trial judge found that Fund I, Sharma and
    Bashir sold their shares of Xtreme Labs based on the wrongful conduct of
    Palihapitiya, Varma and Madra. Had Fund I, Sharma and Bashir been given
    accurate information about the financial position and prospects of Xtreme Labs,
    they would have had the opportunity to negotiate a sale to Palihapitiya or
    another buyer based on this accurate information or to continue to hold their
    shares.

[41]

Using actual revenues of $17.2 million (U.S.)
    for FY 2012, the trial judge multiplied that figure by 1.5, resulting in a
    revised purchase price of $25.8 million (U.S.). Since Fund I, Sharma and Bashir
    owned 64.56% of the shares of Xtreme Labs, the trial judge concluded that they
    would receive 64.56% of $17.20 million (U.S.), the latter figure referring to
    the cash amount they would have received on the new purchase price. In other
    words, they would have received $3.36 million (U.S.) more than what they did
    receive on the sale of the company. Further, because Palihapitiya, Varma,
    Madra, Investco, Varma Holdco and Madra Holdco were all participants in the
    acquisition of Xtreme Labs that was based on the breaches of fiduciary and
    contractual duties and all played a role in the conspiracy, she concluded that
    they should be jointly and severally responsible for the $3.36 (U.S.) million
    in losses.

[42]

Regarding Hatch Labs, while the Respondents
    initially claimed damages for the undervalued share price and lost opportunity,
    during their closing submissions they sought to amend their claim to elect
    disgorgement. After considering the Appellants' submissions on prejudice, the
    trial judge granted leave to amend the claim. She found no non-compensable
    prejudice in granting the amendment, as it was simply another remedy being
    asserted and would not take the Appellants by surprise.

[43]

At the time of the sale to Palihapitiya (through
    Investco), Fund I owned 41.82% of the shares of Xtreme Labs and therefore had a
    41.82% indirect interest in the Hatch Labs equity. One year later,
    Palihapitiya, Varma and Madra transferred the Hatch Labs equity to their
    holding company, 239 Ontario. The shareholders of 239 Ontario were Investco
    (50%), Varma and Madra (25% each). Six months later, 239 Ontario sold the Hatch
    Labs equity to IAC for $30 million (U.S.).

[44]

According to the trial judge, by concealing the
    existence of the Hatch Labs equity, Varma and Madra, working with Palihapitiya/Investco,
    deprived Fund I of the opportunity to take it into account on the sale of its
    shares of Xtreme Labs, to renegotiate the terms of sale, or to decide not to
    sell its shares of Xtreme Labs at that time. Further, as a direct result of
    this concealment, Varma, Madra and Palihapitiya /Investco were able to profit
    from Fund Is interest in the Hatch Labs equity. Accordingly, the trial judge
    found that they should not be entitled to retain the profits attributable to
    their wrongdoing. A disgorgement order was required to serve a deterrent
    purpose. However, she found that the order should only apply to the profits
    that corresponded to Fund Is 41.82% interest in the Hatch Labs equity.

(iv)    Exchange Rate and Prejudgment
    Interest

[45]

The trial judge issued supplementary reasons for
    judgment regarding the exchange rate and prejudgment interest applicable to the
    awards she made in her primary reasons for judgment.

[46]

Orders payable in a foreign currency are subject
    to s. 121(1) of the
Courts of Justice Act
, R.S.O. 1990, c. C.43 (
CJA
).
    The default rule is that the applicable exchange rate to be used is the rate on
    the day before payment is received by the judgment creditor. However, s. 121(3)
    of the
CJA
gives the court the discretion to apply a different
    exchange rate date if it considers using the rate on the day before payment to
    be inequitable.

[47]

The Appellants submitted that the trial judge
    should exercise her discretion to use the exchange rate that existed on the
    date of the transactions in question because the current exchange rate reflected
    a significantly weakened Canadian dollar. Further, the Appellants argued that
    because the Respondents' expert used the date of the transactions in his report
    for currency conversion, the Respondents were estopped from asserting a right
    to the current exchange rate.

[48]

The trial judge found that the Appellants had
    not met their onus of establishing why she should depart from the usual rule
    regarding the exchange rate. She observed that the s. 121(3) discretion is
    often exercised with a view to preventing inequity and making plaintiffs whole.
    Here, however, choosing the transaction dates with a more favourable exchange
    rate in favour of the Appellants would allow them to benefit from their
    wrongful conduct at the expense of the Respondents. Further, she found that the
    Respondents did not rely on their expert report in closing submissions.

[49]

Regarding prejudgment interest on the Xtreme
    Labs Claim, the parties used the same formula and the same rate of 1.3%. The
    only issue was the starting date. The Respondents claimed prejudgment interest
    on the full amount from August 15, 2012. This was the date the Xtreme Labs sale
    closed and, they submitted, the date the cause of action arose. The Appellants agreed
    that August 15, 2012 was the date for the Xtreme Labs sale damages but
    submitted that the loss arising from the Hatch Labs sale only occurred on April
    3, 2014, the date when they first received profits from the sale that closed on
    March 11, 2014.

[50]

The trial judge ruled in favour of the
    Respondents, finding that the Appellants were improperly equating the remedy of
    disgorgement with the date that the cause of action arose. Disgorgement of
    profits was the remedy for Varma and Madras breach of fiduciary duty and
    Palihapitiya/Investco's knowing assistance concerning the concealment of Xtreme
    Labs' equity interest in Hatch Labs. The cause of action arose with the
    concealment of this asset when the Appellants purchased the shares of Xtreme
    Labs on August 15, 2012. Therefore, the trial judge concluded that this was the
    date the cause of action arose and the date from which prejudgment interest
    should be calculated.

Part IV  Analysis

(a)

Damages on Sale of Xtreme Labs (Excluding Hatch
    Labs)

[51]

The Appellants make three submissions regarding
    the award of damages on the sale of Xtreme Labs. I am not persuaded by any of
    these arguments.

[52]

First, they submit that the damages award lacked
    an evidentiary foundation. In setting a revised purchase price of $25.8 million
    (U.S.) and then calculating damages on that basis, they say that the trial
    judge took an extraordinary step in crafting her own damages theory. According
    to the Appellants, the trial judge erred in failing to accept the experts
    evidence, absent any cogent reason, given that both parties experts agreed
    there were no damages.

[53]

The jurisprudence recognizes that trial judges
    are not held to a standard of perfection in making damages awards. Appellate
    courts will not interfere with reasonable damages awards where they have an
    evidentiary basis, as damages cannot always be calculated with mathematical precision.
    Sometimes the trial judge must do the best they can in the circumstances:
Penvidic
    v. International Nickel
, [1976] 1 S.C.R. 267, at 280. An appellate court
    should interfere with a trial judges damages assessment only if it is tainted
    by an error in principle, or is unreasonably high or low:
Whitefish Lake
    Band of Indians v. Canada (Attorney General)
, 2007 ONCA 744, 87 O.R.
    (3d) 321, at para. 28. See also
1758704 Ontario Inc. v. Priest
,
    2021 ONCA 588, at para. 70;
Southwind v. Canada
, 2021 SCC 28, 459
    D.L.R. (4th) 1, at paras. 153-60.

[54]

I am satisfied that there is no basis for
    interference with the trial judges damages calculation. She was not obliged to
    accept the evidence of the expert witnesses on damages. The trial judge reasonably
    calculated the damages, basing her calculations on the actual revenues for FY 2012
    and the fact that the Respondents were amenable to selling at a 1.5 multiplier.
    This award aimed to put the Respondents in the position they would have been in
    had they been given correct information regarding the revenues of Xtreme Labs.

[55]

Second, the Appellants submit that the trial
    judge erred in ignoring the lack of evidence of a buyer at a higher price. Their
    position is that there was no evidence that a $25.8 million purchase price
    could have been achieved but for their alleged misconduct. They note as well that
    there was no suggestion that Palihapitiya, others in his group of buyers or
    anyone else, would have paid that price.

[56]

This submission ignores the critical fact that
    the misconduct of the Appellants prevented the company from being properly marketed,
    as the correct underlying revenue and other information was concealed by the
    Appellants and thus could not be presented to potential buyers. Moreover, the
    trial judge found that the Respondents were deprived of the opportunity to sell
    the company or retain their shares and sell at a higher value later. It should
    be remembered that Xtreme Labs was sold at a much higher value just over one
    year later.

[57]

Finally, the Appellants argue that the
    Respondents were awarded loss of chance damages that were not claimed or argued
    at trial. I disagree. While the Respondents changed the methodology of their
    damages calculation during the course of the trial, they consistently sought
    damages on the sale of Xtreme Labs. They argued that as a result of the
    Appellants' misconduct, they did not obtain a fair price on the sale of the
    company. The trial judges damages calculation is responsive to that claim.

(b)

Amendment to the Statement of Claim

[58]

The Appellants submit that the trial judge erred
    in allowing the Respondents to amend their statement of claim after trial to
    include a claim for disgorgement. They argue that the presumptive prejudice of
    late-stage amendments means the party seeking the amendment bears the burden of
    establishing the absence

of irremediable prejudice. According to the
    Appellants, the trial judge reversed this burden, requiring the Appellants to
    show prejudice. Further, they note that the Respondents never ended up amending
    their claim formally, so the trial judge made a finding of liability and
    awarded substantial damages on a theory that was not pleaded. Counsel for the
    Varma/Madra Appellants submitted in oral argument that the correct course is to
    order a new trial on the issue of disgorgement so that his clients may adduce
    further evidence to respond to this claim. I would not give effect to this
    argument.

[59]

Initially, the Respondents claimed damages for
    the losses they suffered in selling their shares of Xtreme Labs to Palihapitiya
    at an undervalued price. They also claimed damages for lost opportunity
    regarding Hatch Labs due to the concealment of Xtreme Labs' 13% equity interest
    in that company. However, due to errors in their expert's report, they were
    forced to abandon the latter claim. The Respondents raised disgorgement of the
    profits from the Hatch Labs sale during closing submissions, and the trial
    judge commented that they appeared to be trying to amend their claim to seek
    new relief.

[60]

The Appellants opposed the amendment, arguing
    that it would cause non-compensable prejudice because they would have conducted
    the trial differently if they had known about a claim for disgorgement of
    profits. After considering the Respondents submissions, the trial judge gave
    reasons granting leave to amend the claim to seek disgorgement of profits for
    Hatch
Labs
. She concluded that there was no non-compensable prejudice, that disgorgement
    was simply another remedy being sought, and that the Appellants would not be
    taken by surprise in any of the substantive allegations or amounts claimed. Further,
    the trial judge also found that most of the evidence concerning profits was in
    the Appellants possession or control.

[61]

The Appellants were then given an opportunity to
    request an adjournment and/or present further evidence and make additional
    submissions. On their return to court ten days later, the Appellants advised
    that they maintained their position that they had suffered non-compensable
    prejudice and that leave to amend should not have been granted.  They
    advised the court that they would not be seeking an adjournment and would not
    be tendering additional evidence or making further submissions on the
    Hatch
Labs
issue.

[62]

The trial judge was correct in finding that
    there was no prejudice to the Appellants. They have not articulated for this
    court what substantial new evidence they might call at the new trial they are
    requesting. My view is that they have not done so because there is no new
    evidence. They knew at trial that there was an allegation that Varma and Madra
    had hidden Xtreme Labs equity interest in Hatch Labs. The defence proffered
    was twofold: (i) they did not know about the interest in Tinder, and (ii) the
    gains made on the investment were based entirely on a fortuitous series of
    events that occurred after the closing of the sale. Evidence was tendered in
    support of these positions. It is reasonable to infer that the same evidence
    would be presented in a new trial on disgorgement. In any event, the Appellants
    were given an opportunity to either lead further evidence or seek an
    adjournment. They declined both options. That was a strategic choice, and the
    Appellants must live with the consequences of their choice.

[63]

The fact that the pleading was not amended is of
    no moment. Rule 26.06 provides that 
[w]here a pleading
    is amended at the trial, and the amendment is made on the face of the record,
    an order need not be taken out and the pleading as amended need not be filed or
    served unless the court orders otherwise
:
Rules of
    Civil Procedure
, R.R.O. 1990, Reg. 194. In the present case, the pleading
    was effectively amended at trial through the motion judge's order. I am
    satisfied that the Appellants understood the amended claim against them. Thus,
    no formal amendment of the statement of claim was necessary.

[64]

Finally, the trial judge did not reverse the
    onus. Here, it was clear to the trial judge that an amendment would cause no
    irreparable prejudice to the Appellants. The Appellants were given an
    opportunity to dissuade the trial judge of that view and failed to do so.

(c)

Disgorgement Award

[65]

The Appellants submit that the trial judge made
    four errors in making her order for disgorgement independent of her alleged
    error in permitting the statement of claim to be amended.

[66]

First, they submit that the trial judge erred in
    not requiring a causal relationship between the wrongdoing and the profits to
    be disgorged. Here, the profits held to have been received from the sale of the
    Hatch Labs equity were not causally connected to the wrongful conduct. The Hatch
    Labs equity was only worth at most $500,000 (U.S.) when the Xtreme Labs sale
    closed  its increase in value thereafter was due to Tinder's success at the
    2014 Sochi Olympics and a lot of luck." It is argued that the trial judge
    allowed the Respondents to take the benefit of a significant increase in value
    that resulted from external independent events unrelated to the appellants
    conduct.

[67]

I am not persuaded that the trial judge erred in
    this regard. I concur with her statement in paragraph 173 of her reasons where
    she rejected this same argument:

The defendants argue that no one could have
    predicted in August 2012 that Tinder would become a great success. There are
    two problems with this submission. First, it is not consistent with the
    position advanced by the defendants in their testimony. The defendants did
not
testify that they were aware of Tinder but failed to
    disclose it to the board because they thought it had no value at the time.
    Rather, they testified that they
never
heard of
    Tinder until well after the sale transaction. I have rejected their evidence
    and found that they did know about Tinder at the time of the sale and failed to
    tell the plaintiffs about it. Second, as fiduciaries, Amar and Sunny had a duty
    to disclose to the board all of the information with respect to the companys
    assets, regardless of whether or not they thought it had the potential for
    future success at the time. They did not do so.

[68]

The trial judge's second point is worth
    emphasizing. What the fiduciaries did in this case was hide the investment in
    Hatch Labs/Tinder. As a consequence of their actions, Fund I lost the
    opportunity to participate in the upside of the investment. It is no defence to
    such actions to say that no one knew that Hatch Labs would be profitable. A
    fiduciary has a duty of utmost good faith and an obligation to disclose so that
    the beneficiary has an opportunity to make an informed decision about the best
    course of action: see
Hodgkinson v. Simms
, [1994] 3 S.C.R. 377, at
    paras. 93-94. By breaching their duty in this case, the appellants denied the
    respondents the opportunity to make that decision.

[69]

Second, the Appellants submit that the trial
    judge erred in ordering disgorgement from 239 Ontario, Varma and Madra when
    there was no evidence that they had personally profited from Hatch Labs' sale
    to IAC. Thus, they say that the trial judge pierced the corporate veil of 239
    Ontario, a non-party.

[70]

I reject this argument. The trial judge found
    that the Appellants or their holding companies wholly owned 239 Ontario and
    that a sizable portion of the profits "were distributed" to the Appellants.
    This was an available inference on the facts as one of the purposes of the
    conspiracy was to conceal an asset of Xtreme Labs  namely Hatch Labs  from
    the selling shareholders for the benefit of the co-conspirators. There was no
    order that 239 Ontario itself make any disgorgement and therefore no veil
    piercing or disregard of any corporate form.

[71]

Third, the Appellants contend that the trial
    judges disgorgement award focused exclusively on the sale price and did not
    account for deductions/expenses in completing the sale. In effect, the Appellants
    argue, she made her order in an evidentiary vacuum. But if there was indeed an
    evidentiary vacuum, it was created by the Appellants. The trial judge
    recognized that they held the evidence regarding the precise details of the
    sale. Nevertheless, they elected not to call that evidence and cannot now
    complain about its absence from the record.

[72]

Fourth, the Appellants argue that the trial
    judges damages calculation includes an element of double counting. Their
    position is as follows. The trial judges calculation is based on an enterprise
    value of $25.8 million (U.S.), representing a 1.5 multiple applied to the
    actual FY 2012 revenues of $17.2 million (U.S.). The enterprise value, the
    Appellants claim, included the price of Hatch Labs Equity. Thus, the trial
    judge erred by ordering both damages that included this value as well as disgorgement
    of proceeds from the sale of Hatch Labs. Damages and disgorgement are
    alternative remedies; a plaintiff cannot obtain a judgment for both.

[73]

This argument is flawed in its central
    contention that the value of Hatch Labs was reflected in the damages awarded. That
    award was made to compensate for the depressed sale price received by the
    Respondents for Xtreme Labs and was based on the trial judge's assessment of
    the extent to which the actual FY 2012 figures for the revenues of Xtreme Labs
    exceeded the depressed figures put forth by Varma and Madra. The trial judge based
    the damages calculation on a multiple of actual earnings. However, the Hatch
    Labs equity interest did not contribute to the Xtreme Labs revenue stream
    during that fiscal year and was therefore not included in the damages
    calculation. Thus, there was no double counting.

(d)

Knowing Assistance in Breach of Fiduciary Duty

[74]

The constituent elements of the tort of knowing
    assistance in the breach of a fiduciary duty are that: (i) there must be a
    fiduciary duty; (ii) the fiduciary must have breached that duty fraudulently
    and dishonestly; (iii) the stranger to the fiduciary relationship must have had
    actual knowledge of both the fiduciary relationship and the fiduciarys
    fraudulent and dishonest conduct; and (iv) the stranger must have participated
    in or assisted the fiduciarys fraudulent and dishonest conduct:
Air Canada
    v. M & L Travel Ltd.
, [1993] 3 S.C.R. 787, at pp. 811-13.

[75]

The Palihapitiya Appellants submit that the
    trial judge erred in her application of the knowing assistance test because
    there was no intentional wrongful act in this case. They argue that the trial
    judge erred in reaching her factual conclusions. They allege, for example, that
    the trial judge incorrectly concluded that Palihapitiya knew of the Hatch Labs equity
    and Tinder at the time of closing. In addition, these appellants submit that Palihapitiyas
    conduct was legal and entirely consistent with Canadian business conduct
    standards. To properly analyze this submission, it is necessary to consider its
    two underlying themes: (i) the trial judge made palpable and overriding errors
    of fact, and (ii) the trial judge erred in imposing her idiosyncratic moral
    code upon what was otherwise standard business conduct.

(i)      Factual Findings

[76]

It should be remembered that the Varma/Madra
    Appellants accept the factual findings of the trial judge. The Palihapitiya
    Appellants do not. It is helpful to review some of the significant findings of
    fact made by the trial judge in her comprehensive reasons for judgment,
    including the following:

·

Varma, Madra and Palihapitiya were incredible
    witnesses. They were not forthright in their testimony. Their testimony
    constituted an attempt to get around the contemporaneous emails and documents
    that contradict their version of events.

·

Teslia, Bashir and Sharma were straightforward
    in their testimony, which was consistent with the documentary evidence.

·

Varma, Madra and Palihapitiya worked together
    and coordinated their efforts to present Palihapitiyas offer to buy Xtreme
    Labs at the board meeting on March 21. They undertook this coordinated campaign
    in the weeks leading up to the meeting as proven by their emails, which showed
    that they were working together on the offer to purchase, had brought key
    folks on board and were planning the hammer drop for the board meeting.

·

When Varma and Madra presented the offer to the
    board, they pretended that they were not involved in its creation and acted as
    though they had just received an unsolicited offer from Palihapitiya. They
    immediately sent a slide deck recommending the offer and pressured the
    Respondents intensely to accept the offer over the next few days. They tried to
    resist a valuation of the company and voted against giving the board an M&A
    mandate.

·

Varma and Madra were motivated by their
    self-interest because they wanted to increase their compensation and equity
    interests in Xtreme Labs.

·

Varma and Madra downplayed Xtreme Labs'
    financial prospects to facilitate Palihapitiya's acquisition of the company at
    a discounted price. The trial judge rejected Varma and Madra's testimony that
    they thought their $12 million projection was reasonable as of April 2012. Their
    testimony was contradicted by the much higher figures they were providing around
    the same time to others such as Samsung and Palihapitiya.

·

Varma and Madra provided Seven Hills with
    understated revenue projections.

·

Contrary to what they were telling the
    Respondents, Varma and Madra were actually optimistic about the business and
    its potential for continued growth and knew that upcoming projects would
    generate significant additional revenues for FY 2012.

·

Varma, Madra and Palihapitiya all knew the
    Pivotal multiple was higher than the 0.75x number contained in Palihapitiyas March
    20 offer. Varma and Madra nonetheless conveyed the offer to the board, even
    though the offer was based upon a number they knew to be understated.

·

When told by Sharma that a 3x multiple would be
    appropriate, Varma and Madra tried to persuade him that the appropriate
    multiple was a lower number.

·

Varma and Madra never disclosed to the board the
    fact that Xtreme Labs had a 13% equity interest in Hatch Labs, which was
    significant, given managements view that the way for a fee for service
    business to evolve was by developing proprietary technology, which is what
    Hatch Labs was doing.

·

Palihapitiyas testimony wherein he denied
    knowing anything about Hatch Labs at the time of the sale transaction and said
    that he only learned of the investment shortly after closing was false.

·

Varma knew about the development of the Tinder
    app and its launch in the Apple Store at the time of closing. Further, given
    how closely Varma, Madra and Palihapitiya were working together on the Xtreme
    Labs transaction, they clearly all knew about Tinder.

[77]

The Palihapitiya Appellants challenge these
    findings, but they fail to specify, either in their factum or oral submissions,
    how the trial judge went wrong in her factual analysis or how she made any
    palpable and overriding errors of fact. They point out, for example, that the
    initial offer to purchase Xtreme Labs was rejected by the board and thus argue
    that the offer had no impact. However, this submission ignores the trial
    judge's finding that the offer was only one instance of the illegal activity
    employed as part of the ongoing conspiracy to purchase Xtreme Labs at a
    discounted purchase price.

[78]

Another example of an objection to the findings is
    the specious argument that the board could have discovered the actual revenue
    numbers if they had undertaken more due diligence. That is not the way
    corporate law works. A board of directors has a right to believe what its
    officers and directors are telling it. Where that information is deliberately
    falsified, as in this case, it is no defence to say that the board should have
    known better:
Business Corporations Act
, R.S.O. 1990, c. B. 16, s
    135(4).

[79]

The Palihapitiya Appellants also submit that the
    trial judge ought to have accepted Palihapitiya's evidence over the testimony
    of the Respondents. The difficulty with this argument is that Palihapitiya's
    testimony was contradicted time and again by the written record. Indeed,
    Palihapitiya's private and public statements are inconsistent with his sworn
    evidence. I offer the following examples:

·

On September 27, 2012  just seven weeks after
    closing  Palihapitiya wrote an email to a friend regarding the acquisition of
    Xtreme Labs, boasting: 25% net cash margins, 100% YoY revenue growth  should
    do $35  40M next year. We bought it for $16M.  Yum, yum!!!!

·

Palihapitiya spoke at a Town Hall for the Xtreme
    Labs employees shortly after closing. In his remarks, he talked about how the
    previous owners of the company were "douchebags,"
    "fuckfaces" and "idiots that were counterproductive."  He
    described how at the 11th hour, the company's ownership structure got
    "convoluted," and in his opinion, Varma and Madra "got taken
    advantage of."  He said that "over the course of this last year, sort
    of instigating and pushing and prodding, we finally found the path to basically
    buy Xtreme and recapitalize it."

·

Palihapitiya's denials about knowing about Hatch
    Labs and Tinder before closing, as well as his testimony that he found out
    about Hatch Labs shortly after closing and considered it worthless, were
    contradicted by a speech he gave at a Collision Conference in 2014. In his
    speech, Palihapitiya described his strategy in acquiring Xtreme Labs, selling
    it to Pivotal, carving out the Hatch Labs equity and selling it to IAC four
    months later.  Palihapitiya said he knew that his friend had been developing
    apps and receiving equity in lieu of payment.

[80]

In his testimony, Palihapitiya tried in vain to
    distance himself from his previous statements. The trial judge saw through that
    effort. It is difficult to imagine any judge believing his denials and
    prevarications in spite of the record, and I am satisfied that the trial judge
    made no factual errors in finding that he was not only an active participant in
    the core wrongful activity, but also its primary beneficiary. I am fortified in
    that conclusion by the fact that the Varma/Madra Appellants are not challenging
    the trial judges factual findings on these appeals. On the contrary, they
    sensibly concluded that those findings were unassailable.

(ii)     Standard of Business Conduct

[81]

I come now to the second theme. As noted
    earlier, the Palihapitiya Appellants assert that Palihapitiya's conduct was in
    keeping with how business is conducted in Canada, and the trial judge inappropriately
    applied her idiosyncratic moral values and thereby found wrongdoing where there
    was none. The policy issue said to underlie this submission is that allowing
    trial judges to impose their own moral codes will lead to uncertainty in the
    corporate world. The crux of the argument is that business people are supposed
    to maximize profit and look after their own interests; it will lead to
    uncertainty if they are held to a different standard whereby they are obliged
    to look out for the best interests of their competition.

[82]

This is a straw man argument. Counsel for these
    appellants queries whether business people should be forced to assume broad and
    unknowable duties of fairness to their counterparts in transactions. The
    obvious answer to that question is no. But, of course, that was not the
    question before the court below or this court. What was in issue was whether
    the Appellants had breached their duties and/or engaged in tortious conduct by
    organizing the sale of Xtreme Labs. This was not a case of the trial judge
    imposing some new morality-based constraints on the way business operates; it
    was the court applying the settled law of corporations, fiduciary duty,
    contract, and tort to the conduct of the Appellants. The trial judge correctly
    rejected the Appellants submission, finding in her reasons that:

This is not a case of tough business tactics
    and clever negotiating strategy. Nor is it a case of sellers remorse. This is
    a case of a purchaser conspiring with fiduciaries of a company to acquire a
    business and doing so based on breaches of fiduciary and contractual duties.

[83]

Another argument under this theme is that
    Palihapitiya's real interest was in protecting young tech entrepreneurs and
    that this motivation somehow rendered his illegal conduct justifiable in the
    circumstances. The following excerpt from his cross-examination regarding his
    initial offer to purchase Xtreme Labs is particularly revealing on this point:

Q. Sir, you are a founder of Social Capital,
    and you talk about having Social Capital values and Chamath values-the highest
    ethics. Did you find it weird that the potential sellers are helping you with
    an offer that tightens the screws on them?

A. If youre asking for my opinion, this, Your
    Honour, its quite common place. It tends to be the case in Silicon Valley that
    young founders are so in need of money that many of them do really bad deals at
    the beginning and then they do find themselves in a situation where their
    boards really take advantage of them and I do think that this type of stuff is
    quite common place there amongst these kind of deals because youre not talking
    about 35, 40, 50-year-old with years of experience, youre talking about folks
    that are starting their new venture a few years in. Theyre quite naïve and
    they often do get taken advantage of and they do react this way.

[84]

Remarkably, Palihapitiya does not challenge the
    premise of the question that Varma and Madra were assisting him in breach of
    their duties. Instead, he justifies his participation in this conduct on the
    basis that they had been taken advantage of by the board. It is hard to believe
    that a business person of Palihapitiya's experience and sophistication believed
    that his conduct was legal and justified by reason of his co-conspirators'
    dissatisfaction with their compensation. It is tempting to conclude that
    Palihapitiya used Varma and Madra for his own purposes and, in the process,
    reaped a multi-million dollar windfall. However, I need not determine this
    matter, because even if I believed Palihapitiya's dubious justification, it
    offers no defence in law.

(e)

Joint and Several Liability

[85]

The Palihapitiya Appellants submit that the
    trial judge erred in law by holding them jointly and severally liable with the
    Varma/Madra Appellants. They argue, relying on an English trial court decision,
Ultraframe (UK) Ltd. v. Fielding,
[2005] EWHC 1638 (Ch.), that a
    knowing assistants liability ought not to be synonymous with a fiduciarys
    because the knowing assistant, who has not given an undertaking of loyalty, is
    not in the same position as the fiduciary. The court ruled in that case, at
    para. 1600:

I can see that it makes sense
    for a dishonest assistant to be jointly and severally liable for any
loss
which the beneficiary suffers as a result of a breach of trust. I can see also
    that it makes sense for a dishonest assistant to be liable to disgorge any
    profit which he
himself
has made as a result of assisting in the
    breach. However, I cannot take the next step to the conclusion that a dishonest
    assistant is also liable to pay to the beneficiary an amount equal to a profit
    which he did not make and which has produced no corresponding loss to the
    beneficiary. As James LJ pointed out in
Vyse v. Foster
(1872) LR 8 Ch
    App 309:

"This
    Court is not a Court of penal jurisdiction. It compels restitution of property
    unconscientiously withheld; it gives full compensation for any loss or damage
    through failure of some equitable duty; but it has no power of punishing any
    one. In fact, it is not by way of punishment that the Court ever charges a
    trustee with more than he actually received, or ought to have received, and the
    appropriate interest thereon. It is simply on the ground that the Court finds
    that he actually made more, constituting moneys in his hands "had and
    received to the use" of the
cestui que trust
."

[86]

There is Canadian jurisprudence where our courts
    have found a knowing assistant to be jointly and severally liable: see, for
    example, the decision of this court in
Enbridge Gas Distribution Inc. v.
    Marinaccio
, 2012 ONCA 650. Contrary to the assertion of the Palihapitiya
    Appellants, the Canadian cases do not all involve situations where the knowing
    assistant was found to be a constructive trustee: see, for example,
Imperial
    Parking Canada Corporation v. Anderson
, 2015 BCSC 2221. Counsel for the
    Palihapitiya Appellants was unable to point to any Canadian authority that
    supports his position.

[87]

There is also academic commentary that supports
    a finding of joint and several liability for the knowing assistant (also
    referred to by some as the dishonest assistant). Steven Elliott and Professor
    Charles Mitchell, in their article Remedies for Dishonest Assistance, (2004)
    67 Mod L Rev 16, write at p. 40 that:

[A] well established line of Canadian
    authority flowing from Canada Safeway Ltd v Thompson tells us that a dishonest
    assistant is jointly and severally liable for whatever unauthorised profit the
    wrongdoing fiduciary has made.This is consistent with and finds support in the
    secondary nature of liability for dishonest assistance. [Footnotes omitted.]

[88]

Ultraframe
is
    the leading case in England on the issue of a knowing assistants joint and
    several liability: see Geoffrey Morse, ed,
Palmers Company Law
(London,
    UK: Sweet & Maxwell, 2021), at vol. 2, ch. 8.3614. Based on a legal article
    filed with this court, however, it appears that the English approach towards
    knowing assistance is not followed in Australia: see Madison Robins, Accessory
    Liability in Canadian Law (2020) Annual Rev Civ Litigation 1, at p. 9. In any
    event, there is little reason to hew closely to the
Ultraframe
approach;
    the reasoning in that case is in my view inconsistent with the policy goals
    underlying equitable remedies. A court exercising its equitable jurisdiction
    seeks to fashion remedies that are fair in the circumstances of the case before
    it. While I agree that a knowing assistant should not be penalized, experience
    tells us that a judgment against a faithless fiduciary is often uncollectable.
    Indeed, that is one of the reasons why plaintiffs normally seek an order for
    joint and several liability. As between the wronged beneficiary and the knowing
    assistant, in most circumstances, the loss more equitably falls on the
    shoulders of the knowing assistant who has deliberately taken steps to procure
    a breach of fiduciary duty.

[89]

I do not purport to establish a rule that
    liability should always be joint and several between the faithless fiduciary
    and the knowing assistant. There may be circumstances where a different order
    should be made. Courts should be given sufficient flexibility to fashion a fair
    remedy in the circumstances of the particular case. In this case, where
    Palihapitiya was intimately involved in the breach of the fiduciary duty as
    part of a conspiracy where he received most of the profits, there is no
    equitable reason why the liability should not be joint and several.

(f)

Other Grounds of Appeal

[90]

The parties were allocated two full days of
    court time to argue the appeals and cross-appeal. However, counsel for the
    Appellants chose to restrict their oral submissions to the issues discussed
    above. Therefore, the remaining grounds of appeal from their factums, which
    were not pressed in oral argument, may be dealt with summarily as follows.

(i)      Punitive Damages

[91]

The trial judge did not err in awarding punitive
    damages on the Annex Fund Claim. Varma and Madra engaged in outrageous and
    illegal conduct that was worthy of sanction by the court. The damages awarded
    were appropriate to accomplish the objectives of denunciation and deterrence of
    others from acting similarly. Indeed, they could well have been higher in the
    circumstances.

(ii)     Exchange Rate and Prejudgment
    Interest

[92]

The trial judge did not err in exercising her
    discretion not to deviate from the default rules for prejudgment interest and
    the exchange rate. In both instances, she correctly applied the law and ruled
    that the Appellants had not met their onus to establish that a variation of the
    standard rule was appropriate.

(iii)    Group Enterprise Theory

[93]

The trial judge did not use the group enterprise
    theory to affix liability for any breach of fiduciary duty. The Appellants'
    argument that any breach of duty was owed exclusively to Xtreme Labs does not
    withstand scrutiny. I agree with the trial judge that Varma and Madra owed
    fiduciary duties to EVP GP to maximize the value realized by the sellers as
    part of the sale of Xtreme Labs and that they breached those duties.

(iv
)    Directors Liability

[94]

The Appellants argue in their factums that they
    cannot be held liable for any breach because the party to whom they owed the
    duty, EVP GP, is different than the party that suffered the loss, Fund I. In
    rejecting this argument, I reach the same conclusion as the trial judge but for
    different reasons.

[95]

I note that the position taken by the Appellants
    that no duty was owed directly to the Limited Partnership is inconsistent with
    the text of the Limited Partnership Agreement. Article 6.5 of that document
    states that the General Partner and its officers, directors, shareholders or
    agents can be liable to the Limited Partnership or a Limited Partner for acts
    or omissions performed or omitted fraudulently or in bad faith or that
    constituted willful misfeasance or negligence in the performance of their
    obligations or as a result of the reckless disregard of such obligations.

[96]

Moreover,
it would be an anomalous result if the law offered no remedy for the
    breach of a director's fiduciary duty in circumstances where the limited
    partnership suffered the resulting loss. If that were the case, directors could
    act with impunity to damage the interests of the limited partnership, including
    by engaging in self-dealing, and there would be no remedy for such a breach of
    fiduciary duty. The law of fiduciary duties, which is based in equity, should
    not brook such a lacuna in its remedies.

[97]

To analyze this issue it is helpful to turn to
    first principles. Before doing so, I note that the trial judge relied on
McGrail v.
    Phillips
, 2018 ONSC 3571, 83 B.L.R. (5th) 271 (Div. Ct.), at para. 33, for
    the proposition that the directors owe a duty only to the corporate general
    partner, not to the limited partnership itself. The Divisional Court in that
    case in turn cited to
ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.
(1995),
    26 O.R. (3d) 481 (C.A.).
McGrail
is not binding on this court.
    Moreover, the problem with relying on
ScotiaMcLeod
, and by extension
McGrail
,
    is that
ScotiaMcLeod
did not feature a fiduciary duty claim. The
    court's comments regarding the personal liability of directors were in the
    context of claims in tort and are of limited assistance in analyzing a claim
    for breach of fiduciary duty.

[98]

In the present case, we are dealing with a
    limited partnership, which is a hybrid organization that combines elements of
    partnership law and the law of corporations. A limited partnership consists of
    a general partner, who manages the affairs of the limited partnership and has
    liability for all its debts and obligations and at least one limited partner,
    whose liability is restricted to the amount they contributed or agreed to
    contribute to the limited partnership. The general partner owes a fiduciary
    duty to the limited partners. Limited partnerships are not a distinct legal entity.
    Despite this, the law permits a limited partnership to act as a distinct legal
    entity for certain limited purposes. A limited partnership can, for example,
    bring and defend actions: Neil Guthrie, Some Lacunae in the Law of Limited
    Partnerships (2009) 88 Can Bar Rev 147 at 148-49.

[99]

The question is whether Varma and Madra's
    fiduciary duty should expand to include a duty to the limited partnership. In
    my view, it should. Varma and Madra conducted themselves in a manner that
    clearly breached their duties to EVP GP. This is not a situation where they
    were balancing the corporation's interests against those of the limited
    partnership. Instead, they acted solely in their self-interest and contrary to
    the interests of both the general partner and the limited partnership. For that
    reason, they are being sued by both Fund I and EVP GP.

[100]

Where, as here, the directors ignore the
    interests of the general partners and the limited partnership and act solely in
    their self-interest, the concept of a directors fiduciary duty should be
    flexible enough to include duties to both the general partner and the limited
    partnership. Further, it should come as no surprise to the corporate directors
    that the limited partnership, which stands in a fiduciary relationship to the
    general partner and whose interests are supposed to be safeguarded, should have
    a right to claim against them personally.

[101]

In a limited partnership the
raison d

être
of the general partner is to manage the business operations of the limited
    partnership and shield the limited partners from the unlimited liability they
    would face in a partnership. The use of the corporate form by the general
    partner is in turn designed to limit its liability exposure. It would be inequitable
    if the corporate form could be used to insulate directors who are in breach of
    their duties to the general partner and who have caused damages to the limited
    partnership. Given the unique structure of limited partnerships, the common law
    should impose a fiduciary duty on corporate directors of the general partner
    towards the limited partnership.

[102]

It is well established that the categories of
    fiduciary relationship are never closed:
Frame v. Smith
, [1987] 2
    S.C.R. 99, at para. 36; see also
Guerin v. R.
, [1984] 2 S.C.R. 335 at
    384. Certain status relationshipssolicitor-client or doctor-patient, for
    examplegive rise to a
per se
fiduciary relationship. In other
    circumstances, courts can find an
ad hoc
fiduciary duty. Such a duty
    arises where: (1) the fiduciary has the discretionary power to affect the
    vulnerable partys legal or practical interests and (2) the fiduciary has made
    an express or implied undertaking that it will exercise the discretionary power
    in the vulnerable partys best interests:
Galambos v. Perez
, 2009 SCC
    48, [2009] 3 S.C.R. 247, at paras. 66, 83.

[103]

Varma and Madra owed the limited partnership an
ad
    hoc
fiduciary duty. Both the limited partners and the limited partnership
    constituted a class of vulnerable and defined beneficiaries, whose legal and
    substantial practical interests stood to be and in fact were adversely affected
    by Varma and Madras exercise of discretion. Varma and Madras undertaking
    arose from the nature of the business relationship itselfa general partner
    operates on behalf of the limited partnershipas well as from the Limited
    Partnership Agreement, which recognized the duty of the general partners
    towards the limited partners and the limited partnership.

[104]

Further, I note that certain jurisdictions in
    the United States have similarly determined that the liability owed by a
    general partner to the limited partnership should be expanded: see Colin P.
    Marks, Piercing the Corporate Veil (2015) 19 Lewis & Clark L Rev 73 at
    83; J. William Callison & Maureen A. Sullivan,
Partnership Law &
    Practice
(St. Paul, MN: Thomson Reuters, 2021) at § 22:18;
In re
    Harwood
, 637 F (3d) 615 at 622 (5th Cir 2011); One seminal American case
    is
In re USACafes, L.P. Litig.
, 600 A (2d) 43 (Del Ch 1991). Delaware
    courts have consistently upheld and in certain cases expanded the reach of that
    decision: Marks, at 83, 85. In
USACafes
, Chancellor Allen drew an
    analogy to corporate trustees:

While the parties cite no case treating the specific
    question whether directors of a corporate general partner are fiduciaries for
    the limited partnership, a large number of trust cases do stand for a principle
    that would extend a fiduciary duty to such persons in certain circumstances.
    The problem comes up in trust law because modernly corporations may serve as
    trustees of express trusts. Thus, the question has arisen whether directors of
    a corporate trustee may personally owe duties of loyalty to cestui que
    trusts of the corporation. A leading authority states the accepted answer:

The directors and officers of [a corporate
    trustee] are certainly under a duty to the beneficiaries not to convert to
    their own use property of the trust administered by the corporation. . . .
    Furthermore, the directors and officers are under a duty to the beneficiaries
    of trusts administered by the corporation not to cause the corporation to
    misappropriate the property. . . . The breach of trust need not, however, be a
    misappropriation. . . . Any officer [director cases are cited in support here]
    who knowingly causes the corporation to commit a breach of trust causing loss .
    . . is personally liable to the beneficiary of the trust. . . .

Moreover, a director or officer of a trust
    institution who improperly acquires an interest in the property of a trust
    administered by the institution is subject to personal liability. He is
    accountable for any profit. . . . Even where the trustee [itself] is not
    liable, however, because it had no knowledge that the director was making the purchase
    . . ., the director . . . is liable to the beneficiaries. . . . The directors
    and officers are in a fiduciary relation not merely to the [corporation] . . .
    but to the beneficiaries of the trust administered by the [corporation].

[105]

Chancellor Allen also made the following
    comments that are particularly pertinent to the circumstances of the case at
    bar:

The theory underlying fiduciary duties is
    consistent with recognition that a director of a corporate general partner
    bears such a duty towards the limited partnership. That duty, of course,
    extends only to dealings with the partnership's property or affecting its
    business, but, so limited, its existence seems apparent in any number of
    circumstances. Consider, for example, a classic self-dealing transaction:
    assume that a majority of the board of the corporate general partner formed a
    new entity and then caused the general partner to sell partnership assets to
    the new entity at an unfairly small price, injuring the partnership and its
    limited partners. Can it be imagined that such persons have not breached a duty
    to the partnership itself? And does it not make perfect sense to say that the
    gist of the offense is a breach of the equitable duty of loyalty that is placed
    upon a fiduciary?
[1]

[106]

I agree with and adopt Chancellor Allens analysis. In my view, for
    the reasons discussed above, the law of fiduciary duty must hold Madra and
    Varma to account. Accordingly, I would find that they are both liable to Fund I
    for their fiduciary breaches as directors of EVP GP.

(g)

Cross-Appeal

[107]

The trial judge based the amount of the disgorgement award on the
    proportion of shares of Xtreme Labs that Fund I held at the time of the
    transaction. Her reasoning is summarized at paragraphs 297 to 298 of her
    reasons:

[297] By concealing the existence of the Hatch
    Labs Equity, Amar and Sunny (working with Chamath/El Investco) deprived Fund I
    of the opportunity to take it into account on the sale of its shares of Xtreme
    Labs, to renegotiate any terms of sale or to decide not to sell its shares of
    Xtreme Labs at that time. Further, as a direct result of this concealment,
    Amar, Sunny, and Chamath/El Investco were able to profit from Fund I's interest
    in the Hatch Labs Equity. In my view, they should not be entitled to retain the
    profits attributable to their wrongdoing. A disgorgement order is required to
    serve a deterrent purpose in this case.

[298] In determining the extent of this
    equitable relief, however, I agree that the disgorgement order should only
    apply to the profits that correspond to Fund I's 41.82% interest in the Hatch
    Labs Equity. Those are the only profits that flow from the breach of fiduciary
    duty. Concealment of the Hatch Labs Equity deprived Fund I from realizing
    41.82% of the profits from the sale of the Hatch Labs Equity. Any disgorgement
    order beyond that would result in Fund I receiving profits to which it was not
    otherwise entitled. [33]

[108]

The cases cited in footnote 33,
Olson v. Gullo
, (1994), 17
    O.R. (3d) 790 (C.A.) and
Rochwerg v. Truster
(2002), 58 O.R. (3d) 687
    (C.A.), are relied upon by the Appellants on the cross-appeal.

[109]

The Respondents submit that the trial judge committed an error in
    principle because prophylactic disgorgement is aimed not at what the
    beneficiaries lost but rather at what the wrongdoers gained. They say that the
    apportioned disgorgement award issued by the trial judge represents an outcome
    where the wrongdoers are no worse off than if they had never breached fiduciary
    duties in the first place  meaning no deterrence has been achieved. Thus, they
    argue that disgorgement should be ordered for all profits made from the Hatch
    Labs Equity sale, which is $29.5 million (U.S.).

[110]

The Appellants submit that the trial judge followed the law
    correctly and that there is no causal connection between the additional profits
    sought and any wrongdoing found to have been committed against Fund I. There
    is, in their submission, no right to profits unrelated to the breach. They note
    that Fund I has no claim to the remaining 58.18% of the profits, and no other
    shareholders of Xtreme Labs sought or established a fiduciary breach against
    the Appellants that could ground disgorgement of this portion of the profits.

[111]

The leading case on disgorgement of profits is
Strother v.
    3464920 Canada Inc.
, 2007 SCC 24, [2007] 2 S.C.R. 177, where the
    Supreme Court stated:

74.     This Court has repeatedly stated that
    "[e]quitable remedies are always subject to the discretion of the
    court". (internal citations omitted) In
Neil
, the Court stated
    emphatically: "It is one thing to demonstrate a breach of loyalty.  It is
    quite another to arrive at an appropriate remedy" (para. 36).

75.     Monarch seeks "disgorgement"
    of profit earned by Strother and Davis.  Such a remedy may be directed to
    either or both of two equitable purposes.  Firstly, is a
prophylactic
purpose, aptly described as appropriating for the benefit of the person to whom
    the fiduciary duty is owed any benefit or gain obtained or received by the
    fiduciary in circumstances where there existed a conflict of personal interest
    and fiduciary duty or a significant possibility of such conflict: the objective
    is to preclude the fiduciary from being swayed by considerations of personal
    interest.

(
Chan v. Zacharia
(1984), 154 C.L.R.
    178,
per
Deane J., at p. 198)

76.     The second potential purpose is
restitutionary
,
    i.e. to restore to the beneficiary profit which properly belongs to the
    beneficiary, but which has been wrongly appropriated by the fiduciary in breach
    of its duty.

77.     The concept of the
prophylactic
purpose is well summarized in the Davis factum as follows:

[W]here a conflict or significant
    possibility of conflict existed between the fiduciary's duty and his or her
    personal interest in the pursuit or receipt of such profits . . . equity
    requires disgorgement of any profits received even where the beneficiary has
    suffered no loss because of the need to deter fiduciary faithlessness and
    preserve the integrity of the fiduciary relationship. [Emphasis omitted; para.
    152.]

Where, as here, disgorgement is imposed to
    serve a
prophylactic
purpose, the relevant causation is the breach of
    a fiduciary duty and the defendant's gain (not the plaintiff's loss).  Denying
    Strother profit generated by the financial interest that constituted his
    conflict teaches faithless fiduciaries that conflicts of interest do not pay. 
    The prophylactic purpose thereby advances the policy of equity, even at the
    expense of a windfall to the wronged beneficiary.

[112]

In
    my view, it is evident that the disgorgement order was imposed to serve a
    prophylactic purpose. Indeed, the trial judge stated explicitly that a "
disgorgement order is required to serve a deterrent purpose in this
    case." Further, there is a clear nexus between the breach of the fiduciary
    duties and the gains as the profits were secured as a direct result of the
    breach. Thus, the necessary causal connection has been established.

[113]

In the circumstances, the trial judge was obliged to fashion a
    remedy that would have a deterrent impact. I agree with counsel for the
    Respondents that simply ordering the Appellants to pay the Respondents what
    they would otherwise have been entitled to receive serves as no disincentive. A
    party considering breaching a fiduciary duty could reasonably look at the trial
    judge's decision and conclude that in a worst-case scenario, they would only be
    forced to pay over to the aggrieved beneficiary what the beneficiary was always
    owed, thereby profiting from the breach of their fiduciary duties.

[114]

The Appellants' reliance on
Olson
and
Rochwerg
is
    also misplaced. In those cases, which were decided under the
Partnership
    Act
, R.S.O. 1990, c. P.5, the courts did not impose disgorgement orders
    for a prophylactic purpose; they were made for restitutionary purposes. Thus, these
    authorities are of no assistance to the court in this case where the trial
    judge chose to make the order for a prophylactic purpose. Similarly, the
    Appellants' argument about the Respondents receiving a windfall fails because,
    in the case of a prophylactic disgorgement order, the focus of the inquiry is
    not the beneficiary's loss but the gain of the faithless fiduciary. This is so
    even if there is a potential windfall to the beneficiary:
Strother
, at
    para. 77.

[115]

The question that remains is whether, in fashioning a prophylactic
    disgorgement order, the court is required to order disgorgement of all
    ill-gotten gains or whether it can make an order that achieves its deterrent
    purposes but does not require full disgorgement. When this issue was put to
    counsel for the Respondents, she took the position that the jurisprudence
    appears to call for full disgorgement. On the other hand, counsel for the
    Appellants took no position on this issue. In other words, they offered no
    assistance to the court regarding a sum short of full disgorgement that would
    meet the deterrent purpose.

[116]

There may well be circumstances where it would be inequitable to
    order a faithless fiduciary to disgorge all profits. Equity seeks what is fair
    and what is fair should be determined with flexibility, not by means of hard
    and fast rules. For that reason, I would not endorse an inflexible rule that
    full disgorgement of all profits must be ordered in all cases, but nor would I
    speculate on the sorts of reasons that may justify something less than full
    disgorgement. I note that Australian courts have grappled with the circumstances
    in which full disgorgement ought to be made and whether there should be a
    rebuttable presumption that full disgorgement is appropriate: see e.g.
Warman
    International Ltd v. Dwyer,
[1995] HCA 18, at paras. 33-35. I decline to
    decide these questions today, as counsel for the Appellants failed to address
    either point.

[117]

There is nothing to suggest that a partial disgorgement order should
    be made in the case at bar. Certainly, counsel for the Appellants did not argue
    for such an order nor did he offer any suggested amount for such an award in
    response to questions from the court. In these circumstances, an order of disgorgement
    of all profits  $29.5 million (U.S.)  is in my view appropriate.

Part V  Disposition

[118]

I would dismiss the appeals of the Palihapitiya Appellants and the
    Varma/Madra Appellants. I would allow the cross-appeal.

[119]

Regarding costs of the appeals and cross-appeal, the parties may
    make written submissions. The Respondents' submissions are due within two weeks
    of the release of these reasons. They shall be no more than five pages in
    length plus a costs outline. The Palihapitiya Appellants and the Varma/Madra
    Appellants' submissions are also limited to five pages each, and they are both
    required to file a costs outline. Those submissions are due one week after
    receiving the Respondents' cost submissions. The Respondents may file reply
    submissions of no more than three pages within a week of receiving the
    Appellants costs submissions.

Released: December 1, 2021 CWH

C.W.
    Hourigan J.A.

I
    agree. Grant Huscroft J.A.

I
    agree. S. Coroza J.A.





[1]
See also Ben Barnes,
Do
    Fiduciaries of Fiduciaries Owe Duties?

(2019), online: American
    Bar Association <https://www.americanbar.org/groups/litigation/committees/business-torts-unfair-competition/practice/2019/imposition-fiduciary-duties-departing-llc-members1/>


