



COURT OF APPEAL FOR ONTARIO

CITATION: AOD Corporation v. Miramare Investment Incorporated,
    2022 ONCA 95

DATE: 20220201

DOCKET: C69658

van Rensburg and Roberts JJ.A. and Tzimas J. (
ad
    hoc
)

BETWEEN

AOD Corporation

Applicant
(Appellant)

and

Miramare Investment Incorporated
and Alain Mercier

Respondents
(Respondents)

Stéphane Émard-Chabot, for the appellant

Pierre Champagne, for the respondent, Miramare
    Investment Incorporated

Alain Mercier, acting in person
[1]

Heard: November 22, 2021

On appeal from the judgment
    of Justice Pierre E. Roger of the Superior Court of Justice dated June 15, 2021,
    with reasons reported at 2021 ONSC 4280.

REASONS FOR DECISION

Overview

[1]

This appeal involves the application of the
    indoor management rule in relation to the parties January 30, 2012 patent
    agreement (the January 30, 2012 agreement) concerning the appellants
    intellectual property. At immediate stake is the right to own and monetize approved
    patents, in particular a patent granted in the United States in January 2018
    that will expire in 2025.

[2]

The appellant is a corporation incorporated
    under the
Canada
    Business Corporations Act, R.S.C., 1985, c. C-44
(CBCA), with its
    head office in the province of Québec. It appeals the dismissal of its
    application for a declaration that the January 30, 2012 agreement was invalid
    and argues that it is the sole owner of the granted patent on the following
    grounds.

[3]

First, the appellant says that the application
    judge erred in law in finding there were no restrictions on the appellant
    entering into the January 30, 2012 agreement. The appellant relies on the
    provisions of s. 189(3) of the
CBCA
and argues that the sale of its
    intellectual property represented all or substantially all of the appellants
    property and was not made in the ordinary course of business. As such, the
    transaction required the approval by special resolution of two thirds of its
    shareholders. The appellant submits that the January 30, 2012 agreement is
    invalid because the requisite approval was not obtained. This argument was not
    made before the application judge.

[4]

Second, and relatedly, the appellant submits
    that the application judge made a palpable and overriding error in determining
    that the respondent, Miramare Investment Incorporated (Miramare), did not
    have any knowledge of any irregularities in the approval of the January 30,
    2012 agreement through Miramares representative, Warren Johnson. According to
    the appellant, the indoor management rule does not apply to regularize any
    irregularities in the approval of the January 30, 2012 agreement because Miramare,
    through Mr. Johnson, had actual knowledge of the irregularities.

[5]

At the conclusion of the hearing of the appeal,
    we dismissed the appeal with costs of $16,000, inclusive of disbursements and
    applicable taxes, to Miramare, for reasons to follow. These are those reasons.

Factual Matrix

[6]

The appellants predecessor, Wrapped Apps
    Corporation (WAC), originally owned the patent application for the patent in
    issue under the January 30, 2012 agreement (the Patent). WAC had financial
    difficulties in 2008 and its intellectual property consisting of several pending
    patent applications, including the application for the Patent, was transferred to
    its secured creditors. After the transfer, Mr. Mercier, the then operating
    mind, president, director and shareholder of both WAC and the appellant, acted
    as trustee for the secured creditors, who maintained an interest in the pending
    patent applications. The secured creditors were given a ten-year option,
    expiring in May 2019, to convert their interest into shares of the appellant.
    Most, but not all of them, did.

[7]

Following negotiations, on July 13, 2011, the
    appellant and Miramare, under the temporary designation NI (defined in the
    agreement as new investors legal name to be supplied later), entered into a
    licensing agreement and option to purchase the patent rights held by the WAC
    secured creditors (the July 13, 2011 agreement). The WAC secured creditors
    who were the owners of WACs intellectual property and who held options in the
    appellant were also parties to this agreement. The agreement noted that [i]t
    is understood that at some point the [WAC] debenture holders and AOD
    shareholders become one. Mr. Mercier signed the agreement [o]n behalf of
    AOD/WAC Debenture Holders.

[8]

Under the July 13, 2011 agreement, Miramare was authorized
    to take over the processing of the appellants patent applications and assumed
    all attendant risks and costs. Miramare was given an exclusive license to
    exploit any of the appellants patents that Miramare was successful in having
    approved; and acquired an option to buy any approved patent for an amount of up
    to $107,000 and 2.5% of any subsequent sale of the patent to a third party.

[9]

In November 2011, Mr. Mercier reported to the
    appellants stakeholders that the appellant had entered into the July 13, 2011 agreement.

[10]

The parties entered into the January 30, 2012
    agreement so that Miramare could replace the unincorporated moniker of NI and assume
    the 2011 agreement on the same terms as previously agreed to in 2011. Paragraph
    19 provided that the agreement is binding from the date of acceptance of the
    original Agreement in Principle between NI and AOD dated June 25, 2011 and
    supersedes that agreement in full. The agreement also provided that the
    security holders had assigned their interests in WACs intellectual property to
    the appellant. It further stipulated in paragraph 22 that Alain Mercier warrants
    he has authority to execute this agreement as Trustee on behalf of [the
    appellant] and the Wrapped Apps Debenture Holders. He signed the January 30,
    2012 agreement as Trustee.

[11]

Miramare performed its obligations under the
    January 30, 2012 agreement. Upon the approval of the Patent in January 2018, Miramare
    notified the appellant that it would exercise its option to purchase the
    Patent. The appellant objected, taking the position for the first time that the
    January 30, 2012 agreement was not valid. The parties attempted to negotiate a
    resolution. They failed to do so, and the present litigation ensued.

[12]

Before the application judge, the appellant
    argued that the January 30, 2012 agreement was invalid because Mr. Mercier did
    not have authority to sign the agreement on behalf of the appellant. Contrary
    to the provisions of a unanimous shareholder agreement, and to the knowledge of
    Miramare, two thirds of the shareholders did not approve the agreement.

[13]

The application judge thoroughly reviewed the
    relevant factual matrix. He found that the appellant had failed to prove the
    existence of any binding unanimous shareholder agreement, or of any restrictions
    on Mr. Merciers authority, as president and director, to enter into the January
    30, 2012 agreement on behalf of the appellant. The application judge found that
    the indoor management rule under common law and the provisions of s. 18 of the
CBCA
applied, and that Miramare was
    unaware of any alleged restrictions on Mr. Merciers authority. Further, there
    was nothing that could raise a suspicion of any alleged irregularity that
    should have caused the Miramare to make inquiries. Accordingly, he dismissed the
    application.

Analysis

[14]

At the hearing of the appeal, the appellant
    conceded that Mr. Mercier had the requisite authority to enter into the January
    30, 2012 agreement and was no longer relying on the alleged unanimous
    shareholder agreement. However, it argues that the application judge erred by
    failing to address the provisions of s. 189(3) of the
CBCA
and in finding that the indoor
    management rule applies in the circumstances of this case.

[15]

Subsection 189(3) provides that the sale, lease
    or exchange of
all or substantially all the property of
    a corporation other than in the ordinary course of business of the corporation
requires the approval of the shareholders in accordance with subsections (4) to
    (8). Subsection 8 confirms that: A sale, lease or exchange referred to in
    subsection (3) is adopted when the holders of each class or series entitled to
    vote thereon have approved of the sale, lease or exchange by a special
    resolution. Special resolution is defined under s. 2(1) of the
CBCA
to mean a resolution passed by a
    majority of not less than two-thirds of the votes cast by the shareholders who
    voted in respect of that resolution or signed by all the shareholders entitled
    to vote on that resolution.

[16]

We do not give effect to this argument for two
    reasons.

[17]

First, this argument was raised for the first
    time on appeal. There is no reference to s. 189(3) in the Notice of
    Application. As a general rule, an appellate court will not entertain a new issue
    for the first time on appeal since prejudice will result to the respondent
    because of the inability to call evidence in response to the new issue. The burden
    is on the appellant to persuade the appellate court that the evidentiary record
    is sufficient to permit the determination of the new issue:
Kaiman v. Graham
, 2009 ONCA 77, 75
    R.P.R. (4th) 157, at para. 18. In our view, the general rule applies in this case
    and this court should not entertain the new issue raised by the appellant.

[18]

As this issue was not raised on the application,
    no evidence was adduced as to whether the transaction represented all or
    substantially all the property of a corporation other than in the ordinary
    course of business of the corporation. We do not have the benefit of any
    factual findings on this issue by the application judge. Nor are we able to
    determine this issue based on the evidence in the record; the evidence
    concerning the assets and business of the appellant is equivocal on these
    issues.

[19]

Second, the application judge made the factual
    finding, rightly in our view, that Miramare did not have any knowledge of any
    irregularity concerning the appellants internal processes that should have
    caused Miramare to make further inquiries with respect to any approvals that
    may have been required. This finding precludes the application of s. 189(3)
    because it triggers the application of s. 18(1) of the
CBCA
and the indoor management rule at
    common law.

[20]

Section 18(1) incorporates the indoor management
    rule at common law. That rule provides
that parties dealing with a corporation, acting in good faith and without
    knowledge of any irregularity, are entitled to assume that a corporation's
    internal policies and proceedings have been followed and complied with:
The Midas Investment Corporation v. Bank of Montreal
, 2016 ONSC 3003, at para. 4. For
    the purposes of this appeal, t
he relevant provisions of
    s. 18(1) are as follows:

18

(1)
No
    corporation and no guarantor of an obligation of a corporation may assert
    against a person dealing with the corporation or against a person who acquired
    rights from the corporation that

(a)
the articles, by-laws and any unanimous
    shareholder agreement have not been complied with;



(d)
a person held out by a corporation as a
    director, officer, agent or mandatary of the corporation has not been duly
    appointed or has no authority to exercise the powers and perform the duties
    that are customary in the business of the corporation or usual for a director,
    officer, agent or mandatary;

(e)
a document issued by any director,
    officer, agent or mandatary of a corporation with actual or usual authority to
    issue the document is not valid or genuine; or

(f)

a sale, lease or
    exchange of property referred to in subsection 189(3) was not authorized.

[Emphasis added.]

[21]

We see no error in the application judges finding
    that Miramare had no knowledge of any irregularity; his finding was firmly
    rooted in the record. Mr. Johnson resigned from WACs board in 2002,
    almost ten years before the negotiation of the agreements in issue. Mr. Johnson
    was not a director or an officer of the appellant. Neither he nor Miramare had
    any involvement in the operations or governance of the appellant. The
    application judge also referenced and accepted Mr. Johnsons unchallenged
    affidavit evidence that he had no knowledge of any limitation on Mr. Merciers
    authority when he signed the July 13, 2011 and January 30, 2012 agreements. Mr.
    Mercier could not explain how Miramare or Mr. Johnson would know that he
    lacked authority to enter into those agreements nor could the appellant point
    to any document or evidence that would limit Mr. Merciers authority to
    enter into those agreements.

[22]

As a result, there is no basis to interfere with
    the application judges determination that the January 30, 2012 agreement was
    valid.

Disposition

[23]

For these reasons we dismissed the appeal, with costs
    to Miramare in the amount of $16,000, inclusive of disbursements and applicable
    taxes.

K. van Rensburg J.A.

L.B.
    Roberts J.A.

E. Ria Tzimas, J. (ad
    hoc)





[1]

Alain Mercier appeared but made no written or oral
    submissions.


