The latest development in the Mayne’s Vs. Med-Eng oppressed-shareholder case:
THE LITIGATION
i. The pleaded facts relating to the Ongoing Actions and the Original Defendants
[5] The plaintiffs Steve Maynes, Jean Robichaud, and Ken Gingrich were all senior executives of Med-Eng Systems Inc. (“Med-Eng”), an Ontario corporation that specialized in the research, design, and manufacture of personal protective military equipment. In the course of their employment, they each acquired a number of Class A common shares in Med-Eng through the company’s employee stock option plan (“the Plan”). Maynes also transferred some of his shares to his two corporations, 6223362 Canada Inc. and 6223087 Canada Inc., which are the remaining plaintiffs.
[6] Under the Plan, Med-Eng was entitled under certain circumstances to elect to repurchase the shares at fair market value, which was determined by Med-Eng’s Board of Directors. The Plan stipulated that if Med-Eng were to exercise this share repurchase option, it had to give written notice to the employee shareholder and state what the Board determined to be the fair market price.
[7] All of the Med-Eng shares that the plaintiffs held were deposited with Richard L’Abbé, a director of Med-Eng, who held the shares in trust as Trustee under a Voting Trust Agreement. Under that agreement, L’Abbé could exclusively exercise all shareholders’ rights on behalf of the plaintiffs.
[8] In February 2006, Med-Eng issued a notice of repurchase to both Maynes and Robichaud, stipulating a fair market price of $1.60 per share. The notices contained a number of errors and deficiencies that were not resolved to the plaintiffs’ satisfaction. Subsequent to issuing the notices, the Board of Directors twice assigned a new fair market value to Med-Eng’s common shares—first at $2.00 per share in April 2006, then at $4.00 per share in July 2006—but did not advise Maynes or Robichaud of the second valuation and did not seek to amend or reissue the repurchase notices to them.
[9] Similarly, Med-Eng issued two written notices to Gingrich in May and June 2006 informing him that the company was exercising its option to repurchase his shares at a fair market value of $2.00 per share. As in the case of Maynes and Robichaud, the notices contained a number of errors and deficiencies that were not resolved to Gingrich’s satisfaction. When the Board of Directors re-evaluated Gingrich’s common shares in Med-Eng at $4.00 per share in July 2006, they failed to advise him of the new valuation and did not amend or reissue the repurchase notices.
[10] The plaintiffs claim that the repurchase of their shares by Med-Eng was invalid, ineffectual and void because the repurchase notices did not conform to the requirements of the Plan, and the Board of Directors was acting oppressively and did not determine the fair market value listed in the notices in good faith. The plaintiffs allege that the actual market value of the shares was considerably higher than what was stated in the notices, and so the stock repurchases constituted an unlawful expropriation from the plaintiffs. They further allege that the shares that Maynes had transferred to 6223362 Canada Inc. and 6223087 Canada Inc. were not subject to the Plan. Finally, they allege that L’Abbé breached his fiduciary duties to the plaintiffs as trustee of their shares by endorsing and delivering their share certificates to Med-Eng without their authorization under the terms of the Voting Trust Agreement.
ii. Procedural history respecting the Ongoing Actions and the Original Defendants
[11] On October 18, 2006, Maynes, Robichaud, 6223362 Canada Inc. and 6223087 Canada Inc. initiated proceedings against Med-Eng and its directors (collectively, “the Original Defendants”),[2] by way of a statement of a claim. On August 7, 2007, Gingrich followed suit and filed a statement of claim against the Original Defendants, asserting substantially the same claims.
[12] In summary, the plaintiffs in these two actions seek: a declaration that the Original Defendants breached their fiduciary duties to them; a declaration that Richard L’Abbé breached his duties as trustee under the Voting Trust Agreement; a declaration that the repurchase transactions were invalid and so they continue to be registered shareholders of Med-Eng; and an order directing Med-Eng to pay the plaintiffs all unpaid dividends accruing in respect of their shares. In the alternative, the plaintiffs advance an oppression claim against the Original Defendants pursuant to s. 248 of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”). They seek as an oppression remedy an order directing Med-Eng, now Allen-Vanguard Technologies Inc., to repurchase their shares at a price equal to fair market value.
[13] The proceedings for these two actions are ongoing. The pleadings have closed and documentary and oral discovery is substantially complete.
iii. The pleaded facts relating to the genesis of the New Action and the Added Defendants
[14] Subsequent to Med-Eng’s repurchase of the plaintiffs’ shares and the plaintiffs’ commencement of proceedings against Med-Eng and the other Original Defendants, Med-Eng became the target of a takeover bid. On or about August 2, 2007, Allen-Vanguard Corporation (“AVC”) offered to pay $600 million to purchase 100% of the issued and outstanding shares of Med-Eng from certain shareholders (“the Offeree Shareholders”[3]) whose combined interests constituted 70% of Med-Eng’s capital stock. Since the Offeree Shareholders had a majority stake in Med-Eng, pursuant to a shareholders’ agreement they could compel all minority shareholders to sell their shares to AVC in accordance with the terms of the accepted offer.
[15] On or about August 23, 2007, the Offeree Shareholders accepted AVC’s offer by way of a share purchase agreement. They compelled the minority shareholders to sell their Med-Eng shares to AVC. The plaintiffs also each sold their non-disputed shareholdings (i.e. shares that were not purchased through Med-Eng’s employee stock option plan) to AVC pursuant to the shareholders’ agreement. The minority shareholders were advised that the purchase price would be in the range of $11.50 to $12.00 per share. The plaintiffs allege that at all material times, the Offeree Shareholders and AVC were fully aware of the litigation against Med-Eng and the Original Defendants.
[16] The share purchase transaction closed on or about September 17, 2007. Following the closing, two developments occurred.
[17] AVC eventually merged Med-Eng with another of its subsidiaries to form Allen-Vanguard Technologies Inc. The successor corporation remains an Original Defendant in the Ongoing Actions.
[18] As well, pursuant to the share purchase agreement, an Escrow Fund was established in the amount of $40 million. The purpose of the Escrow Fund was to create a fund to which AVC could have recourse if the representations and warranties of Med-Eng and/or the Offeree Shareholders proved to be incorrect. To the extent that the Escrow Fund is not applied in satisfaction of successful claims asserted by AVC, the Escrow Fund will be released to all shareholders of Med-Eng who sold their shares to AVC under the share purchase agreement. AVC has asserted a claim against the entirety of the Escrow Fund, which is now the subject of separate litigation.
Read the the entire appeal here:
Maynes v. Allen-Vanguard Technologies Inc., 2012 ONSC 2014
iv. The Added Defendants
[19] After the close of pleadings in the Ongoing Actions, the plaintiffs sought to combine the Ongoing Actions and also to add as defendants the Offeree Shareholders, AVC and the escrow agent Computershare Trust Company of Canada (collectively, “the Added Defendants”). Counsel for the plaintiffs sent a letter dated June 4, 2009, to the Original Defendants with a draft Fresh As Amended Statement of Claim. The letter stated, “As you will see, we propose to combine the Maynes/Robichaud action with the Gingrich action. All Plaintiffs then join in an enhanced claim against the ‘Added Defendants’ to seek relief in relation to the Escrow Fund that was established in the context of the Allen-Vanguard share purchase transaction.” The plaintiffs did not obtain the consent required by rule 26.02(b) of the Rules of Civil Procedure to add a party after pleadings have closed.
v. What is sought in the New Action
[23] The New Action duplicated the same five claims the plaintiffs made against the Original Defendants in the Ongoing Actions. However, under the heading, “Claims Arising From the Allen-Vanguard Share Purchase and Related Events”, the statement of claim in the New Action also stated that:
• The individual Original Defendants (i.e. the former directors of Med-Eng) and the Offeree Shareholders each obtained a financial benefit (directly or indirectly) from the purported Med-Eng share repurchases upon the conclusion of AVC’s purchase of the Med-Eng shares in September 2007.
• The plaintiffs are the lawful owners of certain shares in Med-Eng and, as such, “are entitled to compensation and payment by way of distribution of a portion of the Escrow Fund”.
• The Escrow Fund is subject to an express, implied or resulting trust in the plaintiffs’ favour.
• The Added Defendants have a form of discretion or power in relation to the Escrow Fund that could unilaterally be exercised so as to prejudice the plaintiff’s interests and that the plaintiffs are “particularly vulnerable to the Added Defendants in respect of the Escrow Fund”. As such the Added Defendants are fiduciaries of the Plaintiffs.
• If the Escrow Fund were to be paid out or distributed without regard to their claims, the individual Original Defendants and the Offeree Shareholders would be unjustly enriched.
Read the judges decision on awarding costs here: