Does a corporate director of a vendor corporation owe
independent fiduciary duties to a purchasing corporation in the
context of an asset purchase? In Manson Insulation Products Ltd. v Crossroads C
& I Distributors, 2019 ABQB 684
(Manson), the Court dismissed counterclaims by a
purchasing corporation against directors of the vendor corporation.
The purchaser corporation had acquired substantially all of the
assets from the vendor corporation through an asset purchase
agreement. The Court ruled the purchaser corporation had no legal
basis to sue the directors of the vendor corporation for any wrongs
they committed against the vendor corporation.
The plaintiff, Crossroads C & I Distributors (or, as they are referred to in the decision, New Crossroads) counterclaimed against, among others, Shawn Tilson and Keith Eaman. Tilson and Eaman were directors of the vendor corporation (which is referred to in the decision as Old Crossroads). Tilson and Eaman together owned half of Old Crossroads.
At the center of the dispute was a distribution agreement entered into in 2008 between Old Crossroads and a manufacturing company owned separately and fully by Tilson and Eaman (the 2008 DA). New Crossroads claimed the 2008 DA, which remained binding on them as the successors to Old Crossroads, was the result of improper and illegal actions taken by Tilson and Eaman to benefit from their own interests without regard for Old Crossroads. This was the reason why New Crossroads claimed they breached the 2008 DA. The Court did not accept these submissions factually and instead found that "[a]ny injury that has resulted to New Crossroads from the 2008 DA was self-inflicted, and a direct consequence of New Crossroads dishonest conduct".
Regardless of whether Tilson and Eaman breached their duty of good faith, or any other duty or obligation that was claimed by New Crossroads to be owed to Old Crossroads, the crux of the issue is whether such a breach would create a chose in action for New Crossroads. The Court found that in an asset purchase, the intention would be to strip the assets out of the old business, and move them to the new one. The Court also raised a thoughtful red flag that if Tilson and Eaman also owed a fiduciary duty to New Crossroads, there would be irreconcilable conflicts regarding the purchase agreement due their alleged multiple obligations. Considering this, the Court concluded that there was no legal basis for New Crossroads to sue Tilson and Eaman, as the rights in relation to the dispute belonged to Old Crossroads.
Manson confirms the fiduciary obligations of a director of a vendor corporation will not automatically transfer to the purchasing corporation. This recognizes one of the fundamental differences between an asset purchase and a share purchase.
Transaction structures have their costs and benefits. While a share purchase is a blanket acquisition of all the assets and liabilities related to the vendor company, known or unknown, an asset purchase is a strategic decision-making process, where the purchaser picks and chooses what they want to take from the vendor. If claims for breach of a fiduciary duty owing to a vendor corporation are not clearly included in the asset purchase agreement, the purchaser will not acquire those rights.
This article was co-authored by Keaton Buchberger, an articling student in the Edmonton office.
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