Canada: No Deal: Court Of Appeal Rules On Buy-Sell "Gone Wrong"

As described below, the Court of Appeal for Ontario recently weighed in on a "share-purchase transaction gone wrong" in Leeder Automotive Inc. v. Warwick.¹

Application Decision

The appellants, Leeder Automotive Inc. and its founder/majority shareholder (together, "Leeder"), brought an application seeking to force the respondent minority shareholder, Douglas Warwick, to complete a share purchase transaction pursuant to the buy-sell provisions of Leeder's unanimous shareholders' agreement (the "USA"). The buy-sell provision could be triggered by any shareholder seeking to sell their shares, effectively giving Leeder a right of first refusal. However, when Mr. Warwick provided notice of his intention to sell all his shares, the parties got into a dispute over the applicable valuation method. Among other things, Leeder sought to rely upon non-current property appraisals from a non-arms' length third party and financial statements prepared on a Notice to Reader basis, both of which were contrary to the valuation provisions in the USA. As a result, Mr. Warwick refused to sell his shares to Leeder and instead took the position that Leeder had repudiated the buy-sell agreement.

The application judge dismissed Leeder's application seeking to force the sale of Mr. Warwick's shares, finding that, although the buy-sell agreement did not constitute a separate contract from the USA, it had nonetheless been repudiated by Leeder.

Appeal Decision

The Court of Appeal held that the application judge erred in holding that the buy-sell provision did not constitute a separate contract. As partial repudiation is not recognized in law, the Court held that the application judge could not have found that the buy-sell provision was merely an "implementation of the USA" on the one hand, but on the other find that the transaction agreement alone had been repudiated. However, the Court of Appeal held that the application judge made no error in finding that Leeder breached the valuation provisions of the USA and had repudiated the agreement. As Mr. Warwick had accepted the repudiation, Leeder was not entitled to force him to sell his shares and the appeal was dismissed.

Key Takeaway

The Court of Appeal held that the valuation provisions in the USA were "not merely procedural; they were essential". Further, it found that "it is difficult to think of anything more important than the price at which the shares will be purchased".[2] The decision is an important reminder that companies must comply with valuation provisions when a buy-sell provision is engaged – to do otherwise is to risk not being able to participate in the buy-sell.

Footnotes

1. Leeder Automotive Inc v Warwick, 2023 ONCA 726 at para 1 [Leeder Automotive].

2. Leeder Automotive at para 60.

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