When is it just and equitable to liquidate and wind up a company by reason of director deadlock? The BC Supreme Court recently canvassed this issue in Kidner Investments Ltd. v. Totem Mercury Holdings Ltd. et al., 2017 BCSC 205. The court concluded that the directors and shareholders of the closely-held company could no longer work together and, without court intervention, the ongoing management of the company would be deadlocked which would not be in the best interests of the company.

Background

The respondent company was owned equally by two companies, based on a structure set up in 1973 by two friends. The original owners died and their respective interests were left to their children. The company owned a large parcel of land near Cambie Street and Marine Drive, which had been leased since 1973 to car dealerships. The current lease expired in November 2017.

The petitioner wanted to sell the land to take advantage of rising property values; the other director wanted to continue leasing the property to receive a regular income stream. Over the course of 18 months, the land had risen in value from $12 to $25 million. The company had received a number of offers to purchase.

The petitioner sought declarations that the directors were at a deadlock or, alternatively, that the affairs of the company, or powers of the respondent director, were being exercised in an oppressive manner. As for relief, it sought dissolution and liquidation of the Company or in the alternative that the respondent director be required to sell its shares to the petitioner.

Disagreements between directors

The evidence demonstrated significant disagreement between the directors which ultimately lead to corporate deadlock regarding the future direction of the company and its plans for the land.

The articles of the company did not provide assistance on this issue but only required a selling shareholder to first give the other shareholder a 30-day opportunity to purchase the shares before the shares could be sold to a third party.

The petitioner sought to engage in a process to determine the value of land for its eventual sale. The respondent refused the petitioner’s request to obtain an appraisal of the land. Similarly, the respondent refused to respond to any offers to purchase and expressions of interest the company received for the property.

The respondent argued the intentions of their fathers was to hold the land in perpetuity so that their children could have a regular income stream. While agreeing that the parties were at an impasse, the respondent’s principal argument rested on the fact that it would have to pay taxes upon the sale of the land and could incur unquantified “damages” on the sale.

Rudderless Company

The court found that the relationship between directors had deteriorated and they were deadlocked in their future ability to make decisions necessary for the ongoing operations of the company. There was no need to make findings as to how or why the deadlock had arisen or to assess blame for it. The issue was determining the fairest or most efficient way to disentangle the parties.

Without court intervention, the ongoing management and operation will be “rudderless and deadlocked” and something had to be done in order to avoid an inevitable adverse outcome for the company.

The court rejected the respondent’s proposition that the status quo was in the company’s best interests. The lease expired in November 2017, there was no guarantee the current tenant would remain in an overholding lease and the petitioner was refusing to agree to a new lease. Further, the payment of taxes was not a basis to oppose the sale; taxes were not “damages”. There was no evidence that the sale would be improvident at this time.

The court outlined that it would not use its equitable powers to enforce legal rights where the evidence showed a ready market for the sale of shares of a dissatisfied shareholder. Here, there was no market as no third-party purchaser would pay for a non-majority position in a deadlocked company without a significant discount.

Since there was no ready market for sale of petitioner’s shares, the parties’ legal rights could be subject to an application of equitable powers. The court ordered that the land be marketed for sale. The court permitted each shareholder to have a right of first refusal to purchase the land or to purchase the others shares based on the value to be received from the sale.

Director's Actions Oppressive

While not needing to decide the issue, the court concluded that the respondent director had acted in an oppressive manner by blocking attempts to obtain a land appraisal and preventing the company from responding to offers to purchase.

The petitioner had a reasonable expectation that it could sell the land to enjoy benefits and legacy left by the shareholders’ father. There was no evidence that the land would be held in perpetuity. In fact, the evidence demonstrated factors indicating its possible disposition over the years. Despite the fact that the land had been leased since 1973, this did not mean that it would not be in the best interests of the company to sell the land in the future. Practices and expectations can change over time.