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An investment by a businessman and a real estate agent in Thunder Bay’s Prince Arthur Hotel turned sour.

In Bleak House, Charles Dickens describes how the costs of a years long litigation over an estate end up absorbing its entire value. The novel is satirical, but should be read by anyone considering entering litigation.

Things need not be so Dickensian, however– these costs can often be avoided with a little bit of planning. The recently published decision of the Ontario Superior Court of Justice in Paul v. 1433295 Ontario Ltd. is a good illustration of how. While Paul gives us some interesting law, it also provides an interesting lesson: Foresight is much less expensive than litigation.

Paul deals with plight of the Prince Arthur Hotel in Thunder Bay. In 1998, Mr. Parmjit Singh Bahia, a U.K. businessman, went looking for a Canadian hotel to invest in. He retained the services of Russell Paul, a real estate agent, to help him do so. The two got along so well at first that Mr. Bahia made Mr. Paul's wife manager of the hotel and gave the couple 20 per cent of the shares in the company in return for a small capital contribution.

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Mrs. Paul proved to be an inexperienced manager and was soon removed from that position. Relations between the parties deteriorated and communications ceased. In 2006, Mr. Bahia requested that Mr. Paul and his wife contribute more money for much needed renovations. The Pauls refused. Unbeknownst to the Pauls, this letter was essentially an ultimatum. If the Pauls rejected the request, Mr. Bahia planned to execute a fairly common "share consolidation" transaction allowed under the Ontario Business Corporations Act. As the majority shareholder, he would reduce the number of shares in the company but keep the relative standing of the shareholders the same. Once the Pauls' shares were reduced to less than a single share, that share could be combined with other fractional shares belonging to Mr. Bahia, and exchanged for a "fair value" sum of cash.

And this is what Mr. Bahia did, paying the Pauls $6,120 per share. Unhappy with the price, in 2008, the Pauls exercised their appraisal rights to have the shares valued by a court and sued for minority shareholder oppression. The lawsuit was finally decided in December of last year.

It's worth pausing for a moment to discuss how the parties could have avoided this protracted litigation and, no doubt, many thousands of dollars in legal fees. By signing a shareholders' agreement with a "shotgun" clause – a clause allowing one party to propose a price and the other to either beat it or sell – the two parties would have been able to avoid court. Or, as the court suggests, if Mr. Bahia had obtained a formal valuation of the company and not simply pulled a number out of his hat, he could have greatly expedited the procedure.

As it was, the court was forced to engage in a formal valuation process, having each side present valuations for the company and then deciding between them. And valuate the court did. The court was given three different valuations and was required to assess the credibility of the experts, examine the discrepancies between the inputs, and finally pick which inputs to use for the valuation.

After analyzing the analysis of each side's experts, the court settled on a valuation for the hotel of $4.1-million. Deducting the mortgage, repairs and other factors, this left the Pauls with a total of $340,000 and unpaid interest from 2008 for their twenty shares.

As I've described before, the oppression remedy is an all encompassing remedy that allows minority shareholders to sue the majority when they've been treated unfairly but lack a formal legal claim such as a fiduciary duty violation. Courts weigh a party's reasonable expectations against a party's ability to protect itself. In particular, the Supreme Court has found that squeezing out a minority shareholder can constitute the kind of "unfair prejudice" that the oppression remedy covers.

Such a squeeze out transaction will be particularly susceptible to a finding of oppression where it lacks a valid corporate purpose, where it does not simulate an arm's length transaction, and where there's a lack of good faith or discrimination (but not necessarily "bad faith").

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And yup, the court found that the share consolidation was oppressive even though it was lawful because the court found that it was done solely to squeeze out the Pauls, and such conduct was found oppressive by the Supreme Court.

So what did the Pauls get for their oppression remedy efforts? A pyrrhic victory, unless the goal was to get the court to give Mr. Bahia a somewhat tepid scolding. While the court awarded them $45,000 in damages, that amount was entirely swallowed up by the interest payments that Mr. Bahia made to the Pauls during that period on their shareholder loans, in violation of a loan agreement with the Business Development Bank of Canada.

This is a little bit funny. Had Mr. Bahia paid the Pauls fair value for their shares, they would have still had their oppression remedy claim. The oppression remedy is about the unfair treatment that the Pauls were afforded, not the unfair price they were given. Because the litigation had taken so long, their interest payments on their shareholder loans had totaled more than $45,000. Since the BDC was supposed to be paid first, the court counted the Pauls' interest payments against their award. The oppression remedy claim was the Pauls' very own Bleak House. The years of litigation ate it up.

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