Dispute over brokerage sale could have sent “commercial law sideways”

In a case that would “have had the potential to send the practice of commercial law sideways,” Manitoba’s Court of Appeal has reversed a lower court’s $10 million-decision against Western Financial Group over a disputed share price valuation related to Western Financial’s acquisition of Hayhurst Elias Dudek Inc. (HED) in 2009.

HED called for the “rectification” of the complex purchase agreements, in which the two parties agreed to terms on how Western Financial would finance the acquisition of HED shares.

Essentially, HED claimed they had mistakenly agreed to an incorrect share valuation formula in the share purchase agreements; consequently, they were underpaid for their shares. The trial judge agreed and ordered Western Financial to pay HED about $10.7 million.

Manitoba’s Court of Appeal found in November 2017 that the trial judge erred in law by declaring the terms in the purchase agreement “ambiguous.” As a result of that erroneous finding, the trial judge used correspondence between HED and Western Financial lawyers leading up to the deal to determine the intent of the two parties.

In fact, the terms in the purchase agreement were quite clear, and the two parties had agreed to the terms all along, the Court of Appeal found. Rectifying a contract can only be done when the parties have agreed to terms all along, but the mutual understanding is not properly reflected in the wording of the contract.

“There was absolutely no mistake in the recorded terms of the 2008 SPA [share purchase agreement] as required by [the Supreme Court of Canada decision in] Fairmont,” Manitoba Court of Appeal Justice Jennifer A. Pfuetzner wrote in the Appeal Court’s reversal. “It perfectly reflected the agreement of the parties.  What the plaintiffs [HED] characterize as a ‘mistake’ is, in reality, their error in judgment in offering to sell their remaining shares on terms that they subsequently regretted.”

Western Financial started negotiations to acquire 11% of HED shares in 2006, and then bought 24% more of HED’s shares in 2008. In 2009, Western Financial bought the rest of the outstanding shares.

Each transaction was executed by way of a share purchase agreement, which the courts refer to by year — SPA 2006, SPA 2008 and SPA 2009.

The complex agreements contained language that HED ultimately came to dispute. Basically, the agreements called for Western Financial to pay HED ‘bump’ payments, based on calculations of HED’s share value, which reflected any increases in HED’s share value following the purchase by Western Financial. The calculations for bump payments contained a formula that deducted the $3.3-million value of Western Financial’s equity injected into the HED brokerage in 2006.

“The 2008 SPA, the 2009 SPA, the valuation formula, the valuation calculations and the bump calculations were reviewed by numerous people, including the parties and their advisors, accountants and lawyers,” Manitoba’s Court of Appeal observed. “Moreover, the valuation calculations were prepared on behalf of [HED] and presented by them to [Western Financial].”

During the negotiation of the 2009 SPA, HED “harboured concerns about the deduction of the 2006 equity but remained silent,” the Appeal Court found. “The plaintiffs [HED] did not voice any concerns regarding their valuation calculations to the defendants until 2010, when the final bump payments were calculated.  It was only then, months after the plaintiffs had sold their final tranche of shares, that they emerged from the weeds, claiming that there had been a mistake.”

The trial lawyer declared the language in the share purchase agreements was ambiguous, and therefore the intent of the parties to the negotiation had to be reconstructed. But the Court of Appeal disagreed, saying the terms were clearly stated in the 2006, 2008 and 2009 agreements. There was, therefore, no reason to reconstruct the intent of the parties to rectify the agreement.

“It is difficult to imagine what more [Western Financial] in this case could have done to ensure that it knew what its rights and obligations were under the documents it signed,” the Appeal Court ruled.

“The importance of certainty in commercial relations and the protection of the reasonable expectations of parties to commercial contracts cannot be overemphasized. The approach taken by the trial judge to the admission of parol evidence [the correspondence between parties to determine intent], the interpretation of commercial contracts and the application of the doctrine of rectification had the potential to send the practice of commercial law sideways.”