Prem lobo and nadia chiesa shareholder disputes a practical guide to proving damages

Shareholder Disputes: A Practical Guide to Proving Damages Nadia Chiesa nchiesa@weirfoulds.com Prem Lobo plobo@cohenhamiltonsteger.com

Jamaican Bar Association's Continuing Legal Education Weekend Montego Bay, Jamaica 18-20 November 2016 Š2016 WeirFoulds LLP / Cohen Hamilton Steger & Co. Inc.

Proving Damages in Shareholder Disputes When acting on a claim for relief from oppression/unfair prejudice where there are allegations of financial impropriety: 1. How do you find, trace and recover the funds that have been flowed out of the company?

2. What do you need to "follow the money trail" so that you can prove (or disprove) allegations of oppression?

3. And how can you do it in a cost- and time-efficient manner?

This presentation covers what you need to know from a legal and forensic accounting/valuation perspective.

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Agenda • Overview of the oppression/unfair prejudice remedy • Proving damages: A legal perspective – Legitimate interests and reasonable expectations – Burden of proof – Valuing shares where oppression has occurred – Investigating allegations of oppression – Interim relief

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Agenda • Proving Damages: A forensic accounting/business perspective – What are potentially oppressive transactions?

– Investigating and proving shareholder oppression – Valuing shareholder interests once oppression is proven • Case Study: Putting theory into practice

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What is the Oppression/ Unfair Prejudice Remedy?

[The] Oppression remedy 'is beyond question the broadest, most comprehensive and most open-ended shareholder remedy in the common law world. It is unprecedented in its scope'.

Lalla v. Trinidad Cement Limited et al. 1TT 1998 HC 172 (30 November 1998, per Jamadar J)

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What is the Oppression/Unfair Prejudice Remedy?

The oppression remedy is a most flexible device given by Parliament to the court in order to protect the interests of minority shareholders. Since this remedy is a peculiar creature of statute, the court must, before resorting to it, ensure that certain essential elements are present. The court must also engage in a fine balancing act. On the one hand it must protect the legitimate interests of the minority shareholder. But at the same time it must take care not to usurp the function of the board of directors.

While the minority must not be treated unfairly, the court should respect the justifiable exercise of control by the majority.

In the Matter of the Companies Act 1996 and another v. Du Boulay Holdings Limited and others, [2005] ECSCJ No 18 5

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Companies Act, 2004

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Remedies available for oppression/ unfair prejudice are found in Part IV of Jamaica's Companies Act

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"Complainant Remedies" – Section 212: Derivative Actions – Section 213: Court Powers – Section 213A: Remedy in case of Oppression

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The Court's Discretion to Grant Relief from Oppression or Unfair Prejudice • On an application for relief under s. 213A, the Court has broad discretion to "make any interim or final order it thinks fit“. The list of orders in s. 213A is not exhaustive • Discretionary nature of orders acts as a safeguard to prevent vexatious or frivolous proceedings from going forward • Discretion may only be used to rectify the wrongs committed – The oppression remedy is intended to rectify not punish 7

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The Court's Discretion to Grant Relief from Oppression or Unfair Prejudice

"[I]n seeking to redress equity between private parties the provision does not seek to punish but to apply a measure of corrective justice".

Naneff v. Con-Crete Holdings Ltd. (1995), 23 OR (3d) 48 (CA) at 11

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What is Actionable Under the Oppression Remedy?

• Legislation in the Caribbean offers relief from conduct that is: – oppressive; – unfairly prejudicial; or – unfairly disregards the rights of the complainant

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What is Actionable Under the Oppression Remedy?

In Jamaica, the Companies Act provides that relief may be granted to a complainant where: (2) If upon an application under subsection (1), the Court is satisfied that in respect of a company or of any of its affiliates— (a) any act or omission of the company or any of its affiliates effects a result; (b) the business or affairs of the company or any of its affiliates are or have been carried on or conducted in a manner; (c) the powers of the directors of the company or any of its affiliates are or have been exercised in a manner, that is oppressive or unfairly prejudicial to, any shareholder or debenture holder, creditor, director or officer of the company, the Court may make an order to rectify the matters complained of.

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What is "Oppressive"?

"Oppression must, we think, import that the oppressed are being constrained to submit to something which is unfair to them as the result of some overbearing act or attitude on the part of the oppressor."

Butler v. Butler [1993] 30 J.L.R. 348 as cited in In the Matter of W.G. Northover Associates Limited, [2014] JMCC Comm. 14 and Cash Plus Limited v. Madam A, JM 2012 CA 87

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What is "Oppressive"?

Oppressive conduct: – "burdensome, harsh and wrongful conduct" – requires a continued pattern of oppressive conduct rather than isolated acts – considered to carry the most rigorous burden of proof.

House of Lords in Scottish Cooperative Wholesale Society Ltd v. Meyer adopted by the Eastern Caribbean Supreme Court in – Du Boulay Holdings Limited 12

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What is "Unfairly Prejudicial"?

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Unfairly prejudicial: – conduct that does not rise to the level of oppressive – "prejudicial in the sense of causing prejudice or harm to the relevant interests of the complainant and both unfairness and prejudice must be proved" – the Court may consider the conduct of the complainant in determining whether to grant relief for unfair prejudice – there is no clean hands requirement but it is nonetheless an equitable remedy

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What does "Unfairly Disregards" mean?

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Some Caribbean companies legislation includes a third category of actionable conduct: conduct which "unfairly disregards the interests of" a specified party – See companies legislation in Barbados and Trinidad – "unjustly or without cause pay no attention to, ignore or treat as of no importance the interests of the security holders, creditors, directors or officers"

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Jamaica's legislation doesn't include this category

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Who Can Bring a Claim?

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Before you can ask how to prove damages, you have to consider whether your client can seek damages

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Think stakeholder, not just shareholder

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Remember: "The section 213A remedies are for wrongs done to a certain class of persons or an individual who is a member of that specified class. These remedies are not for wrongs done to the company." – Dewar v. Young et al., JM 2015 SC 150 For recent discussions of derivative actions, see Fulton v. Ramson Limited, [2016] JMSC Comm 14 and Lewis et al. v. Valley Slurry Seal Company, [2013] JMSC Comm. 21

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Who Can Bring a Claim?

Companies Act, s. 212(3) "Complainant" means: (a) a shareholder or former shareholder of a company or an affiliated company; (b) a debenture holder or former debenture holder of a company or an affiliated company; (c) a director or officer or former director or officer of a company or an affiliated company.

For a discussion of s. 212(3), see: Dewar v. Young et al., JM 2015 SC 150 (application for leave to bring a derivative action) Cash Plus Limited v. Madam A, JM 2012 CA 87 (whether an officer is a complainant) 16

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What Relief can you Claim?

• Remember, there is an important limitation on the Court's discretion to craft remedies for oppression • The remedy should rectify the oppression or unfair prejudice but it should not exceed the reasonable expectations of the shareholders

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Legitimate Interests • Oppression remedy provides relief for a complainant's "thwarted expectations" – Extends beyond a shareholder's strict legal rights – Protects reasonable expectations, not all expectations

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Legitimate Interests •

As a preliminary step to deciding what damages have been suffered, the Court must determine: – the expectations of the shareholder and – whether those expectations are reasonable

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For guidance on how to determine whether expectations are reasonable, see Jamadar J's decision in Lalla, which Jamadar J referred to the Ontario Court of Appeal's decision in Naneff:

"the Court must determine what the reasonable expectations of that person were according to the arrangements which existed between the principals"

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Legitimate Expectations • The determination of whether there has been oppression is case-specific [I]t must be that it is essentially a question of fact whether or not there has been Oppression. Therefore, each case must turn on its own particular circumstances. To do so, clearly, the courts must consider both the nature of the acts complained of and the method by which they were carried out, in the context in which they arise.

Oppression must necessarily be, in my opinion, context specific (…)

Lalla v. Trinidad Cement Limited et al., TT 1998 HC 172 citing Naneff

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Reasonable Expectations in Closely-Held Corporations •

Determining reasonable expectations can be particularly challenging in the context of closely held corporations (also known as quasi-partnerships) and family businesses – Legitimate expectations can include the expectation to participate in management of the company – Legitimate expectations are subject to contractual obligations and mutual understandings

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Reasonable Expectations in Closely-Held Corporations

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The court will often look to the parties' "legitimate expectations" or "equitable considerations", which are defined as: an expectation or consideration arising out of a fundamental understanding between the shareholders, which formed the basis of their association, but which was not written into the constituent document

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For a comprehensive discussion of legitimate expectations and what is required to establish unfair prejudice, see In the Matter of W.G. Northover Associates Limited, [2014] JMCC Comm.

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Burden of Proof and Damages •

The claimant has the burden of proving the fact and the amount of damage

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Even if the defendant fails to deny the allegations of damages, the claimant must still prove his loss

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See Jaikaran v. Tsikendu Investment Corporation, Seepersad and WIN TV Limited, TT 2015 CA 18 • •

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Court of Appeal dealt with the issue of proving damages in an oppression claim (no expert evidence was adduced) Trial judge erred in award of damages because there was a significant gap (a few million dollars) between what the respective parties were alleged and what was actually spent Defendants did not challenge the quantum at trial Court of Appeal found that the damages award "grossly exceeded what could conceivably be the reasonable expectation of the claimants"

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How to Value Shares Where Oppression has Occurred •

The court is generally guided by two general principles when valuing shares: (1) Shares are to be valued as if the oppressive conduct did not occur • Otherwise, the party ordered to purchase the shares will be profiting from its own oppressive conduct by acquiring the shares at a depreciated value (2) Shares are to be priced at fair value

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What is fair value vs. fair market value?

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What is Fair Value?

Fair value: "the value that is just and equitable in the circumstances" – equitable concept – court will often decline to apply minority discount – court may add to its calculation any amounts that have been improperly taken from the company by actors within it

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What is Fair Market Value?

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Fair market value has been defined as "the best price that can be obtained in an open market by a willing seller from a willing purchaser.“ (Brant Investments Ltd. v Keeprite Inc. (1991) 1 BLR (2d) 225) – Where there has been oppression/unfair prejudice, there is no willing seller – In the case of closely held corporations, there is often no market for the shares

"In relation to the valuation of shares and other property it is well settled that the best indicator of market value of property is what a willing but not over-anxious purchaser would pay to a willing but not over-anxious vendor and that an offer to buy is generally not admissible as direct evidence of the value of property or shares (…) " See In The Matter Of Accufit Investments Inc. and In The Matter of Section 184C of The BVI Business Companies Act, 2004; Basab Inc. v Accufit Investment Inc. and another, [2015] ECSCJ No. 249 26

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Minority Discount

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A minority discount is applied to the value of a minority block of shares and takes into account disadvantages such as the inability to control the company policy and restrictions on the right of transfer of shares

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Generally, the court will decline to apply a minority discount when the minority is bought out under an oppression order – It should not apply where the minority is being squeezed out

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Minority discount may apply where there is bad faith conduct on the part of the minority shareholder

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Methods of Valuation Generally accepted methods of conducting a valuation include: 1) Market value approach: • Based on the quoted stock market price of the shares • Used where shares in the company are widely traded and there is no single shareholder or group of shareholders 2) Assets approach: • Fair market value of the assets of the company • Used where the majority of the company's assets are real estate or if the corporation is worth more liquidated than as an active business

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Methods of Valuation 3) Earnings or investment value approach: • An appraiser calculates the maintainable earnings of the company in the near future • Used for more for closely held companies (no market for the shares and the company is worth more as a going concern).

4) "Combination approach" • Combination of the three methods • Used because the courts have a wide discretion in determining fair value

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When are Shares Valued?

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Appropriate valuation date depends on whether the oppressive conduct has affected the value of the company in question Ask: Has the oppressive conduct diminished the value of the company?

– If yes: valuation date is the date of the application – If no: Courts have been flexible in setting the valuation date The valuation date should not – "(a) deprive the petitioner of the benefits of any contributions he has made to the business success of the company, or (b) confer on the petitioner the benefits of contributions to the company's business for which he has not been responsible."

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Investigating Allegations of Oppression • You need to prove (or disprove) wrongdoing (i.e. oppression) before you prove damages – As a lawyer, you will need access to company information, documents and records to prove oppression – The forensic accountant/valuator will also need access to this information in order to prepare an expert report and/or valuation • How can you access the information that you need when the majority may control all company information

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Investigating Allegations of Oppression

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Consider statutory investigations by a court-appointed investigator, the Registrar or even the Minister.

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In many Caribbean jurisdictions, the legislation provides for a courtordered investigation of a company's affairs where the court is satisfied that there are circumstances suggesting wrongdoing

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In most statutes, the court may order an investigation where it appears that the conduct at issue falls within the grounds enumerated in the relevant statutory provision

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See ss. 160 to 171 of the Companies Act

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Investigating Allegations of Oppression •

The burden of proof is lower than where the court must be satisfied –

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Compare to burden in an application to bring a derivative action or an oppression claim

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Mere suspicion is insufficient

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The applicant must establish a prima facie case based on specified grounds of misconduct but doesn't have to meet the civil standard of proof

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The investigation may produce a report that becomes the basis for an application pursuant to other shareholder remedies but the investigation must be prima facie in the interests of the company or its shareholders

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Other Information Gathering Mechanisms •

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Look to the Civil Procedure Rules – The claimant's duty to set out her case includes identifying or annexing a copy of any document which she considers to be necessary to the case – Where the claimant fails to do so, the defendant may request, and if necessary, seek an order for production of those documents.

The disclosure and inspection of documents is a fundamental step in the litigation process.

– A party has the right to inspect a document which is referred to in a statement of case (which is a defined term but captures a broad scope of documents), affidavit, expert's report or witness statement/summary.

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Other Information Gathering Mechanisms • Part 28 of Jamaica's Civil Procedure Rules 2002 imposes a duty to disclose documents that are directly relevant to the matters in question in the proceedings • A document will be considered directly relevant if: (a) the party with control of the document intends to rely on it; (b) it tends to adversely affect that party's case; or (c) it tends to support another party's case

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Other Information Gathering Mechanisms •

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Application for specific disclosure – Where the opposing party is withholding documents or information – CPR Rule 28.6: Any party may apply to the court for an order for specific disclosure of documents which are directly relevant to one or more matters at issue in the proceedings.

– Relevance is analyzed by reference to the pleadings, and the factual issues in dispute on the pleadings

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Other Information Gathering Mechanisms •

Court will also consider whether an order for specific disclosure is necessary in order to dispose fairly of the claim or to save costs, having regard to the following factors: • • •

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(a) the likely benefits of specific disclosure; (b) the likely cost of specific disclosure; and (c) whether it is satisfied that the financial resources of the party against whom the order would be made are likely to be sufficient to enable that party to comply with any such order

An order for the discovery of a document is "necessary for disposing fairly" of the claim if and only if the document is likely to contain information which would give substantial support to the applicant's contention on an issue which arises in the case and for that reason, the order would facilitate the applicant's success in the proceedings

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Interim Relief •

Recall that s. 213A(3) gives the Court discretion to grant any interim or final order it thinks fit

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Interim order for costs – Test: Applicant must establish (a) that there is an arguable case with a reasonable chance of success and (b) that his financial circumstances are such that he would be precluded from pursuing his claim but for an order for interim costs.

– There is no need to establish a link between the inability to fund the proceedings and the alleged impecuniosity Motor and General Insurance Co Ltd v. Sanguinette and Another (No 2), TT 2006 CA 21

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Interim Relief •

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Consider the allegations and craft an interim order that is responsive to the problem For example, ask for an order: – Appointing a receiver or monitor to ensure proper management of the company pending a final disposition; – Restraining the company and/or its directors from further encumbering the company with new liabilities that are outside of the ordinary course of business; – Requiring disclosure of the company's financial books and records; – Expediting the hearing of the application (depending on the nature of the action and the circumstances of the case); or – Bringing the application before the Commercial Division.

For a discussion of injunctive interim relief in the context of a corporate dispute, see: Khemlani v. Public Supermarket Limited et al., JM 2015 SC 60 Gold Seal Holding et al. v. Paladin et al., BM 2014 SC 65

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Proving Damages: A Forensic Accounting Perspective

• What are potentially oppressive transactions?

• Investigating shareholder oppression

• Valuing shareholder interests shareholder oppression is proven

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What are Potentially Oppressive Transactions?

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There is no codified standard or definition for "oppression" or "oppressive transactions".

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Potentially oppressive transactions are those that are seen by the Court to, among other things: – violate a fiduciary "duty of good faith" owed by shareholders to each other, or – depart from "fair dealing" or "fair play" as among shareholders, or – impose unreasonable burdens to shareholders, or – represent harsh or improper conduct.

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Potentially oppressive transactions cover various situations but do not necessarily have to be "illegal" or "fraudulent".

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What are Potentially Oppressive Transactions (cont'd)?

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Restricting the payment of dividends to shareholders when the company has available financial resources.

Excessive/over-market compensation paid to controlling shareholders or related parties such as family etc., possibly in lieu of dividends.

Using company funds to pay personal expenditures of controlling shareholders or related parties.

Use of company assets (cars, airplanes, real property) by controlling shareholders or related parties.

Withholding of financial statements or other documents with respect to the financial position of the company.

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What are Potentially Oppressive Transactions (cont'd)?

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Entering into non-arm's length contracts or transactions with related parties that are not at market values.

Repurchase/redemption of shares at below fair market value.

Not allowing minority shareholders to acquire additional shares to prevent the dilution of their equity interest.

Preventing minority shareholders from participating in company decision making (improper dismissal of shareholders from management positions, for example).

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Investigating Shareholder Oppression

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Investigating or proving shareholder oppression is always a challenge. From the minority's perspective, the majority is rarely willing to provide full and transparent financial disclosures. From the majority's perspective, information/documentary requests from the minority may be overreaching, irrelevant or onerous.

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The approach to investigating shareholder oppression needs to be carefully tailored so that it is relevant to the fact circumstances at hand.

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Lack of focus on the core investigative issues could lead to excessive expenditure of client funds and insufficient depth of evidentiary findings.

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Investigating Shareholder Oppression – Role of the Accounting Expert •

Accounting experts are often retained by the minority and/or the majority parties to investigate the legitimacy of claims of oppression.

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The role of the accounting expert should be independent, not partisan, and should seek to identify the facts so that the Court can make an objective and fully informed ruling.

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The expert accountant's motto: All truths are easy to understand once they are discovered the point is to discover them.

- Galileo Galilei

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Documentary Evidence – Generally (Key Documents)(cont'd) •

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Financial statements of the company (annual & quarterly) (externally audited or internally prepared).

– These help create a big-picture view of the ongoing operations of a company (through the income statement), the financial position at a point in time (through the balance sheet), and the cash flows of a company (through the cash flow statement).

– Help one see the "forest" before delving into the "trees".

– Help formulate some idea of what dollar amount is "material" versus "immaterial" to investigate.

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Documentary Evidence – Generally (Key Documents)(cont'd) •

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General ledger of the company.

– A company's general ledger is the chronological accounting log or repository of all transactions that a company enters into.

– Transactions are categorized into such items as revenue and operating expenditures, with sub categories in each.

– General ledger transactions subtotal to reconcile to the amounts reported on financial statements.

– Note: Asking for the "general ledger" is too broad. Need to ask for/review relevant GL accounts (salaries and benefits, office expenses, professional fees, miscellaneous expenses etc.)

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Documentary Evidence – Generally (Key Documents)(cont'd)

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Back up accounting documents for select transactions.

– Invoices, transaction receipts, requisition documents etc.

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Material service, supply, sales or other contracts.

– Particularly with respect to non-arm's length parties.

– Any procurement efforts that were undertaken before selecting a particular non-arm's length party as a vendor.

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Corporate documents.

– Minutes of Board of Director meetings, extraordinary meetings etc.

– Internal budgets/forecasts/strategic plans – Remuneration paid to Directors

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Documentary Evidence – Generally (Key Documents)(cont'd)

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Bank Statements and cheque copies.

– Review of bank statements can be expansive. Need to review relevant bank statements for specific transactions or large/unusual transactions.

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Listing of all company vendors, sorted by dollar value of purchases.

– To identify potential related party vendors.

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Listing of company customers, sorted by dollar value of sales.

– To identify potential related party customers.

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Obtaining Information/Documentation

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Ask politely! Send out a master document request for voluntary disclosure. Ensure that it is relevant and focused.

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Obtain a Court order for a company to provide required information/documentation.

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Court order to conduct an inspection of documents on premises.

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If certain important requested documents are not provided, clearly set out scope limitations in any report that is eventually prepared.

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Obtaining Information/Documentation – Example – Non-Arm's Length Transactions •

Context: – Excessive/over-market compensation paid to controlling shareholders or related parties such as family etc.

– Using company funds to pay personal expenditures of controlling shareholders or related parties.

– Entering into non-arm's length contracts or transactions with related parties that are not at market values.

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Key investigative objective: – Misappropriation/under-generation of revenue from related parties.

– Misappropriation/over-incurring of expenses with related parties.

– Misappropriation of company resources by controlling shareholders.

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Obtaining Information/Documentation – Example – Non-Arm's Length Transactions (cont'd)

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What time period is being investigated? When did the alleged oppressive activity begin? Can the time period be narrowed down?

Consider obtaining the below for the relevant time period.

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Financial statements – These will help identify total revenue, operating expenses and ideally expenses in respect of total compensation, total purchases, consulting expenses etc.

– Allow for assessment of what dollar amount is material to investigate.

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General ledger details for such accounts as compensation expense, shareholder remuneration expense, consulting expenses, revenue, purchases etc.

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Obtaining Information/Documentation – Example – Non-Arm's Length Transactions (cont'd) •

Listing of company customers, sorted by dollar value of sales.

– Identify material sales to significant related parties. See below.

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Sales transactions/sales contracts with related parties.

– Are sales made at fair market value or are they intentionally being conducted at subsidized prices to the detriment of minority shareholders?

– Review sales transactions/contracts with non-related parties to see if sales prices and terms are consistent/reasonable.

– Research external market sales transactions/contracts to see if sales prices and terms are consistent/reasonable.

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Obtaining Information/Documentation – Example – Non-Arm's Length Transactions (cont'd) •

Listing of all company vendors, sorted by dollar value of purchases.

– Identify material purchases from related parties. See below.

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Purchase transactions/purchase contracts with related parties.

– Are purchases made at fair market value or are they intentionally being conducted at excessive prices to the detriment of minority shareholders?

– Review purchase transactions/contracts with non-related parties to see if purchase prices and terms are consistent/reasonable.

– Research external market purchase transactions/contracts to see if purchase prices and terms are consistent/reasonable.

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Obtaining Information/Documentation – Example – Non-Arm's Length Transactions (cont'd) •

Employment contracts for controlling shareholders.

– Is compensation (base, bonus and benefits) to controlling shareholders and related parties at fair market value?

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Supporting documents for transactions between the company and controlling shareholders or related parties.

– Are such transactions at fair market value?

– Determine the quantum of company funds used to pay personal expenditures.

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Obtaining Information/Documentation – Example – Non-Arm's Length Transactions (cont'd)

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Corporate documents such as Board of Director minutes – What do minutes of meetings reveal about related party transactions?

– Do the minutes identify additional (i.e. non disclosed) related parties?

– Do the minutes identify the rational/purpose or legitimacy of the amount and terms of related party transactions?

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Review of large/unusual transactions from bank statements.

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Sufficient, Appropriate Evidence

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The information/documentation that is analyzed should be sufficient and appropriate in order to be able to form conclusions.

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For example, for a sales transaction with a related party, identifying the existence and quantum of the related party transaction is not sufficient. Obtaining sufficient evidence with respect to whether or not the amount and terms of the transaction were at fair market value is also needed before concluding.

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Corroborating Sets of Facts •

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Where possible, accounting experts should attempt to assess the reasonableness of conclusions using various corroborating sources of data. i.e. "get comfort" from multiple sources to form a persuasive basis for conclusions.

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Corroborating Sets of Facts (cont'd) •

For example, when analyzing potential compensation of a controlling shareholder:

over

– An analysis of the relevant employment agreement would reveal the amount and terms of employment.

– External research into similar employment roles for arm's length employees may reveal if there is any over compensation.

– Analysis of employment remuneration at the same company for arm's length employees (ideally for similar employment roles) would reveal if there is any over compensation.

– Review of Board minutes may reveal whether any over compensation was deliberate.

– Was an arm's length employee ever employed in the same capacity in the past? What compensation was paid to this employee?

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Use of Assumptions

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Making assumptions is an important element in the provision of accounting expert evidence.

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Key assumptions need to be set out in a written expert report such that the basis of conclusions can be understood and assumptions need to be tested and be realistic.

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Accounting experts sometimes make assumptions where facts are not available, unclear or contradictory. Ensure that facts are not available in these cases and that reasonable attempts have been made to obtain further information to no avail.

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Use of Assumptions (cont'd) • Insufficient attempts to obtain factual information will not be viewed favourably by the courts.

• Experts are required to test assumptions for reasonability and to establish that they are grounded in "common sense and commercial reality".

• Adequate due diligence should be undertaken to client-provided information/data for reasonability and technical accuracy before adopting them in financial analyses.

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Focus on Critical Issues Efficiently ("FOCIE") •

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The following decision framework, entitled the FOCIE method, helps plan and execute a forensic accounting engagement: a) Issue Identification b) Materiality Assessment c) Impact Assessment d) Cost Assessment e) Budget Constraint Identification f) Issue Selection g) Approach Selection h) Reasonableness Check i) Adaptive Execution j) Clear and Concise Reporting

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Remedies for a Shareholder once Oppression is Proven • Ask Court to compel the sale of the minority interest to the majority.

• Ask Court to dissolve the company and redeem all the shares.

• Appoint a receiver or custodian to run the company.

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Valuing Shareholder Interests once Oppression is Proven • Determining the value of minority shareholder interests is challenging because often the company is private and a publicly listed stock price is unavailable. • A business valuation may have to be undertaken.

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Valuing Shareholder Interests once Oppression is Proven (cont'd) • The term "valuation" refers to the determination of the potential market value of a business interest, asset or liability.

• The term valuation is usually referred to in context of a specific definition of value such as "fair market value", "fair value" or similar.

• In shareholder oppression contexts, courts usually instruct a valuation to be at "fair value" instead of "fair market value" (see next slide).

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Valuing Shareholder Interests once Oppression is Proven (cont'd)

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Fair market value: the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash.

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Fair value: a fair and equitable amount. A value term commonly used in connection with minority shareholder dissent and oppression remedy actions. Fair value of a block of shares is determined by taking the "en bloc" share value (i.e. fair market value of 100% of the shares) and calculating the respective pro-rata amount relating to the block of shares being valued without a minority discount.

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Valuing Shareholder Interests once Oppression is Proven (cont'd) • A minority discount is a discount to the en bloc pro-rata share value of a minority interest to account for the fact that a minority has limited control over a company's operations and, also, limited liquidity (ability to sell the shares for cash). An arm's length purchaser will require a "discount" to pro-rata value in order to acquire a minority interest. • In the shareholder oppression context, value is usually calculated with relevant adjustments to cash flows, and balance sheet items as if oppressive conduct had not occurred.

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Valuation Methodologies

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There are two generally accepted approaches to value, being a going-concern approach and a liquidation approach.

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A going-concern approach is appropriate where a company is generating an acceptable rate of return and/or is expected to do so in the future.

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Under a going-concern approach, a number of valuation techniques can be applied to determine value. The techniques commonly applied to determine going-concern value can be classified into two broad categories, those based on assets and those based on earnings or cash flow.

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Valuation Methodologies (cont'd) • An asset-based valuation technique restates the net book value of individual assets and liabilities to their fair market values at the valuation date.

• Valuation techniques based on earnings or cash flow require the capitalization or discounting of future expected earnings or cash flow. The multiple selected for capitalization or the rate selected for discounting reflects the risk of achieving the anticipated results in relation to other possible investments.

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Valuation Methodologies (cont'd) • Under a liquidation approach all assets and liabilities are restated to their realizable values, net of the costs of realization.

In addition, liabilities which are contingent in nature under a going-concern approach, such as liabilities arising on the termination of supplier, landlord and/or employee contracts, may be considered to crystallize at the time of the liquidation.

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Example of a Discounted Cash Flow Valuation Business Value Year

Los 0

1

2

3

4

5

Revenue Operating expenses Cash flow Interest Capex net of tax shield

X (X) X n/a (X)

X (X) X n/a (X)

X (X) X n/a (X)

X (X) X n/a (X)

X (X) X n/a (X)

R O C In C

Income taxes Net cash flow (after tax) After tax capitalization multiple

(X) X

(X) X

(X) X

(X) X

(X) X

In N

5X

After tax discount rate X%

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X

Y

*5

Capitalized terminal value

Discounted present value (business value)

Beyond

Dis

Case Study: WME Mineral Exploration Inc. • WME Mineral Exploration Inc. ("WME") was incorporated pursuant to the laws of Kazakhstan in 2001.

• Company explores for zinc in the northern region of Kazakhstan.

• Three equal shareholders initially – Shareholders 1, 2 and 3.

• In 2002, company discovered zinc reserves of approximately USD $500 to $750 million.

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Case Study: WME Mineral Exploration Inc. (cont'd)

• In 2002, Shareholders 1 and 2 recommended that a person they knew, Mr. X, be retained as a consultant of WME in order to help the company stay on track after its recent discovery of the zinc reserves.

• Shareholder 3 reluctantly agreed.

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Case Study: WME Mineral Exploration Inc. (cont'd)

• Shortly after Mr. X began providing consulting services to WME the attitudes of the Shareholders 1 and 2 changed towards Shareholder 3.

• Arguments over the direction of the company began to become more frequent over Mr. X's involvement with WME. • In 2003, Mr. X was retroactively voted into WME as a shareholder by Shareholders 1 and 2.

• In 2003, Shareholder 3 was suspended as a director of WME.

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Case Study: WME Mineral Exploration Inc.(cont'd) • Subsequent to Shareholder 3 being frozen out of the management of WME, the following changes in the business operations were noted: – Travel expenses increased significantly.

– A number of "consulting companies" were retained by WME who paid flat monthly fees ranging from $25,000 to $200,000 per month for services only described as "professional services" on invoices. Sometimes, no invoices were submitted.

– Shareholder loans amounting to $10 million each were granted to all shareholders expect for Shareholder 3.

Six months after being issued, these loans were forgiven by the company and written off.

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Case Study: WME Mineral Exploration Inc. (cont'd) – WME's legal expenses increased to over $2 million per year, representing a 500% increase from 2002‐2003.

– The company entered into a financial services contract with a firm that was paid over $2 million over a two year period. The contract was to negotiate the purchasing of complex derivative instruments on behalf of WME that did not appear to have any business purpose related to the mining operations.

– In addition, from 2002 to 2012 no dividends were declared or paid by WME, despite the unrestricted cash balance in the company increasing from $200,000 in 2002 to $50 million by 2012.

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Case Study: WME Mineral Exploration Inc. (cont'd) • Shareholder 3 initiated legal action against Shareholders 1, 2 and Mr. X ("the majority") alleging shareholder oppression, citing, among other things: – Mr. X was never legally made a shareholder of WME. – The majority used funds from WME for personal travel that included the use of expensive private jets, unrelated to the business of WME. – Various consulting companies that WME retained after Shareholder 3 was removed as a director were actually owned by related parties of the majority and no services were actually being performed in return for the very high monthly fees.

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Case Study: WME Mineral Exploration Inc. (cont'd) – The forgiven loans were a mechanism to pay dividends out to the majority while excluding Shareholder 3 from receiving any distributions.

– Large sums of money were being retained in the company which were not needed for the operations of WME. They were withheld so that Shareholder 3 would not receive her portion of the distribution.

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Case Study: WME Mineral Exploration Inc. (cont'd)

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Shareholder 3 has limited financial resources, and being frozen out of WME, had no access to cash flow from WME.

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What investigation can be undertaken such that sufficient appropriate facts can be gather to objectively investigate the veracity of Shareholder 3's allegations of shareholder oppression?

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QUESTIONS

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THE END – THANK YOU Nadia Chiesa WeirFoulds LLP Tel: (1) 416-947-5084 E-mail: nchiesa@weirfoulds.com

Prem Lobo Cohen Hamilton Steger & Co. Inc.

Tel: (1) 416-304-7020 E-mail: lobo@cohenhamiltonsteger.com

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