Friday, January 24, 2014

Ontario would be "Forum Conveniens" for Employee Claim, but for Hypothetical Employer Counterclaim

Here's an interesting scenario, of the recent case of Solloway v. Klondex Mines Ltd.:

A mining company, Klondex Mines, is incorporated in British Columbia, with its head office in British Columbia.  It has a wholly owned subsidiary, Klondex Gold, incorporated in Nevada, with its head office in Nevada.  Then there's Solloway, who was president (and a director) of the parent company, and Chairman of the Board of the Nevada subsidiary, who has been involved with both companies for thirty years.  His most recent employment contract is under B.C. law, but he lives in Florida and mostly works out of New York, though he regularly attends to the companies' business affairs in Toronto.

Under his employment contract, Solloway was entitled to stock options in the parent company, though those options would terminate if he was dismissed for cause.

In June 2011, at the annual meeting of the parent company's shareholders in Toronto, there was a proxy battle, resulting in a settlement agreement (the "K2 Settlement Agreement") between the management and the dissidents:  They agreed on how to constitute a new board of directors, and Solloway stepped down as President and CEO, though remained Chairman of the Board for a period of 12 months (i.e. until the next AGM).  He remained president, director, and employee of the subsidiary company.

In July 2011, for regulatory compliance reasons, Klondex Mines had to cancel a portion of his stock options, because they had issued too many.  A negotiation ensued between Solloway and Klondex Mines, and they entered into a Release and Settlement Agreement, in September 2011, which was made in Ontario and purports to be governed by Ontario law, which protected Solloway's remaining options, guaranteeing them even if he ceased to be an employee, officer, or director.  Solloway ceased to be a director, officer, and employee of the companies in June of the following year, when the dissident shareholders took control of the Board.

Part of the release also involved a release of all claims by Klondex Mines against Solloway, in reliance on an express representation that Solloway had not engaged in wilful misconduct, among other things.

And here's the hitch:  Klondex now alleges that, around the time the Release was signed, Solloway began conspiring to appropriate a business opportunity from Klondex, conspiring with other Nevada employees to do so.  They have also alleged that he misappropriated company funds for improper personal expenses.  They then notified him that he was being terminated retroactively for cause.

Solloway then brought an Application in Ontario for an interpretation of the effect of the Release and Settlement Agreement, arguing that the allegations of wrongdoing (which he denies) are immaterial to his entitlement to exercise his stock options.

Klondex argued that Ontario does not have jurisdiction to hear the Application, or alternatively that it is "forum non conveniens" - i.e. that the Ontario courts should decline to hear the matter because it is better dealt with in Nevada.

The Court's Analysis

Justice Perell dealt fairly cleanly with the argument that Ontario doesn't have jurisdiction to interpret the agreement; the agreement was made in Ontario, and purports to be made under Ontario law.  This creates a "real and substantial connection" to Ontario sufficient for the Ontario courts to take jurisdiction.

However, whether or not Ontario should accept jurisdiction is more complicated.  The test for forum non conveniens is fairly complicated, looking at factors such as the location of the majority of the parties, the location of key witnesses and evidence, contractual provisions specifying applicable law or jurisdiction, the avoidance of a multiplicity of proceedings, the applicable law and its weight in comparison to the factual questions to be decided, geographical factors suggesting the natural forum, and whether declining jurisdiction would deprive the plaintiff of a legitimate juridical advantage in the domestic court.

In looking at those factors, there are three principles to be borne in mind:  The threshold for displacing the plaintiff's choice of jurisdiction is high, so the existence of a more appropriate forum must be clearly demonstrated; the court should consider and balance the efficiency and convenience of a particular forum with the fairness and justice of that choice to the parties; and that because a forum non conveniens motion is brought early in the proceedings, the court should be cautious about fact-finding, and should assess the factors based on the plaintiff's claim if there's a reasonable basis in the record.

Justice Perell noted that "but for one major analytical problem, I would conclude that Ontario is an appropriate forum and I would exercise the court's discretion and dismiss Klondex Mines' motion."

The one major analytical problem is that "there are more claims and disputes between Mr. Solloway and Klondex Mines and Klondex Gold to be litigated."  Klondex indicated an intention to bring an action against Solloway for his alleged misconduct, and there was a prospect that Solloway might "up the ante" by adding a wrongful dismissal claim.  And the real problem becomes that Ontario really isn't the appropriate jurisdiction for litigating all of those claims.  (Indeed, Solloway already commenced an action for expense reimbursement in the BC Small Claims Court.)

The Court sums up the problem thusly:  "if one analyzes the factors about a convenient forum just in context of Mr. Solloway's Application, Ontario is forum conveniens but Ontario becomes forum non conveniens for resolving the omnibus and interrelated disputes between the parties if those claims were advanced in Ontario."

Solloway argued that Klondex is "high jacking" his Application, which "is a neat and free-standing interpretive matter that can be decided regardless of whatever suits Klondex Mines and Klondex Gold may bring against him."  However, Justice Perell noted that while Solloway "may own his own claims", he cannot control the claims his opponent may bring, and if his opponent does bring claims in Nevada, they would end up with an undesirable multiplicity of proceedings.  "The horns of the dilemma for the court, however, is that Klondex Mines and Klondex Gold has yet to commence proceedings against Mr. Solloway in Ontario or anywhere else."

The compromise solution implemented by Justice Perell was to stay the application conditionally on Klondex commencing proceedings in B.C. or Nevada within 60 days.


This is a tricky case.  Justice Perell is an experienced and astute judge, and he wisely highlights that the exact timing at which Solloway (allegedly) began his improper pursuit of a business opportunity might be very important.  I agree with him:  If Solloway was actively engaged, when signing the Release and Settlement Agreement, in such an overt breach of his fiduciary duties as Klondex alleges, that could very probably result in the agreement being set aside.  That wouldn't be the end of Solloway's claims, but it would probably be the end of the applicability of Ontario law - he would have to then turn to the Stock Option Plan, under B.C. law, and argue that he's still entitled to them notwithstanding the purported retroactive termination for cause.

(The retroactive termination for cause, by the way, is really strange, and illustrates the significant bad blood that is often characteristic of these dissident proxy takeovers.  More on that in a bit.)

So when Justice Perell hints that the Application may need to be converted into an action, and may need to litigate many of the same issues that would be involved in Klondex's claims against Solloway, he's really zeroing on the central points.  He's also right that those claims really have no place in an Ontario court.

At the same time, Solloway does own his own claims, and his claims are the only ones currently being litigated, and it isn't exactly like there was a rush to get in the first punch here.  It's been over a year since the retroactive termination, nearly two years since he stopped working for the companies, and the facts connected to his alleged wrongdoings are becoming stale indeed.  So it seems quite odd to say that he's wrong to bring an application in Ontario because Klondex might want to bring an action that's better litigated elsewhere.

It isn't unusual for a party to decline to litigate until the other side takes them to court.  "I want to put this behind me, but if we have to fight about it, then I'm going to counterclaim."  So, to that extent, it's kind of natural for Klondex to only want to litigate in response to Solloway's own claims.  Yet it seems very odd for Klondex to be able to succeed on a forum non conveniens motion on the basis of the convenience associated with a counterclaim it hasn't brought, where it fails on the convenience of the proceeding actually before the Court.

As well, employment law is an area where jurisdiction matters.  Employment law is fairly uniform across Canada, but in most of the United States it is very different.  (The central difference is that most non-union employment in the U.S. is "at will", meaning that either party can terminate the relationship without notice at all.  In Canada, not only has the common law developed in a very different direction, but "at will" employment is generally illegal.  But this distinction bleeds into other areas of the law as well, including contract interpretation, the meaning of 'just cause', etc.)  In theory, a court is able to apply the laws of another jurisdiction - so an action might be properly brought in Ontario, and be required to interpret Nevada's laws, but for a number of reasons that's less than ideal, and especially so in employment law where our judiciaries have such fundamentally different perspectives on where the justice lies.

Therefore, bringing the omnibus litigation in Nevada, where the witnesses to the alleged misconduct are, would nonetheless deprive Solloway of a legitimate juridical advantage of having a 'just cause' issue determined in Canada.

Respectfully, I think the problem in this decision lies here:  Justice Perell correctly identified that the issues of Solloway's alleged breach of fiduciary duty may be relevant to this Application, but didn't follow through on that analysis to its conclusion - that the factual elements (such as location of the witnesses) leaning towards Nevada being a more appropriate forum actually are directly engaged by Solloway's application itself.

If they weren't, then the 'multiplicity of proceedings' is less concerning, because you're litigating about completely discrete issues.  But because they probably are, that means that the appropriate analysis is to weigh those factors directly against the factors which Justice Perell found made Ontario the appropriate forum for the Application itself.  In other words, rather than query the convenience of trying Klondex's hypothetical claims alongside Solloway's actual claims, look at the convenience associated with hearing Klondex's defence to Solloway's claims.

(Again, there's an analytical problem - this was an Application, not an Action, though it could yet be converted into an Action.  Thus, the 'convenience of the witnesses' is less important until and unless it is converted into an Action.  It may well be that this should have doomed Klondex's motion, however - that without first successfully arguing a motion that it needs to be converted into an Action, there's no basis for staying it, because there's no 'convenience of the witnesses' issue engaged, and no potential to try their proposed counterclaim alongside it.)

Dissident Shareholder Takeovers

These takeovers happen from time to time, where a group of stakeholders become disillusioned with the existing management regime, and decide to change it up.  In publicly traded corporations, they're relatively rare, because it takes a lot of resources to mount a proxy campaign, so only heavily-invested shareholders will find it worthwhile, rather than 'voting with their feet', so to speak.

In small closely-held corporations, they're even rarer, because where you have a single person or family with a majority of the voting shares, it's next-to-impossible to unseat them.

However, where you have a middling number of shareholders, this can happen more frequently.  I've also seen it happen with not-for-profit organizations where an existing board member gets ambitious and starts campaigning against existing managers.

Regardless of how it happens, it's almost inevitable that, by the time it's done, there's an axe to grind with previous management.  And so the fact pattern here - that the new Board started an investigation into the activities of previous management, and found a basis to allege significant misconduct - is pretty much par for the course.  Whether or not those allegations are sustainable or not is a different matter entirely.

In general, the core of the allegations are going to be against the old President and CEO, and - regardless of the objective reasonableness of his actions - such allegations are typically fairly difficult to make out, because the old President and CEO was usually pretty cozy with the old Board, and would often have gotten their approval to do the things that the new Board thinks was misconduct.  The problem being that, if the old Board knew of it and approved it, it usually isn't misconduct.

That's why the new management often has an uphill battle:  Proving that the old management did some sneaky-looking stuff often isn't that hard, but proving that the sneaky-looking stuff was actually misconduct is another question entirely.

UPDATE:  March 20, 2014

Last week, Justice Perell released a costs decision, ordering Solloway to pay $42,000 in legal fees.  Ouch.

Solloway argued that, because of the circumstances of Justice Perell's decision, being that Ontario would have been an appropriate jurisdiction for Solloway's application alone, but wasn't because of other disputes which Klondex planned to raise, there shouldn't be costs on the motion.

Justice Perell acknowledged that "there is an initial attractiveness to Mr. Solloway's argument", but on further analysis the argument appeared to be "not much more than in all the circumstances, it was not reasonable for him to expect that he would lose the motion".  But he contested and lost the motion, so the normal presumptions apply:  Loser pays costs.

Respectfully, I think Solloway's argument may have been more than that.  Klondex only succeeded on a contingent basis (i.e. the application is stayed unless they fail to bring another action elsewhere), and only because they expressed an intention to do something that they had sat on for a lengthy period of time.  There's really no question, on the basis of Justice Perell's findings, that Solloway was reasonable in bringing his application in Ontario in the first place.  Even if he might have reasonably anticipated the counterclaim, it's unreasonable to expect him to pick a jurisdiction based on claims against him which haven't yet been made.  It would have been insane for him to simply consent to the order sought on the motion:  At this point, he's already incurred significant legal fees in bringing the application (which, remember, was appropriate for Ontario, according to Justice Perell), and Klondex still hasn't commenced the proceedings elsewhere that engage a factual matrix inappropriate for consideration in Ontario.

Were I in Solloway's shoes, then even in hindsight (i.e. anticipating Justice Perell's conclusions on the motion), I would have contested the motion unless (a) an agreement with Klondex could be reached about where and when other proceedings would be brought and (b) Klondex agreed to compensate me for costs thrown away.  After all, they're asking to get rid of my properly-brought proceeding because it isn't convenient to claims that they haven't yet made.

There are cases where the successful party should be denied costs, or even ordered to pay costs - most frequently where the motion is for some kind of technical or procedural relief, necessitated by the moving party's own conduct (say, a last-minute adjournment request for good but avoidable reasons, or setting aside a dismissal for delay), and where the court can look at the responding party and say something like "I feel for you, but the interests of justice and fairness are better served by granting the relief."

This might fall into that class of cases:  It's a jurisdictional issue, and not even jurisdiction simpliciter (on which basis Solloway succeeded, too).  Fundamentally a technical issue, not going to the heart of the matter, with the finding not implying that Solloway did anything wrong by bringing the application in Ontario.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer. 

1 comment:

  1. Update: The Court of Appeal dismissed Solloway's appeal both on the jurisdictional issue, and on costs.