Montreal Trust Co. of Canada v. Call-Net Enterprises Inc.

In this matter Ken was co-counsel on behalf of an executive in a shareholder dispute involving a corporation and a change in control of the corporation. In 1999, the corporation, Call-Net Enterprises Inc. was involved in a dispute with a shareholder, Crescendo Partners L.P..  While this dispute was happening, Call-Net entered into a Change of Control Agreement with its senior executives. According to this agreement, a change of control was deemed to take place when any person acquires control of 35% or more of the voting power of Call-Net. Crescendo got the required 35% (via shares and proxies) and a shareholders’ meeting was to take place to attempt to oust the incumbent board of directors.

Before the shareholders’ meeting could take place, a deal was reached to adjourn the meeting and the vote to oust the incumbent board of directors did not take place.

The main issue at trial was whether the 35% control accumulated by Crescendo gave it the right to control or direct the voting power of Call-Net amounting to a change in control.

The initial application was commenced by Montreal Trust. The reason for this was that a few days before the meeting (which was scheduled on October 14, 2019 but ultimately did not take place), Call-Net entered into a trust agreement with Montreal Trust whereby Montreal Trust deposited $30 million as trust property to be paid to the executives in the vent of a change of control.

Shortly after the adjournment of the meeting Call-Net terminated the agreement taking the position that no change of control had occurred. Montreal Trust then received notices that from a number of executives of Call-Net who claimed that a change in control had in fact occurred in or about October 14, 1999.

The main issue for the Court to decide was whether a “change in control” had occurred.

The Court found that the purpose of the Change of Control Agreement was to serve as a protective mechanism to retain executives when outside parties attempt to obtain control of a corporation like Call-Net as the outside party that obtains control may change the duties of the executives or simply get rid of them.

On the issue of whether Crescendo’s 35% gave it the right to control or direct the voting power of Call-Net, the Honourable Justice Lax decided as follows:

“25      In summary, proxies are an expression of the shareholders’ right to vote, they are revocable until an actual vote is taken and a proxyholder is bound to act in accordance with the instructions of the shareholder, irrespective of the interests of the proxyholder. A proxy does not confer any right to control or direct the voting power of the corporation. Therefore, Crescendo never acquired the right to control or direct the voting power of Call-Net. What Crescendo acquired was the authority to vote the shares for which it held proxies in accordance with the instructions given to it by those shareholders who gave their proxy. It is worth noting that at least some of those proxies instructed Crescendo to vote against its own resolution. This belies the assertion that Crescendo acquired any real power over the shares, apart from those it owned.”

Justice Lax also concluded that no change in control had occurred:

“33     I conclude that no change in control as defined in section 1.01 of the Trust Agreement and section 1.1(i) of the Change of Control Agreement occurred. All parties are agreed that if no change in control occurred, Call-Net validly terminated the Trust Agreement on October 25, 1999. I therefore direct Montreal Trust to return the trust property to Call-Net.”

This decision was appealed to the Ontario Court of Appeal by a group of former senior executives at Call-Net as given the decision of the Honourable Justice Lax, the various compensation provisions in their employment contracts were not triggered:

“1      The appellants are a group of former senior executives at the respondent Call-Net Enterprises Inc. (“Call-Net”). They appeal the judgment of Justice Joan Lax in which she determined that in the autumn of 1999 there had been no “change in control” at Call-Net. Accordingly, she held, various compensation provisions in the employment contracts of senior executives were not triggered.”

The appellants sought significant payouts  from the trust fund:

“8      After the dust settled, ten senior managers invoked the Change of Control Agreement. The five appellants sought payouts from the trust fund as follows: Vincent Salvati – $1,366,328.76; Andrew Krupski – $1,275,366; Ken Wilson – $1,564,600; Brock Robertson – $706,582; and Irene Panageas – $243,576. Call-Net refused to pay these amounts because, in its view, there had been no “change in control” at the company before or on October 14.”

The Court of Appeal agreed with the Honourable Justice Lax and stated that the accumulation of proxies is not sufficient to trigger a “change in control” as outlined in the Change of Control Agreement:

“15     In summary, we agree with the trial judge that the mere accumulation of proxies is not a sufficient foundation to trigger a change in control within the wording of s. 1.1(i) of the Change of Control Agreement. We are satisfied that bearing in mind the entire definition of change in control, the evident purpose of the agreements and the legal requirements imposed on a proxy holder, Crescendo did not acquire the right to “control or direct” 35 per cent or more of the combined voting power of the corporation.”

The appeal was dismissed. Although the executives felt they had a strong case at the outset of litigation, ultimately, the Court did not side with them. There were significant monies at issue in this matter as a result of the substantial funds initially received from Montreal Trust. The parties had significant funds to litigate this matter and instead of settling this dispute decided to take this matter all the way to the Ontario Court of Appeal.

This case is a good reminder of the uncertainty of litigation and the significant legal costs that can be incurred if the parties do not settle their dispute.

Full citations:
Montreal Trust Co. of Canada v. Call-Net Enterprises Inc., 2004 CarswellOnt 670, [2004] O.J. No. 631, 129 A.C.W.S. (3d) 90
Montreal Trust Co. of Canada v. Call-Net Enterprises Inc., 2002 CarswellOnt 225, [2002] O.J. No. 292, [2002] O.T.C. 60