Kruger Wayagamack Inc. v. The Queen

Kruger Wayagamack Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2015-04-14
Neutral citation
2015 TCC 90
File numbers
2011-1739(IT)G
Judges and Taxing Officers
Gaston Jorré
Subjects
Income Tax Act
Decision Content
Docket: 2011-1739(IT)G
BETWEEN:
KRUGER WAYAGAMACK INC.,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
Appeal heard on 10, 11, 12 September 2013 and 29 October 2013,
at Montreal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the appellant:
Wilfrid Lefebvre, Q.C.
Vincent Dionne
Counsel for the respondent:
Marie-Andrée Legault
Philippe Dupuis
JUDGMENT
The appeal from the reassessments made under the Income Tax Act for the 2003, 2004, 2005 and 2006 taxation years is dismissed in accordance with the attached reasons for judgment. Costs are awarded to the respondent.
If the parties can not agree on costs on or before 1 June 2015, they shall contact the registry and advise whether they wish to make representations in writing or at a hearing; appropriate arrangements will then be made.
Signed at Ottawa, Ontario, this 14th day of April 2015.
“Gaston Jorré”
Jorré J.
Citation: 2015 TCC 90
Date: 20150414
Docket: 2011-1739(IT)G
BETWEEN:
KRUGER WAYAGAMACK INC.,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction [1] The appellant operates the Wayagamack paper mill in Trois-Rivières, Quebec. At the time it was acquired by its owners in 2001, the mill was facing closure unless substantial funds and efforts were invested in modernizing the mill.
[2] Kruger Inc. (Kruger) and SGF Rexfor Inc. (SGF), a company owned by the Government of Quebec, agreed to undertake to acquire the appellant and invest in the modernization of the mill to turn it around.[1]
[3] The modernization, itself, was successful. The sought efficiencies were achieved and the product mix was improved. One factor beyond the control of the parties significantly affected the outcome. In planning the modernization, the parties had assumed there would be a quite significant increase in the Canadian dollar relative to the U.S. dollar; unfortunately, not only did the Canadian dollar rise to the assumed extent, it soared well beyond.
[4] That rise in the dollar resulted in losses for the appellant and is at the origin of the issues in this appeal.
[5] It is common ground that the appellant conducted scientific research and experimental development and, as a result, became entitled to investment tax credits.[2]
[6] Because there were no profits and, consequently, no income tax to offset the credits against, the appellant applied for refundable investment tax credits. The Minister of National Revenue (Minister) assessed on the basis that the appellant is not entitled to any refundable credits.
[7] According to the respondent, the appellant is associated with Kruger within the meaning of section 256 of the Income Tax Act (Act).
[8] The parties agree that if the two companies are associated, the appellant is not entitled to the refundable credits. Conversely, if they are not associated, they agree that the appellant is entitled to the refundable credits.
[9] In turn, whether the two companies are associated turns on:
(a) whether Kruger has de jure or de facto control of the appellant, or
(b) whether Kruger has control by reason of the operation of certain deeming provisions in section 256 of the Act.
[10] The dispute turns entirely on control. One of the key questions that arise is: Just how much control is needed to constitute “effective control”? Given the facts set out below, it will be necessary to decide whether routine operational control amounts to “effective control” when one does not have the ability to make strategic decisions as described below.
[11] I wish to thank counsel.
De Jure or De Facto Control [12] I will deal first with the question whether Kruger had de jure or de facto control of the appellant.
Legal Principles — De Jure or De Facto Control [13] The applicable provisions of the law are paragraph 256(1)(a) and subsection 256(5.1) of the Act. They read as follows:
256(1) For the purposes of this Act, one corporation is associated with another in a taxation year if, at any time in the year,
(a) one of the corporations controlled, directly or indirectly in any manner whatever, the other;
. . .
(5.1) For the purposes of this Act, where the expression “controlled, directly or indirectly in any manner whatever,” is used, a corporation shall be considered to be so controlled by another corporation . . . (. . . referred to as the “controller”) . . . where . . . the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation, except that, where the corporation and the controller are dealing with each other at arm’s length and the influence is derived from a franchise, licence, lease, . . . or management agreement or other similar agreement . . . , the main purpose of which is to govern the relationship between the corporation and the controller regarding the manner in which a business carried on by the corporation is to be conducted, the corporation shall not be considered to be controlled, directly or indirectly in any manner whatever, by the controller by reason only of that agreement . . . .
[14] It is well established that “control” of a corporation means de jure control. The leading decision on this point is the Supreme Court of Canada decision in Duha Printers (Western) Ltd. v. Canada.[3]
[15] In that decision the Supreme Court set out what constitutes “control” and what is to be considered in the course of determining whether someone has “control” of the corporation. Speaking on behalf of the Supreme Court, Iacobucci J. said:
70 As I have said, the essential purpose of the Buckerfield’s test is to determine the locus of effective control of the corporation. To my mind, it is impossible to say that a shareholder can be seen as enjoying such control simply by virtue of his or her ability to elect a majority of a board of directors, when that board may not even have the actual authority to make a single material decision on behalf of the corporation. The de jure control of a corporation by a shareholder is dependent in a very real way on the control enjoyed by the majority of directors, whose election lies within the control of that shareholder. When a constating document such as a USA provides that the legal authority to manage the corporation lies other than with the board, the reality of de jure control is necessarily altered and the court must acknowledge that alteration.
. . .
72 The appellant correctly points out that to recognize the USA as affecting de jure control begs the question of how much power must be removed from the directors before one may safely conclude that the majority voting shareholder no longer has de jure control. Certainly, the existence of a USA does not necessarily imply the loss of de jure control. But I cannot agree that there is no rational basis for determining when a majority shareholder loses de jure control on the basis of a restriction of the directors’ powers. . . . [T]his issue comes down to a question of fact, turning on the extent to which the powers of the directors to manage are restricted, to what extent these powers have devolved to the shareholders, and to what extent the majority shareholders are thereby able to control the exercise of the governing powers.
. . .
81 . . . Rather, the specific provisions of the USA must alter such control as a matter of law. But to what extent must these powers be compromised before the majority shareholder can be said to have lost de jure control over the company?
82 In my view, it is possible to determine whether de jure control has been lost as a result of a USA by asking whether the USA leaves any way for the majority shareholder to exercise effective control over the affairs and fortunes of the corporation in a way analogous or equivalent to the power to elect the majority of the board of directors (as contemplated by the Buckerfield’s test). . . .
83 In my view, the provisions in the Agreement at issue in this case did not in fact result in the loss of de jure control by Marr’s. The inability to issue new shares without unanimous shareholder approval, while surely a restriction on the powers of the directors to manage the business and affairs of Duha No. 2, was not so severe a restriction that Marr’s can be said to have lost the ability to exercise effective control over the affairs and fortunes of the company through its majority shareholdings. . . .
. . .
85 It may be useful at this stage to summarize the principles of corporate and taxation law considered in this appeal, in light of their importance. They are as follows:
(1) Section 111(5) of the Income Tax Act contemplates de jure, not de facto, control.
(2) The general test for de jure control is that enunciated in Buckerfield’s, supra: whether the majority shareholder enjoys “effective control” over the “affairs and fortunes” of the corporation, as manifested in “ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors”.
(3) To determine whether such “effective control” exists, one must consider:
(a) the corporation’s governing statute;
(b) the share register of the corporation; and
(c) any specific or unique limitation on either the majority shareholder’s power to control the election of the board or the board’s power to manage the business and affairs of the company, as manifested in either:
(i) the constating documents of the corporation; or
(ii) any unanimous shareholder agreement.
(4) Documents other than the share register, the constating documents, and any unanimous shareholder agreement are not generally to be considered for this purpose.
(5) If there exists any such limitation as contemplated by item 3(c), the majority shareholder may nonetheless possess de jure control, unless there remains no other way for that shareholder to exercise “effective control” over the affairs and fortunes of the corporation in a manner analogous or equivalent to the Buckerfield’s test.
[16] Thus, for the purposes of determining whether there is de jure control:
(a) One determines whether a person has “effective control” of the corporation[4] at any time in the year.[5]
(b) In doing so one is limited to the consideration of only the share ownership (the share register), the governing statute and constating documents of the corporation and any unanimous shareholder agreement.
[17] Paragraph 256(1)(a) encompasses both de facto and de jure control.[6]
[18] Both de jure and de facto control aim to get at the question whether a person has effective control. The difference is the following.
[19] In determining whether there is de jure control, one may only examine those documents described in paragraph 85(3) of Duha, above, and one may take account of any relevant consideration found within those documents.
[20] In determining whether there is de facto control, there is no limitation on what may be examined and, again, any relevant considerations may be taken into account.
[21] As the Supreme Court of Canada said, it is ultimately a question of fact turning on the extent to which a shareholder is “able to control the exercise of the governing powers”.
[22] For our purposes in this appeal, it is useful to think of there being a spectrum ranging from complete control to completely shared control. A single shareholder who can name the board has complete control in the sense that, within the legal constraints to which the company is subject, that single shareholder is entirely free to decide what the company should do. A shareholder who is able to elect the majority of the board and who is not subject to any constraints other than those arising from the general law will have effective control.
[23] That same majority will still have effective control even when there are certain additional but limited constraints imposed by arrangements between shareholders, as was the case in Duha.
[24] At the other end of the spectrum, if there are, say, two shareholders who, pursuant to a unanimous shareholder agreement, have agreed that all the directors’ decisions will be taken unanimously, or that all the directors’ decisions will be taken unanimously by the shareholders, then, even if one shareholder has a majority of the shares and the directors, that shareholder will not have effective control.[7]
[25] Just how much control is necessary for someone to have effective control? While the answer to this is not susceptible of being given as a precise formula, Justice Lamarre Proulx used the following helpful definition of control in Plomberie J.C. Langlois Inc. v. The Queen:[8]
39 G. Cornu, dir., Vocabulaire juridique, 2d ed. (Paris: Presses universitaires de France, 1990) defines the word “[control]” in a manner that I find interesting, at p. 207:
[TRANSLATION]
• 3 Dominion over the management of a business or organization; power ensuring the one who has it a dominant influence in the direction of a group, a corporation, etc., or the orientation of its future.
[26] Adapted to the context here, the question is: Does Kruger have a dominant influence in the management or direction of the appellant or a dominant influence in the orientation of its future?
[27] More particularly in the circumstances here, must that dominant influence go beyond operational control of day‑to‑day operations and management of the modernization project and include the ability to make more strategic decisions such as budgeting and changing business plans? Put somewhat differently, does one have a dominant influence if one can not make a significant course change?
[28] In Duha,[9] it is clear that effective control means the control which a majority of the board of directors normally has.[10] If one does not have the ability to make strategic decisions that will change significantly the general course of a business, one does not, in my view, have the effective control normally held by a majority of directors.[11]
Facts and Analysis, Control [29] The appellant is a Canadian controlled private corporation incorporated under the Canada Business Corporations Act. Kruger owns 51% of the shares and SGF owns 49% of the shares. Kruger can elect three out of five directors.
[30] Kruger is a major producer of paper, tissue and other wood products.
[31] SGF is a crown corporation of the Government of Quebec. SGF’s mandate was to “carry out, in cooperation with partners and in accordance with accepted requirements of profitability, economic development projects, in particular, in the industrial sector, in conformity with the economic development policy of the Government”.[12]
[32] It is clear from the evidence that SGF did not plan to or want to operate the mill. However, because of its mandate, SGF was not just a financial investor, profitability was not its only objective.
[33] The mill was previously owned by Abitibi Consolidated Inc. Leading up to the sale, Abitibi had decided through strategic review to shut down certain mills. The Wayagamack mill was on that list. Had the closure proceeded, many jobs would have been lost.
[34] Although the acquisition price of the mill was relatively inexpensive, it was recognized that making the mill profitable would require a very significant investment. Kruger and SGF foresaw the mill needing a new paper machine, improvements to their pulping facility and modernizing of the mill’s entire infrastructure. They estimated the cost of the modernization project at some $400 million.
[35] Neither Kruger nor SGF were prepared to embark on such an endeavour alone. Kruger had just made a major acquisition and was unwilling to add another major expenditure to its balance sheet. As for SGF, it is not their usual practice to purchase companies independently. Rather, they worked with partners in the relevant industry.
[36] Originally, Kruger and SGF envisaged a 50-50 joint venture. Subsequently, it was decided that the entire venture would be perceived as more credible if Kruger owned 51% of the project and SGF owned 49%.[13]
[37] Both Kruger and SGF refer to the appellant as a joint venture in their financial statements.[14]
[38] Together, however, Kruger and SGF had the financing and industry expertise necessary to take on the project. Thus, Kruger and SGF formed the appellant in February 2001 for the purposes of purchasing, modernizing and operating the Wayagamack mill.
[39] The appellant purchased the mill in March 2001.
[40] At the time of the purchase, the appellant and its shareholders also entered into a number of agreements that would dictate how the mill and the modernization project would be governed and operated, most importantly the Unanimous Shareholder Agreement of 8 May 2001.[15]
[41] In order to benefit from Kruger’s industry knowledge and business network, the appellant also engaged Kruger in a Management Services Agreement[16] and a Sales Agency and Marketing Agreement. The appellant and Kruger also entered into a Kraft Pulp Selling Agreement.
[42] With 51% of the shares and the ability to elect a majority of the board of directors, Kruger appears to be able to control the appellant, absent other considerations.
[43] However, there are other considerations; the most important is the Unanimous Shareholder Agreement.
[44] Given that the Unanimous Shareholder Agreement is critical to this matter, I have reproduced below some of the key provisions:
1. DEFINITIONS AND RULES OF INTERPRETATION
. . .
1.1.1.13 “Control or Controlled” refers to, when a legal person, the fact for one or several persons of holding, directly or indirectly, securities of this legal person giving the right to exercise more than 50% of the voting rights attached to the total outstanding voting securities of this legal person and allowing such person to elect the majority of the directors of such legal person;
. . .
1.1.1.16 “Dividend Policy” designates the dividend policy described in section 4.10;
. . .
1.1.1.19 “Kraft Pulp Selling Agreement” designates the Kraft Pulp Selling Agreement between the Company and KRUGER concluded this same date;
. . .
1.1.1.22 “Management Services Agreement” designates the Management Services Agreement between the Company and KRUGER concluded this same date;
1.1.1.23 “Marketing Agreement” designates the Marketing Agreement between the Company and KRUGER concluded this same date;
1.1.1.24 “Mill” designates the Wayagamack pulp and paper mill located in Trois-Rivières (Québec) including all corporeal and incorporeal assets used in its exploitation.
1.1.1.25 “Mission” has the meaning conferred in section 3;
. . .
1.1.1.32 “Project” designates the acquisition of all tangible and intangible assets of the Mill, its commercial exploitation as of the date hereof, and its modernization to manufacture and sell approximately 205 000 metric tonnes of lightweight coated paper (LWC) and approximately 57 000 metric tonnes of kraft pulp annually, as such may be modified from time to time by written agreement between the Shareholders;
. . .
1.1.1.34 “Shareholders” designates CANADA INC. and SGF REXFOR as well as any Authorized Assignee and other physical or legal person who could become holder of Shares, in accordance with this Agreement, and who becomes a party to this Agreement;
. . .
1.5.1.5 The Parties agree to take all other actions and sign all other documents, which either Party could reasonably request for the purpose of giving full effect to the Agreement.
. . .
2. GENERAL COMMITMENT AND PORTE-FORT
2.1.1 The Parties agree, reciprocally and irrevocably, to take any action required and govern themselves in every respect such that the provisions of this Agreement receive full effect and, in particular, the Shareholders agree for this purpose to exercise (or arrange that be exercised) consequently the voting rights associated with the Shares.
2.1.2 Each Party agrees not to do indirectly that which it is prohibited from doing directly under the Agreement, and if any such situation occurs, any other Party can require that the prohibited act cease and exercise any other recourse as provided for by law or under of this Agreement. A porte-fort shall be in default under his promise for another in any of the following cases: if he votes against his promise for another, if he withholds from voting as required by his promise for another, if he takes an action which is counter to his promise for another or if he withholds from taking an action as required by his promise for another.
2.1.3 Any breach of any of the provisions of this Agreement, without prejudice to any other recourse or remedy provided by law, shall give rise to a recourse for injunctive relief, which the Parties recognize to be an appropriate recourse and to which they expressly and irrevocably consent.
3. COMPANY’S MISSION
3.1.1 The Shareholders acknowledge that they have invested in the Company for the purpose of operating a company through the latter, the mission of which is to accomplish the Project.
4. GOVERNANCE OF THE COMPANY
4.1 Board of Directors
4.1.1 The Shareholders agree that five (5) members shall sit on the Board of Directors, of which three (3) will be appointed by KRUGER and two (2) by SGF REXFOR. The Shareholders agree that they shall appoint annually a Chairman of the Board of Directors from amongst the elected directors.[17]
. . .
4.2 Meetings of the Board of Directors
4.2.1 The quorum at the meetings of the Board of Directors shall be of three (3) directors, one (1) of whom shall at all times be a representative nominated by SGF REXFOR. Quorum shall not be maintained unless the directors comprising such quorum are present at the meeting, or are participating by a technical means as provided for in section 4.2.6, at the same time and for the entire meeting of which at least one (1) shall be designated by SGF REXFOR, present at the meeting or participating by a technical means as provided in section 4.2.6, at the same time and for the entire meeting. If the quorum is not reached on the date and at the time fixed for the meeting, the directors present shall adjourn the meeting. Notice of at least ten (10) Business Days or at least three (3) Business Days if the initial meeting was called for an emergency before the date of the adjourned meeting shall be given to the directors in office and the meeting shall be held at the same place where the initial meeting was supposed to take place. If at the adjourned meeting the quorum is still not reached on the date and at the time fixed for the replacement meeting, the directors present shall again adjourn the meeting. Notice of at least ten (10) Business Days or at least two (2) Business Days if the initial meeting was called for an emergency before the date of the adjourned meeting shall be given to the directors in office business day and the meeting shall be held at the Company’s business place in Trois‑Rivières (Québec). The quorum at that meeting, but exclusively at that meeting, shall then consist of the directors present at such adjourned meeting provided there are at least two (2). Notwithstanding the provisions of section 4.2.4, only the matters on the agenda forwarded prior to the date provided for the initial meeting can be discussed and voted upon at the adjourned meetings, if necessary.
. . .
4.3 Decisions requiring unanimity amongst directors present
4.3.1 Any action, ruling, resolution or by-law relating to the business of the Company or one of its Subsidiaries having in purpose or affect, either directly or indirectly, any of the following matters, shall, in order to be effective, be adopted or approved at all times by the unanimous consent of those members of the Board of Directors present at the meeting legally called to discuss such matter, provided that quorum is reached, or by written resolution duly signed by all directors in office entitled to vote on such resolution:
4.3.1.1 acquisition by the Company of shares, capital shares, units or a substantial portion of the assets of a legal person, company, partnership, limited partnership or a cooperative;
4.3.1.2 execution of any loan, financing, refinancing, issuance of debentures, bonds, notes or any other such debt instruments, whether they be convertible or not, for an amount in excess of one million dollars ($1,000,000) per financial year;
4.3.1.3 any loan of money made by the Company and the security by the Company or one of its Subsidiaries of a Third Party’s given debts or any guarantees;
4.3.1.4 approval of the annual business plan and the annual marketing plan as well as any amendments thereto;
4.3.1.5 approval of the annual capital budget and the annual operating budget, along with the approval of any amendments thereto, the approval of any expenditure that is part of the annual capital budget for an amount in excess of one million dollars ($1,000,000) and approval of any capital expenditures not included in such budget;
4.3.1.6 any decision related to the declaration and payment of dividends that contravene the Dividend Policy;
4.3.1.7 the hiring, termination, removal, dismissal or end of employer-employee relationship of any officer, other than the Controller, reporting directly to the General Manager (on the recommendation of KRUGER), as well as the establishment of their compensation, other than by the General Manager following approval by the Board of Directors by simple majority;
4.3.1.8 hiring, termination or end of employer-employee relationship of the Controller [General Manager][18] and the fixing of his compensation and establishment of his mandate;
4.3.1.9 granting and payment of any bonus, premium or benefit sharing, or any other allocation of special rights to any manager including the allocation of share purchase options;
4.3.1.10 annual appointment of the Company’s president, as the case may be;
4.3.1.11 compensation of directors;
4.3.1.12 execution of any contract, understanding or agreement that is outside the ordinary course of business of the Company or any of its Subsidiaries;
4.3.1.13 institution, defence or settlement of any legal proceeding, whether or not initiated by the Company or one of its Subsidiaries, where the amount at issue is fifty thousand dollars ($50,000) or more or when the total amounts claimed during the same financial year attains fifty thousand dollars ($50,000);
4.3.1.14 the execution of a lease with a term exceeding two (2) years or a lease with a lesser term but which requires the Company or any Subsidiary to assume obligations of three hundred thousand dollars ($300,000) or more in the same financial year;
4.3.1.15 adoption of a compensation policy for the employees and management of the Company or any Subsidiary that does not comply with the compensation policy that is in effect from time to time at KRUGER, and any modification or replacement of such a policy that would entail non-compliance with the employee and management compensation policy that is in effect from time to time at KRUGER; payment of any compensation to employees or managers of the Company or any Subsidiary that does not comply with the guidelines established from time to time in the Company’s compensation policy;
4.3.1.16 the licencing by the Company or of any of its Subsidiaries of its technology licences;
4.3.1.17 the adoption or amendment of any delegation of authority or banking resolution;
4.3.1.18 the establishment of any Board of Directors’ Committee; and
4.3.1.19 any action, ruling, resolution, by-law or other measure referred to in section 4.8 which relates to a Subsidiary and whose effectiveness requires the affirmative vote of the Company’s representative who is authorized to vote at the shareholders’ meeting of the Subsidiary concerned.
. . .
4.6 Project Management
4.6.1 The Shareholders agree to establish their requirements for the Project’s management on the basis of principles stated in Appendix B of this Agreement. The Shareholders also agree that KRUGER will form a Project Management Committee responsible for the execution of the Project’s management plan (“Project Management Committee”) and that the Project Management Committee will appoint a Project Manager.
4.6.2 SGF REXFOR will appoint a representative to communicate directly with the Project Manager. This representative will have access to the Project Management Committee, to the minutes of meeting of said Committee and to the monthly progress of works reports. This representative may also attend the meetings of the Project Management Committee, the site meetings and visit the Mill site at all times during the realization period of the Project.
4.6.3 All construction reports shall be sent regularly and simultaneously to the SGF REXFOR representative and to the Company’s directors by the Project Manager.
4.6.4 Notwithstanding the provision of section 4.6.1, all major decisions concerning the Project’s realization, including those mentioned below, will require the approval of the Company’s Board of Directors:
- any amendment of allocation to the contingency reserve;
- any amendment of the schedule by Project sectors;
- any amendment of the Project Scope; and
- the budget, which is established by phase and investment sector.
4.7 General Manager and Controller
4.7.1 The General Manager will be employed by KRUGER, but his services shall be rendered for the exclusive benefit of the Company. The terms and conditions of the services that shall be rendered by the General Manager shall be governed by the Management Services Agreement. However, the selection of a General Manager as well as his compensation is subject to the prior approval of the Company’s Board of Directors. KRUGER shall, if it wants to terminate, remove or replace the General Manager, provide notice of such decision to the Board of Directors of the Company along with reasons for its decision.
4.7.2 The Controller shall be an employee of the Company. It appertains to the Board of Directors to determine the duties and compensation of the Controller in accordance with the provisions of section 4.3.1.8. Even though the Controller shall report to the General Manager with respect to his daily duties, he shall report directly to the Board of Directors concerning the Company’s financial situation and the internal control system that he intends to implement. The General Manager may not dismiss the Controller without prior approval of the Board of Directors as provided for in section 4.3.1.8. Written instructions informing him of the foregoing will be sent to him by the Board of Directors. In addition, the job descriptions for the Controller and the General Manager will specifically stipulate their duties and responsibilities to protect the Shareholders’ interests.
4.7.3 Amongst other things, the job description applicable to the Controller and the General Manager shall specifically provide that they have the duty to protect the best interests of the Shareholders.
. . .
4.9 Unanimous Decisions of the Shareholders
4.9.1 The actions, rulings, resolutions, by-laws or other measures relating to the conduct of the affairs of the Company or any of its Subsidiaries having the direct or indirect object or effect one of the questions mentioned below shall, at all times, have legal force only upon unanimous adoption and approval by the Shareholders:
4.9.1.1 any important change to the Company’s mission;
4.9.1.2 the creation of a Subsidiary and the decision to invest in any manner whatsoever in the implementation of a permanent activity other than as envisaged in the initial business plan;
4.9.1.3 any amendment to the articles of incorporation or by-laws, the adoption or cancellation of by-laws or any amendment to this Agreement;
4.9.1.4 any change in the Company’s authorized capital stock; any issuance of shares of any class and series; any issuance of shares convertible or exchangeable into securities of any class or series; any purchase, redemption, or other acquisition, exchange or conversion of any classes or series; any options or granting of stock options of any class or series or of convertible or exchangeable securities into shares of any class or series, except with respect to any issuance of convertible or exchangeable shares if such issue respects all the pre-emptive rights contained at section 6 hereof and except with respect to any purchase or redemption executed in conformity with section 8 hereof;
4.9.1.5 the approval or registration of a transfer of shares of the Company’s capital stock which is not in compliance with the provisions of the Agreement;
4.9.1.6 the allocation of the Company’s assets or those of any of its Subsidiaries, and more specifically the granting, prolongation or taking over of any mortgage or charge on any of their assets as Security for a loan;
4.9.1.7 any modifications to the Management Service Agreement, to the Marketing Agreement, to the Kraft Pulp Selling Agreement or to the Assumption and Loan Agreement and any assignments thereof;
4.9.1.8 any change in the head office, policy center or principal place of business of the Company or any of its Subsidiaries;
4.9.1.9 the liquidation, dissolution or merger of the Company or any of its Subsidiaries;
4.9.1.10 the disposal of the business, in whole or in part, as well as the sale, lease or exchange of all or a substantial part of property or assets of the Company or any of its Subsidiaries, including the granting of an option to that effect, including the sale of intellectual property rights;
4.9.1.11 any decision to institute proceedings under the Winding-up Act (Québec) or the Bankruptcy and Insolvency Act (Canada) or the Companies’ Creditors Arrangement Act (Canada) or any other law regarding insolvency or the protection of debtors;
4.9.1.12 the approval, adoption or modification of the annual financial statements of the Company or any of its Subsidiaries, any change in the date of the fiscal year end and any change in the accounting standards used or established by the Company or by one of its Subsidiaries in the preparation of its financial statements;
4.9.1.13 the appointment and replacement of the auditors of the Company or any of its Subsidiaries, it being understood that at the end of each financial year the auditors shall be chosen among five (5) internationally known accounting firms; and
4.9.1.14 the decision relative to the execution of agreements, conventions or contracts by the Company or any of its Subsidiaries, including any amendment with a company for a non arm’s length transaction, more specifically with a Shareholder, with a person bound or associated with one of the Shareholders or with a director, officer or employee of such persons.
4.9.2 The above provisions shall be interpreted in accordance with section 146 of the Act, as a transfer of powers from the directors on those specific questions in favour of the Shareholders who will assume the related powers and obligations. No Shareholder shall be required to justify its refusal to approve or reject any proposal.
4.10 Dividend Policy
4.10.1 The Parties shall apply the dividend policy described below, provided that this policy has not been modified to meet provisions of the Agreement.
4.10.2 The Directors may not declare any dividend on the Company shares, regardless of the category, unless all of the following conditions have been met:
4.10.2.1 the Company meets the financial requirements of the Act;
4.10.2.2 the Company respects the financial ratios set forth in any Credit Agreement and all financial requirements and other restrictions contained in any Financial Assistance Agreement.
4.10.3 Once all the above-mentioned conditions are met, the Directors are obliged, upon request by one of the Shareholders, to declare, either at a Board Meeting or by way of a resolution signed by all Directors in office, a dividend equal to the corresponding amount indicated by the shareholder in his request, provided that the dividend does not exceed seventy-five per cent (75%) of the amount established according to the following formula:
The total of funds available for disbursement of a dividend calculated according to the provisions of preceding section 4.9.2:
LESS:
• Funds required for any forecasted operating loss (operations) outlined in the operating budget (operations) adopted for the current year;
• Funds required for capital projects authorized in capital budget for the current year.
4.10.4 Notwithstanding the above, the amount of dividends declared and paid shall not have the direct or indirect effect of placing Company in default pursuant to any Credit Agreement or a Financial Assistance Agreement following disbursement of such dividend, it being understood that all financial ratios and requirements shall be respected at all times.
4.10.5 None of the above shall be interpreted as a restriction on the power of the Directors to pay greater dividends if they deem that the Company’s financial situation permits it, the whole subject to the provisions of any Credit Agreement or a Financial Assistance Agreement.
. . .
APPENDIX B
PROJECT MANAGEMENT
. . .
KRUGER INC. will assume responsibility for Project Management.
. . .
The Project Management Committee must:
- Establish the Project Management Plan and present it to the Board of Directors;
. . .
- Submit to the Board of Directors for their approval:
- Any modification or allocation of the contingency fund;
- Any modification of the deadline by Project sector;
- Any modification of the Project scope;
- The budget, which will be established by phase and by investment sector.
. . .
APPENDIX D
ADDITIONAL PREREQUISITES TO BE MET BY SEPTEMBER 30, 2001, AT THE LATEST
. . .
9. Approval of the costs and business plan of the Project by the Shareholders.[19]
10. The set-up of a Project Management Committee.
. . .
[45] When one considers the above provisions, there are quite a wide range of restrictions on what decisions can be taken by the three directors named by Kruger. This is the result of the list of decisions which require the unanimous agreement of directors or the unanimous agreement of shareholders pursuant to clauses 4.3 and 4.9 of the agreement.[20]
[46] I wish to highlight certain provisions restricting Kruger’s ability to exercise control whether they require unanimous directors’ votes or unanimous shareholders’ votes.
[47] The company’s mission is to carry out the “project”, i.e. the acquisition and modernization of the mill and the production of approximately 205,000 metric tons of lightweight coated paper and 57,000 metric tons of kraft pulp per year. There can be no important change to that mission without the agreement of both Kruger and SGF.[21]
[48] The cost and business plan of the project had to be agreed to by both shareholders at an early stage, no later than 30 September 2001.[22] This particular requirement was an important one; if it was not fulfilled, it gave a right to SGF to require Kruger to buy all its shares in the appellant at SGF’s cost, an amount of just over $39 million.[23] This would have, in effect, forced Kruger to almost double its equity contribution and its risk.
[49] Changes to the scope of the project, the deadlines, and to the budget of the project had to be brought to the board for approval.[24]
[50] The capital budget, the operating budget, any amendments to the budget, any individual capital expenditure in excess of $1 million and any capital expenditure not included in the budget had to be approved unanimously by the board of directors. I would note that wherever unanimity of the directors is required, it is unanimity of the directors present at the meetings.
[51] It should be noted that in order for the board to have a quorum, one of the directors present had to be a nominee of SGF.[25]
[52] The annual business plan and marketing plan as well as any amendments thereto requ