Shareholder Deadlock: When Ontario Courts Will Order A Wind Up

Two equal shareholders. Thirty-five years of business together. More than $90 million in land. And no shareholders’ agreement. That was the position in Vastis v. Kommatas, 2022 ONSC 1366, a Commercial List trial before Justice Dietrich that turned almost entirely on a single question: not whether the relationship had failed, but what the court should do about it.

Both shareholders agreed the business relationship was over. Both alleged oppression. What they could not agree on was the remedy. One wanted to buy the other out at an appraised value. The other wanted the companies wound up and the assets sold on the open market under court supervision. 

The decision is a useful roadmap for how Ontario courts choose between those two outcomes.

George Vastis and Christos Kommatas incorporated a gas station development company in 1984, each taking 50 percent of the shares and each becoming an officer and director. 

They later incorporated a second company to operate a driving range on the same basis. The businesses were run informally, on mutual trust, and despite three separate attempts over 25 years, no shareholders’ agreement was ever signed.

The relationship fractured after Mr. Vastis was diagnosed with cancer in 2017 and began succession planning. He asked Mr. Kommatas to agree to a voting trust that would preserve the balance of control between the two families after his death. 

Mr. Kommatas refused. 

From there the parties attempted a tax deferred division of the underlying assets, which collapsed when a municipal administrative freeze made severance of the most valuable property impossible. Both sides then filed competing oppression applications, which were converted into a single action.

The court applied the two part test from BCE Inc. v. 1976 Debentureholders: does the evidence support the reasonable expectation asserted, and does the evidence establish that the expectation was violated by conduct amounting to oppression, unfair prejudice, or unfair disregard of a relevant interest?

Justice Dietrich found that both shareholders had engaged in conduct that was unfairly prejudicial or that unfairly disregarded the other’s interests.

On Mr. Kommatas’ side, that included threatening the corporate bank in a way that led to the accounts being frozen, refusing to release the minute book so governance could be regularized, and refusing to consent to a succession related share transfer that would have had no practical effect until Mr. Vastis’ death. 

On Mr. Vastis’ side, it included cancelling his partner’s credit cards without notice while the family was overseas, making unilateral decisions on cash distributions and development spending that had historically been made jointly, and withholding distributions for three years knowing his partner had no other income.

Critically, the court also confirmed that a finding of oppression is not a precondition to a wind up order. That principle materially changes the strategic picture in a deadlock case, and it is worth reading alongside our overview of the oppression remedy in Ontario.

Mr. Vastis sought an order permitting him to purchase his partner’s shares at a value fixed by a court selected appraiser. He argued a receivership was an extraordinary remedy, that it was slower and more expensive, that a forced sale of the frozen development land would attract a significant discount, and that his shortened life expectancy weighed against a lengthy process.

Mr. Kommatas sought a court supervised wind up, liquidation, and the appointment of a receiver. He argued that where the value of a company sits almost entirely in unique parcels of land, the only reliable way to establish fair market value is to expose the assets to the market. He also pointed to the corporations’ liabilities, including exposure to unreported income, unpaid dividends, and shareholder loan accounts.

The competing appraisals proved his point. One valuation put the principal development land at roughly $62.8 million. The opposing appraisal put it at not less than $76.2 million, and a broker’s opinion suggested it would sell in excess of $80 million. That spread is precisely the problem a paper valuation cannot solve.

The court granted the wind up under section 207(1)(b)(iv) of the OBCA, on just and equitable grounds.

First, the test for a just and equitable wind up was met. The authorities require an irreparable breakdown of trust and confidence that makes continuation impossible, and a sufficiently serious failure of the parties’ expectations. 

Where a corporation in substance resembles a partnership and the relationship has reached deadlock, judicial intervention under section 207 is appropriate. Here the parties had stopped communicating except through counsel, and one had threatened the other with violence.

Second, liquidation measures fair market value in the marketplace rather than on paper. A forced buyout creates an opportunity for the purchaser to delay and to resist paying fair market value, locking the parties into further litigation.

Third, a remedy cannot run counter to the parties’ reasonable expectations. Mr. Vastis opposed liquidation at trial, but liquidation had appeared as “Option B” in his own final offer, on his own meeting agenda, and in a recorded voicemail to his son. He could not credibly say it fell outside his expectations.

Fourth, cost was only one factor. A receiver was needed to do more than sell land. Someone had to address the historical accounting irregularities, income tax reporting, unpaid dividends, shareholder loan accounts, and to distribute proceeds fairly between two people with a documented history of distrust.

Both shareholders were expressly permitted to bid in the sale process, which gave the party who wanted the land a genuine path to acquiring it, while still exposing the assets to the market.

Several lessons emerge. A shareholders’ agreement with a valuation mechanism and an exit process would have avoided a thirteen day trial over a $90 million portfolio; mechanisms such as shotgun clauses exist precisely for this scenario.

Above all, the remedy you ask for is not necessarily the remedy you receive. Where two equal owners are deadlocked, the court will choose the process most likely to produce a fair and final result, even if neither party is fully satisfied with it. If you are considering an exit, review our guidance on what happens when a business partner wants out.

Our commercial litigation team advises shareholders, directors, and closely held corporations on oppression claims, wind up applications, receiverships, valuation disputes, and negotiated exits.

Contact Pinto Shekib LLP for a confidential consultation at 416-901-9984 or info@pintoshekib.ca.