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.
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.
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.
That rise in the dollar resulted in losses for
the appellant and is at the origin of the issues in this appeal.
It is common ground that the appellant conducted
scientific research and experimental development and, as a result, became
entitled to investment tax credits.
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.
According to the respondent, the appellant is
associated with Kruger within the meaning of section 256 of the Income Tax
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.
In turn, whether the two companies are
associated turns on:
(a) whether Kruger has de jure or de
facto control of the appellant, or
Kruger has control by reason of the operation of certain deeming provisions in
section 256 of the Act.
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.
I wish to thank counsel.
De Jure or De Facto Control
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
The applicable provisions of the law are
paragraph 256(1)(a) and subsection 256(5.1) of the Act. They read
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 . . . .
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.
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.
. . .
. . . 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:
111(5) of the Income Tax Act contemplates de jure, not de
(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
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.
Thus, for the purposes of determining whether
there is de jure control:
(a) One determines whether a
person has “effective control” of the corporation at any time in the year.
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.
Paragraph 256(1)(a) encompasses both de
facto and de jure control.
Both de jure and de facto control
aim to get at the question whether a person has effective control. The
difference is the following.
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.
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.
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”.
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.
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.
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.
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:
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:
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.
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?
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?
it is clear that effective control means the control which a majority of the
board of directors normally has.
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.
Facts and Analysis, Control
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.
Kruger is a major producer of paper, tissue and other
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”.
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.
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.
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.
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.
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
Both Kruger and SGF refer to the appellant as a
joint venture in their financial statements.
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.
The appellant purchased the mill in March 2001.
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.
In order to benefit from Kruger’s industry
knowledge and business network, the appellant also engaged Kruger in a
Management Services Agreement
and a Sales Agency and Marketing Agreement. The appellant and Kruger also
entered into a Kraft Pulp Selling Agreement.
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.
However, there are other considerations; the
most important is the Unanimous Shareholder Agreement.
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
. . .
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;
. . .
Policy” designates the dividend policy described in section 4.10;
. . .
Pulp Selling Agreement” designates the Kraft Pulp Selling Agreement
between the Company and KRUGER concluded this same date;
. . .
Services Agreement” designates the Management Services Agreement
between the Company and KRUGER concluded this same date;
Agreement” designates the Marketing Agreement between the Company and
KRUGER concluded this same date;
designates the Wayagamack pulp and paper mill located in Trois-Rivières
(Québec) including all corporeal and incorporeal assets used in its
has the meaning conferred in section 3;
. . .
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;
. . .
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;
. . .
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
. . .
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
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.
3.1.1 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
OF THE COMPANY
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.
. . .
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.
. . .
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:
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
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;
220.127.116.11 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;
of the annual business plan and the annual marketing plan as well as any
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
decision related to the declaration and payment of dividends that contravene
the Dividend Policy;
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;
termination or end of employer-employee relationship of the Controller [
and the fixing of his compensation and establishment of his mandate;
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
appointment of the Company’s president, as the case may be;
of any contract, understanding or agreement that is outside the ordinary course
of business of the Company or any of its Subsidiaries;
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);
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
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;
licencing by the Company or of any of its Subsidiaries of its technology
adoption or amendment of any delegation of authority or banking resolution;
establishment of any Board of Directors’ Committee; and
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.
. . .
4.6.1 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.
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
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 18.104.22.168. 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 22.214.171.124. 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’
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.
. . .
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:
important change to the Company’s mission;
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;
amendment to the articles of incorporation or by-laws, the adoption or
cancellation of by-laws or any amendment to this Agreement;
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
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;
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;
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;
change in the head office, policy center or principal place of business of the
Company or any of its Subsidiaries;
liquidation, dissolution or merger of the Company or any of its Subsidiaries;
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;
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;
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
126.96.36.199 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
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
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:
Company meets the financial requirements of the Act;
Company respects the financial ratios set forth in any Credit Agreement and all
financial requirements and other restrictions contained in any Financial
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
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.
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
. . .
. . .
KRUGER INC. will
assume responsibility for Project Management.
. . .
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:
modification or allocation of the contingency fund;
modification of the deadline by Project sector;
modification of the Project scope;
- The budget, which
will be established by phase and by investment sector.
. . .
ADDITIONAL PREREQUISITES TO BE
MET BY SEPTEMBER 30, 2001, AT THE LATEST
. . .
of the costs and business plan of the Project by the Shareholders.
10. The set-up of a
Project Management Committee.
. . .
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.
I wish to highlight certain provisions restricting
Kruger’s ability to exercise control whether they require unanimous directors’
votes or unanimous shareholders’ votes.
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
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
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. This would have, in effect,
forced Kruger to almost double its equity contribution and its risk.
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.
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
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.
The annual business plan and marketing plan as well as
any amendments thereto required a unanimous board decision.
The powers I have just described clearly prevent
any significant variation of the project and budget agreed upon at an early
stage unless both Kruger and SGF agree.
There also has to be unanimity for:
form of financing in excess of $1 million per year;
loan made by the company to a third party or any security provided for third
establishing the compensation of, or termination of, any officers including the
controller but not including the general manager;
of any form of bonus to a manager;
of any contract outside the normal course of business;
institution or defence of legal proceedings where the amount at issue is
$50,000 or more or if the total amounts claimed in a year exceed $50,000;
of leases exceeding two years or with a rent of more than $300,000 in a year;
of non‑arm’s length contracts including contracts with shareholders,
anyone associated with a shareholder and directors as well as approval of
contracts outside the normal course of business;
creation of any subsidiary and any investment not envisaged in the original
to the articles of incorporation, the by-laws or the Unanimous Shareholder Agreement;
decision to use corporate assets to secure a loan;
any modification to the Management Services Agreement, the Kraft Pulp
Selling Agreement or the Marketing Agreement between the appellant and Kruger;
liquidation, dissolution, wind up or merger of the company.
The Unanimous Shareholder Agreement has a
dividend policy that sets out the circumstances in which a dividend may be paid
and also provides that one shareholder can force a dividend to be paid if the
conditions are met; that shareholder can force a dividend of any amount not
exceeding an amount calculated by formula. Any variation from that policy
required unanimity of the directors.
The general manager of the appellant is an
employee of Kruger, but his services are to be rendered exclusively for the
benefit of the company. Kruger’s choice of general manager and his compensation
is subject to the approval of the board; however, I note that unanimity is not
required with the result that he can be approved by the three directors
appointed by Kruger.
The hiring of the controller is subject to
unanimity and, although he reports to the general manager for his daily duties,
he reports directly to the board regarding the financial situation and internal
controls of the company.
The provisions I have described, and others in
the Unanimous Shareholder Agreement, require key decisions to be decided unanimously,
whether it is unanimity of the directors present at a board meeting or
unanimity of the shareholders. There must be unanimity in regard of budgets,
the business plan, and in respect of the very specific mission of the company.
The specificity of the mission is quite
significant since any important change to it requires both shareholders to
agree. Thus, an important change in the product mix would require both to
These are very significant restrictions on
Kruger’s ability to control the appellant. Kruger can not make strategic
decisions that will change the course of the appellant.
This is not to say that there are not
significant decisions that can be taken by the majority of directors named by
Kruger. They are: all decisions in relation to management of production
operations and management of the modernization project; all sorts of policies in
relation to operations and implementation of the mission can be decided by a
majority and, as well, some very important decisions such as setting the
parameters for negotiating labour agreements can be decided by a majority.
I agree with the respondent that these are
important powers; one might describe these powers as operational control. I
also agree that the two shareholders are not equal. Kruger has more influence
The respondent takes the position that the
numerous provisions requiring unanimity are simply standard protections for
minority shareholders. I agree that this is in large measure true. However, in
this particular case, the provisions go beyond that and prevent Kruger from
making what I have referred to as strategic decisions without the agreement of
This is not surprising given SGF’s mandate. SGF
sought through the agreement not only to protect itself as an investor, but also
to ensure the fulfillment of the mission
thereby meeting SGF’s economic development objectives.
However, even with those remaining powers in the
hands of the directors named by Kruger, can it be said that Kruger has
effective control as expressed by this Court in Plomberie J.C. Langlois,
above? Does Kruger have a dominant influence in the direction of the appellant
or in the orientation of the appellant’s future?
The answer is clearly no in this case. Because
the directors or the two shareholders must decide unanimously so many key
decisions for the direction and orientation of the appellant, Kruger does not
have such dominance. Kruger can not substantially change the overall course of
the appellant; it can not make strategic decisions.
The respondent takes the position that by reason
of the call option in clause 8.7 of the Unanimous Shareholder Agreement that allows Kruger to compel SGF to sell its shares to Kruger,
Kruger controls the appellant “in the long run” following
Donald Applicators Ltd. v. M.N.R.
In Donald Applicators, the power in the
long run was one that was based on the particular shareholders’ then
existing shareholding and not, as here, on future shareholdings which
Kruger may or may not acquire on the seventh anniversary of the signature of
the Unanimous Shareholder Agreement, 8 May 2008, over a year after the end
of the last year in issue in this case.
Given that the test in subsection 256(1) is done
on a year-by-year basis, the principle arising out of Donald Applicators
has to be understood as being a long run power based on what a person could do at
some future date with their presently existing shareholdings.
Accordingly, I do not accept that Kruger has control in the long run for that
Kruger does not have de jure control.
I have considered whether any of the provisions
in the Unanimous Shareholder Agreement giving various rights of first refusal,
to follow, to buy each other out, or to force a sale could affect the outcome
but, whether one is examining de jure or de facto control, I do
not see how any of these would give effective control to Kruger in this case.
I turn now to de facto control.
For the purposes of analyzing de facto
control, one must expand one’s considerations to consider all relevant factors. In this regard, there are two
groups of factors. First, there are three important contracts between Kruger
and the appellant: the Management Services Agreement, the Marketing Agreement
and the Kraft Pulp Selling Agreement. Second, Kruger has a degree of knowledge of
the industry that SGF does not have.
Do these facts confer additional power to Kruger
such that it has de facto control?
Let us consider the three agreements.
The Management Services Agreement of 8 May
states that Kruger will provide the general manager who will be an employee of
Kruger. While recognizing that the appellant will be fully staffed, it also
provides for the provision by Kruger to the appellant of employees on an as needed
basis to provide specific expertise to assist the appellant’s management.
The agreement does not have a profit element and
simply provides that the appellant will pay its proportional share of the
salary and benefits of the employees in question.
The agreement further provides that, in respect
of corporate purchasing and wood supply services provided, Kruger will ensure
that the appellant’s raw material costs are comparable to those of Kruger,
particularly Kruger’s Trois‑Rivières mill.
Finally, I note that the Management Services
Agreement, just like the Unanimous Shareholder Agreement, provides that it may
only be amended with the unanimous agreement of all the shareholders.
The Marketing Agreement provides that Kruger will
sell the appellant’s products. The sale price and terms of the appellant’s
products must be comparable to that of similar grade products by Kruger and
there are provisions to ensure that broadly speaking the rate of downtime for
production of the appellant’s product is the same as the downtime for
production of comparable products produced in Kruger’s mills.
Kruger is compensated for these services by a
fixed percentage commission that falls after five years and again after 10
The Kraft Pulp Selling Agreement provides for the purchase by
Kruger of wood pulp from the appellant. Kruger’s intention is to buy wood pulp
for use in its own mills.
The Kraft Pulp Selling Agreement provides for a
price calculated by reference to sales between unrelated parties; it also
provides that, if Kruger reduces its overall demand for pulp, Kruger must continue
to buy the same proportion of its needs from the appellant. There are also
provisions releasing either party if they can obtain more advantageous terms
The second factor to be considered is that
Kruger is a significant industry player with substantial expertise in the pulp
and paper industry that SGF does not have. However, SGF is a knowledgeable and
sophisticated investor and the branch of SGF that made this investment had significant experience
investing in the forest industry.
The three contracts cited do tie the appellant
in many ways to Kruger and there is no doubt Kruger knows more about the
However, the contracts were agreed upon at the
start and contain various elements protecting the appellant from Kruger taking
advantage of the appellant and, indirectly, SGF. Those contracts can only be
changed by a unanimous shareholder agreement.
Further, while SGF does not have the depth of
industry knowledge that Kruger has, it is a knowledgeable investor. Finally, it
is not unimportant that SGF is owned by the Government of Quebec. The
Government of Quebec plays an important role in forest and forest related
industries including the pulp and paper industry.
These circumstances do not change the balance so
as to give Kruger control of strategic decisions.
As a result, Kruger does not have de facto
Paragraph 256(1.2)(c) of the Income Tax Act
I now turn to the deeming provision in paragraph
256(1.2)(c) of the Act. It reads as follows:
corporation shall be deemed to be controlled by another corporation, a person
or a group of persons at any time where
(i) shares of the capital stock of the
corporation having a fair market value of more than 50% of the fair market
value of all the issued and outstanding shares of the capital stock of the
(ii) common shares of the capital stock of
the corporation having a fair market value of more than 50% of the fair market
value of all the issued and outstanding common shares of the capital stock of
are owned at
that time by the other corporation, the person or the group of persons, as the
case may be;
The following is a well‑accepted
definition of fair market value quoted by the Federal Court of Appeal in Canada
18 In Nash v. Canada, 2005 FCA 386,
our Court agreed with the definition of “fair market value” set out by
Cattanach J. of the Federal Court in Henderson Estate and Bank of New York
v. M.R.N. (1973), 73 D.T.C. 5471, at page 5476 (affirmed by this Court in
 F.C.J. No. 613), namely:
. . . the
highest price an asset might reasonably be expected to bring if sold by the
owner in the normal method applicable to the asset in question in the ordinary
course of business in a market not exposed to any undue stresses and composed
of willing buyers and sellers dealing at arm’s length and under no compulsion
to buy or sell. I would add that the foregoing understanding as I have
expressed it in a general way includes what I conceive to be the essential
element which is an open and unrestricted market in which the price is hammered
out between willing and informed buyers and sellers on the anvil of supply and
The principle in paragraph 256(1.2)(c) of
the Act seems fairly straightforward.
Among the issues that arise as to how this paragraph is to be read are the
the provision apply if Kruger’s shares in the appellant are worth more than 50%
of what someone would pay to buy all the shares of the appellant at once?
(b) Does the provision apply if Kruger’s shares are
more than 50% of the value of all the shares with the shares owned by different
owners valued separately, i.e. are Kruger’s shares worth more than those owned
Further, one must consider paragraph 256(1.2)(g)
of the Act. It reads:
(g) in determining the fair market value of a share of the
capital stock of a corporation, all issued and outstanding shares
of the capital stock of the corporation shall be deemed to be non-voting.
This means one must do the valuation in a
hypothetical world where shareholders can not vote. As a result, they can not
make decisions by voting at shareholders’ meetings and can not elect directors.
Consequently, the clear result is that for
valuation purposes, one must ignore issues of control. The shares must be valued
from a financial perspective without regard to control. Thus, in determining
the value per share, one must first look to the share rights to dividends and
to assets if the corporation were wound up. Second, one must consider what
other factors may affect the value per share, but only factors unrelated
to voting rights and, therefore, unrelated to control may be considered.
Kruger and SGF own the same class of shares of
the appellant with identical rights attached to the shares.
In a case where all shareholders have the same
class of shares, as here, in the absence of other factors each share has the
same value since each share is entitled to receive the same dividend and the
same distribution on the wind up of the company. Thus, the starting point is that
normally 51% of the shares would be worth more than 49%. Do other factors
Both parties filed the report of an expert
witness in share valuation and had them testify. Luc Lafontaine testified for
the appellant and Howard Johnson testified for the respondent.
Mr. Lafontaine was asked to determine,
first, whether, taken individually, the value of the shares of Kruger had a
fair market value of more than 50% of the fair market value of all the shares
of the appellant and, second, what the relative value of the shares of Kruger
and SGF was.
 I will briefly outline the methodology used by Mr. Lafontaine
in answering the first question.
 His starting point was a valuation done by another firm in order to
estimate the value of all the appellant’s shares as of 31 December 2006.
That estimate gives a range of values.
 Mr. Lafontaine, after explaining various principles of business
valuation, including discounts for lack of control and discounts for lack of
marketability, proceeds to apply these principles to value Kruger’s shares. Applying
his estimated discounts, he arrives at the conclusion on the first question
that Kruger’s 51% of the shares are worth about 41% to 43% of the value of all
the appellant’s shares.
 The first discount he accounted for is in relation to what he
considers to be an absence of control by Kruger.
 I would note that the question asked of Mr. Lafontaine did not
instruct him to do his valuation on the basis that no shares had any voting
rights. The same is true for Mr. Johnson.
 Second, he took account of a discount for lack of marketability. He
includes lack of liquidity with lack of marketability.
 I would note that within the discount for lack of marketability, there
are two elements that he considers. The first is the general lack of
marketability of the enterprise by its nature and as a result of its current
circumstances. This includes the fact that there are relatively few buyers
interested in a paper mill; this also includes its difficult financial
situation in the relevant period. The second element consists of the various
provisions in the Unanimous Shareholder Agreement that affect the ability to
 In answer to the second question, Mr. Lafontaine considers the
various asymmetric rights in the Unanimous Shareholder Agreement for Kruger and
SGF regarding buying or selling shares.
 In Mr. Lafontaine’s view, there is one right which could lead
to a relative value other than 51% for Kruger and 49% for SGF, the SGF put
option in clause 8.10 of the Unanimous Shareholder Agreement.
 Returning to Mr. Lafontaine’s analysis of the first question he
was asked, I am generally unable to accept the methodology he uses and, as a
result, his conclusion for the reasons below.
 Given that the effect of paragraph 256(1.2)(g) of the Act
is to do away with any consideration of control, the valuation can not take
account of any premium or discount for control or the absence of control.
Paragraph 256(1.2)(g) applies to all the shares and, as a result,
one must value the whole on the shares as well as Kruger’s shares and SGF’s
shares without any adjustment for control.
 As a result, I must disregard Mr. Lafontaine’s adjustment for
 With respect to the lack of marketability, I can not, subject to one
possible qualification, accept that it should result in a discount in relation
to the shares as a whole.
 Based on Mr. Lafontaine’s report, there appears to be some
overlap between the lack of marketability and the issues relating to control
given that he indicates that the discount for the lack of marketability is
greater for a minority interest, about 40%, than for a controlling interest
where it is about 25%.
However, given that we must assume shares to be non‑voting, any such
marketability difference resulting from control must be also ignored.
 The factors leading to a lack of marketability and liquidity also
apply equally to the shares as a whole and the shares held by Kruger — there
are relatively few buyers and even more so given the financial difficulties. As
a result, any such discount should be applied to the entire share value and can
not be applied only in assessing the value of Kruger’s shares.
 Accordingly, subject to what follows, I do not accept that there
should be a different discount for lack of marketability in respect of Kruger’s
shares as opposed to the shares as a whole or of SGF’s shares. Stated
differently, if it is appropriate to have a marketability discount, that
discount, whatever it may be, should be the same percentage for Kruger’s shares
alone, for SGF’s shares alone and for all the shares. As a result, the
marketability discount must be disregarded.
 The notion that there is value to a majority interest relative to a
non‑majority interest is so deeply ingrained that it seems
counterintuitive to accept the logical consequences of the legal fiction that no shares have voting
rights for the purpose of the required valuation.
 Notwithstanding that it may seem counterintuitive, the practical
result of the absence of voting rights is that all the shares have the same
characteristic as shares in a portfolio holding where the owner does not expect
to influence the governance of the corporation. Such a portfolio owner’s shares
have a value on the basis only of the expected financial return in the future.
They also have the same per share value whether one takes each share singly,
all the shares together, the shares of Kruger together or the shares of SGF
 It is, I think, helpful to emphasize the following: Given the effect
of paragraph 256(1.2)(g) of the Act, what one has to value is
Kruger’s holding of 51% of the shares with some expected financial return
per share and SGF’s holding of 49% of the shares with the same expected
financial return per share in circumstances where it is as if a third party ran
the appellant without Kruger or SGF having the slightest influence on that
third party. In such circumstances, it is hard to imagine why someone would pay
a different price per share whether they bought 49 shares, 51 shares
or all 100 shares. Whichever quantity of shares the buyers acquire, they
will receive the same financial return per share.
 As a result, subject to the discussion that follows, Kruger’s 51% of
the shares represent a majority of the value of all the shares and a greater
value than SGF’s shares.
 The rights of Kruger and of SGF are not identical under the
Unanimous Shareholder Agreement and the one possible exception arises from
 Since those different rights, asymmetric rights, are discussed in
Mr. Lafontaine’s answer to the second question he was asked, the relative
values, I shall examine this aspect together with his analysis of that second
 To sum up so far — apart from the aspect to be discussed below — there
is no reason to conclude that 51% of the shares would be worth less than 51% of
the value, and there is no reason to conclude anything other than Kruger’s
shares have a greater fair market value than SGF’s shares.
 I also note that it does not matter how the test in paragraph
256(1.2)(c) is to be applied; so far, the result is the same whether the
question is: Are Kruger’s shares worth more than 50% of the value of all the
shares or are they worth more than SGF’s shares?
 As I previously indicated, Mr. Lafontaine, after considering
various clauses in the Unanimous Shareholder Agreement, concludes there is one
that may affect the relative value.
This is the provision that gives SGF, under certain conditions, the right to
require the appellant to buy SGF’s shares.
 These are the relevant portions of the Unanimous Shareholder
Agreement in relation to this provision:
Market Value” means the highest price expressed in Canadian dollars
that would be agreed upon in an open and unrestricted market between two (2)
fully informed, knowledgeable and willing parties dealing at arm’s length
without constraint, without taking into consideration or providing a discount
for the following: (i) the fact that the Shares or Other securities confer only
a minority or non‑majority position in the capital stock of the Company
and (ii) the fact that there is no market, or only a very restricted market,
for the Shares or Other securities, nor any other factor that may reduce or
otherwise affect their liquidity, as such liquidity is established, at the
Company’s expense, by the Valuator;
. . .
8.10 Option to
sell to SGF REXFOR as of the 9th anniversary of the date thereof
8.10.1 The Company
hereby grants SGF REXFOR the irrevocable option to require from it to acquire
from SGF REXFOR all and no less than all of the Shares and Other securities of
SGF REXFOR (the “Subject Securities”) on the terms stipulated
8.10.2 This option may
be exercised by SGF REXFOR at any time effective from the ninth (9th)
anniversary of the date thereof.
. . .
8.10.4 SGF REXFOR shall
not be able to oblige the Company to buy or redeem the Subject Securities and
pay for them,
188.8.131.52 if, due to
the exercise of the option and payment of the option exercise price, (i) the
Company is no longer able to conform to the ratios and financial commitments
stipulated in any Credit Agreement and (ii) the Company is no longer able to
conform to the ratios or financial commitments, as the case may be, stipulated
in any Financial Assistance Agreement; or
184.108.40.206 if the
transactions resulting from the exercise of the option by SGF REXFOR constitute
or are likely to constitute a default or a case of breach (i) under the terms
of any Credit Agreement or any accessory agreement (it being understood that
the withdrawal of SGF REXFOR from the Company shall not be deemed to constitute
a default or a case of breach under any contribution and/or subordination
and/or debt extension agreement to the extent that the beneficiaries of SGF
REXFOR’s commitments consent to its withdrawal from the Company) or (ii) under
the terms of any Financial Assistance Agreement; or
220.127.116.11 if, due to
the exercise of the option and the payment of the option exercise price, the
Company’s financial position is jeopardized.
 Clause 8.10.6 sets the option exercise price at the “Fair Market Value” of the shares as defined above in
 If the effect of this provision were to raise the value of SGF’s
shares by 4.1% relative to SGF’s shares, it would make SGF’s shares worth more
than Kruger’s shares.
 Mr. Lafontaine says that this provision increases the value of
the shares above 51% because the “Fair Market Value”
as defined in the agreement excludes the discounts set out in clause 18.104.22.168,
discounts relating to a minority position or a restricted market.
 In his analysis, Mr. Lafontaine says that, to determine the
value of the shareholdings of SGF and of Kruger, one must perform a discounted
cash flow analysis of the shareholdings taking into account a number of
factors. However, he says that no consideration should be given to control. He also says that, because
only relative fair market value matters, the discount rate used and the fair
market value of the equity do not change the outcome.
 The factors left to consider are the probability of the option being
exercised and the percentage discount that should apply.
 As can be seen in clause 8.10 of the Unanimous Shareholder
Agreement, the clause can not be exercised if doing so would cause the
appellant to violate its financial commitments under any credit agreement or
financial assistance agreement. Further, the option can not be exercised if
doing so would jeopardize the appellant’s financial position.
 In the years in question, although operationally the project was
going well and the appellant was carrying out many cost‑cutting
initiatives, because of the exchange rate the appellant was having serious
As Mr. Lafontaine states in his
report “the company was in breach of its bank covenants
as early as 2004”.
I note that as of
the year‑end of 2006, the company failed to meet a covenant although soon
after year‑end it obtained a waiver to remedy the situation. Also, when one looks at the shareholders’
equity in the financial statements, it changes from about $88 million as
of the end of 2002 to a shareholders’ deficit of about $51 million at the
end of 2006.
also takes account of the projection used in determining the fair market value
of all the shares.
was based on an expected significant improvement in the financial situation.
factors, he concluded that the probability of the exercise of the option is in
the range of 5% to 25%.
He estimated the
applicable marketability discount at 25%.
states that a differential of 0% in the table would mean that, pursuant to the
clause in question, SGF would receive an amount equal to the fair market value
of Kruger’s shares.
 He highlights a certain range of values; these are a discount of 20%
to 30% and a probability of exercising the option of 5% to 25%. Within these
two ranges of value, the results go from -1.4% to 3.1%. He then points out that
the mid‑range estimate, i.e. at a 25% discount and a 15% probability of
exercise, has a result of a positive 0.4%. This would mean SGF’s shares are
worth more than Kruger’s shares.
 It is helpful to go to the schedule doing the calculation of this
In it, one sees that he computes that SGF’s shares would have a value of
$6,310,000 applying the clause in question, while Kruger’s shares would have a
value of $6,260,000, a difference of $50,000.
 Under his calculation, the difference is extremely small; SGF’s
shares are worth 50.19% of the total and Kruger’s shares are worth 49.81% of
the total. Given that, it is not surprising that he concludes the shares have
essentially the same value.
 The results are extremely sensitive to the probability of exercise
of the option and the appropriate discount.
 I am unable to accept Mr. Lafontaine’s conclusion.
 My first difficulty is with the probability of exercise of the
option and the appropriate discount.
 In the difficult circumstances of the appellant at that time, a 15%
probability of exercise is too high. More importantly, I fail to understand,
based on the report, why the 25% discount for marketability is chosen. In
section 5.3.2, there is a discussion of the empirical data and the conclusion
of the section in reference to various studies is that they show ranges from 0%
to 35% with most results in the range from 15% to 25%.
Later in section 6.2.2, there is
reference to a 25% discount for controlling interests, but this comes after a table
listing four kinds of studies. The last of the studies listed corresponds with
the discussion earlier in section 5.3.2 of the report that is entitled “Acquisition Studies for Controlling Interests”. It is
indicated that the range is 0% to 35% with most studies showing 15% to 25%.
choosing a 25% discount seems high, 20% is the middle of the range and more
appropriate. At 20% and a probability of exercise of 15% or less, the table shows the SGF shares as of slightly lower
value than Kruger’s shares. At a probability of exercise of less than 15%, the
This results in
my concluding that Kruger’s shares are worth more than SGF’s shares even if one
uses Mr. Lafontaine’s approach.
 I note that for the same reasons clause 8.10
does not have the effect of reducing the value
of Kruger’s shares to less than 50% of the value of all the shares.
 My second difficulty is that I can not accept that clause 8.10 will
have the effect suggested.
 For the purposes of paragraph 256(1.2)(g) of the Act,
we are already obliged to assume that, hypothetically, the shares of the
appellant had no voting rights. We also have to pretend that in the years in
question the shares could be sold, although under the Unanimous Shareholder
Agreement it had been agreed that they could not be sold until later. However,
we otherwise take the existing facts.
 Here, we have to take into account that any buyer will have to
adhere to the Unanimous Shareholder Agreement and abide by it; the buyer may
rely on it as well with respect to the rights he receives.
 However, when I examine the Unanimous Shareholder Agreement, I do
not see how our hypothetical buyer could be the beneficiary of clause 8.10. I
have examined clause 8.10 and the rest of the agreement and can only reach the
conclusion that only SGF can claim the benefit of clause 8.10.
 This is clear when one considers the agreement. First, clause 8.10
specifically gives the right to SGF; nothing in the clause or elsewhere in the
agreement that I can find gives the rights in that clause to any successor to
Elsewhere in the agreement, there is
provision for successors. For example, clause 8.11 allows Kruger to compel SGF to sell its
shares. There is specific reference in that provision to SGF or an “Authorized Assignee” thereby extending the obligation
beyond SGF. “Authorized Assignees” are set out
in clause 7.2 and are the Government of Quebec or certain entities owned by SGF
or by the Government of Quebec.
 A more general example is the provision which requires a unanimous
decision of shareholders in clause 8.9. Given that this is simply spelled out
as applying to shareholders, it applies to all the shareholders whoever they
might be. Indeed, the definition section cited above states that “shareholders” include authorized assignees and others
who could become holders of the shares.
 All of which is to say that while our hypothetical buyer will be
bound by the agreement, he can not be a beneficiary of clause 8.10 and, as a
result, he will not in our hypothetical sale pay any additional amount because
of that clause. It follows that clause 8.10 will not increase the value of
 Having decided that Mr. Lafontaine’s report does not lead me to
a conclusion other than Kruger’s shares are worth more than 50% of the value of
the shares, I need only comment briefly on Mr. Johnson’s report. He also
discusses control at length and, as a result of paragraph 256(1.2)(c) of
the Act, all issues of control must be ignored.
 He is of the view that there is no reason to discount the value of
Kruger’s shares relative to the whole and that there is no reason to add a
premium to the value of SGF’s shares relative to the whole. Nothing I have
heard or read suggests otherwise. I agree with his conclusion.
 Accordingly, there is no reason to depart from the starting point
that 51% of the shares with the right to 51% of the dividends and of any distribution
of the assets of the corporation are worth more than 50% of the fair market
 It follows that, pursuant to paragraph 256(1.2)(c) of the Act,
Kruger is deemed to control the appellant.
 As a result, paragraph 256(1.2)(c) deems Kruger to control
the appellant and the appeal must be dismissed.
Signed at Ottawa, Ontario, this 14th day of April