Pangaea - Federal Court of Appeal finds that an agreement with another shareholder to enter into a share sale with a 3rd party was a restrictive covenant

A non-resident shareholder (“Pangaea”) of a Canadian corporation (“Public Mobile”) was required under the terms of the unanimous shareholder agreement to agree to any sale of the Public Mobile shares. Telus wanted to acquire 100% of the Public Mobile shares, but Pangaea professed reluctance to sell. A resident shareholder (“Thomvest”) paid Pangaea a lump sum as an inducement for its agreement to execute a share purchase agreement with Telus.

In confirming the view of Smith J that the lump sum payment was “in respect of a restrictive covenant” described in s. 56.4, so that it was subject to Part XIII tax under s. 212(1)(i), Woods JA stated (at paras 13, and 16):

[T]he language used [in the “restrictive covenant” definition] clearly applies more broadly than to non-compete agreements. …

[T]he letter agreement between Pangaea and Thomvest is a “restrictive covenant,” as defined, because the agreement is intended to affect the provision of property by Pangaea by having an effect on its disposition. The intention of the letter agreement is to require Pangaea to sell its shares of Public Mobile by executing the share purchase agreement with Telus. In this way, the agreement is intended to affect the disposition by Pangaea of its shares of Public Mobile.

Neal Armstrong. Summary of Pangaea One Acquisition Holdings XII S.À.R.L. v. The Queen, 2020 FCA 21 under s. 56.4(1) – restrictive covenant.