N-Krypt International Corp. v. LeVasseur

2016 BCSC 1539 N-Krypt International Corp. v. LeVasseur

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: N-Krypt International Corp. v. LeVasseur, 2016 BCSC 1539 Date: 20160823 Docket: S153418 Registry: Vancouver Between: N-Krypt International Corp. Petitioner And Thierry LeVasseur Respondent Before: The Honourable Mr. Justice Schultes Reasons for Judgment Counsel for the Petitioner: D.C.F. Cowper Counsel for the Respondent: D.B. Kirkham, Q.C. Place and Date of Hearing: Vancouver, B.C. October 16, 2015 Place and Date of Judgment: Vancouver, B.C. August 23, 2016 1. INTRODUCTION [1] Thierry LeVasseur holds shares in Cirius Messaging Inc. ("Cirius") in trust for N‑Krypt International Corp. ("N‑Krypt"). In this petition N‑Krypt seeks orders that (1) Mr. LeVasseur provide it with the information to which shareholders are normally entitled and an accounting of his management of the shares, and (2) that he transfer his legal title to the shares, either to N‑Krypt or to a new trustee.

2. EVIDENCE [2] N‑Krypt is registered in Ontario. Cirius is registered in British Columbia. Cirius produces technology that enables businesses to send emails securely. N‑Krypt was previously an authorized reseller of this technology. Mr. LeVasseur is the president of Cirius, a director of it and, at least at one stage, its largest shareholder. [3] N‑Krypt purchased its shares in Cirius in December 2009 for $535,000. The purchase was of two blocks of approximately 800,000 shares each. It was governed by a subscription agreement between N‑Krypt and Cirius and a voting trust agreement between N‑Krypt, Mr. LeVasseur and Cirius. [4] Under the trust agreement N‑Krypt's shares were registered in Mr. LeVasseur's name, as the voting trustee of them. He was to exercise all of the voting rights relating to the shares. This arrangement was to be in force for ten years, subject to certain terminating events which have not yet occurred. [5] Under the subscription agreement N‑Krypt agreed to keep all information relating to the subscription confidential. It also agreed that it would not have the right to review Cirius's minute book or the records that are required to be kept in it pursuant to the Business Corporations Act, S.B.C. 2002, c. 57 or "to review or observe [Cirius's] material contracts". However, there was also a term that Cirius "may from time to time provide such information." [6]

It appears that dissatisfaction with the level of information provided was the catalyst for this petition. The principal of N‑Krypt, Asif Choksi, complains in his affidavit that Mr. LeVasseur has never reported on how he has voted the shares, or on Cirius's "financial performance or expectations." A promise by Cirius in 2011 that a "shareholder information package" would be provided to N‑Krypt was not fulfilled. All N‑Krypt has received is a general assurance in 2010 that there had been "no material change" in Cirius and a further assurance through counsel in 2015 that Cirius has not "paid any dividends, returned capital or otherwise undertaken a distribution to its shareholders." Mr. Choksi says that this leaves him unable to assess the status of N‑Krypt's investment and what, if anything, Mr. LeVasseur may be doing to protect it. [7] In his affidavit Mr. LeVasseur places both the original agreements with respect to the shares and the current petition within the larger context of the business relationship between N‑Krypt and Cirius. In 2008 Cirius entered into the agreement for N‑Krypt to be a reseller of Cirius's technology and he describes the efforts then made by Cirius to make N‑Krypt, its first "master reseller", "the most important partner in building up Cirius's business." [8] According to Mr. LeVasseur, the restriction on company information being given to N‑Krypt,

once it purchased shares in Cirius, was to prevent N‑Krypt from gaining an advantage over other resellers through its knowledge of Cirius's financial information. These conditions were "important to protect Cirius's business." For this reason, the company's financial statements were placed in its minute book, to which N‑Krypt had expressly agreed it would not have access. The reseller relationship was terminated in 2011 and N‑Krypt is now a competitor, so Cirius's need to protect its financial information continues. [9] To dispel any suggestion that N‑Krypt is being singled out, Mr. LeVasseur advises that until 2014 he required voting trust agreements from all subscribers of company shares, not just N‑Krypt. His resulting ability to vote the shares of all subscribers gave him the necessary flexibility to raise capital. There has never been a meeting of the shareholders who have signed voting trust agreements and none of them has ever received financial statements. [10] Mr. LeVasseur says that N‑Krypt's understanding and acceptance of the basis on which it held shares in Cirius is demonstrated by a paragraph in its statement of claim in an action in Ontario involving a dispute with other parties over its ownership of those shares. In that paragraph N‑Krypt explains the reasons for the voting trust and the restriction on receiving confidential information from Cirius in identical

terms to those used by Mr. LeVasseur. He also points to his comments about the importance of these conditions to Cirius in his email communication with officials of N‑Krypt before it entered into the agreements. [11] To illustrate the importance of safeguarding Cirius's confidential information, Mr. LeVasseur alleges ongoing improper behaviour by Mr. Choksi and N‑Krypt, such as: · Representing to potential customers that it was the owner of the technology it was selling on behalf of Cirius, including after the reseller agreement was terminated; · Seeking and receiving payment directly from customers and failing to account to Cirius for those payments; · Making defamatory statements about Mr. LeVasseur to one of his employees and other Cirius shareholders; and · After the reseller relationship was terminated, attempting to appropriate Cirius's customers and providing proprietary technology to one of its competitors. [12] Mr. LeVasseur decided not to send the shareholder information package to N‑Krypt, which he had previously advised would be given to all shareholders, because there had been no resolution of the issue between them by that point. [13] For his part, Mr. Choksi denies the allegations of impropriety. Some of the contradicting facts that he cites are: · N‑Krypt was always permitted to resell the technology under its own name and Mr. LeVasseur's concerns about the

prominence given to the Cirius brand in N‑Krypt's materials are contradicted by their contemporaneous correspondence and the contents of N‑Krypt's website; · The real problem for customers was the hostility directed at N‑Krypt by Cirius, not any efforts by N‑Krypt to undermine it as the producer of the technology; · Cirius did not properly calculate the amounts owing to N‑Krypt and deprived it of commissions to which it was entitled; · Mr. Choksi's allegedly defamatory statements that Mr. LeVasseur had deliberately misled N‑Krypt into investing in Cirius are factually true; and · N‑Krypt never shared Cirius's technology with competitors and has not become a competitor itself. Once the reseller agreement foundered, N‑Krypt had to set itself up as a reseller of another company's products. [14] Most fundamentally in response to Mr. LeVasseur's concerns, Mr. Choksi questions how basic information such as financial statements, which are normally available to any shareholder, could be used to injure Cirius. For example, he responds to Mr. LeVasseur's concern about the danger of knowing the portion of Cirius's revenues that are made up of sales by N‑Krypt by noting that his "sense at the time" (that is, when the shares were purchased) was that N‑Krypt was responsible for the bulk of those revenues.

3. POSITIONS [15] N‑Krypt's counsel submits that this petition should be decided based on fundamental trust principles and that the circumstances of the parties' business dispute are mostly irrelevant to that analysis. [16] Here the essential feature of a trust is present -- the legal ownership of the shares by Mr. LeVasseur has been separated from N‑Krypt's beneficial ownership. In addition, the share certificates were explicitly issued to Mr. LeVasseur "in trust" for N‑Krypt and the voting trust agreement refers to N‑Krypt as the "beneficial owner", to the "deposit of the shares owned by the shareholder with the voting trustee", and to Mr. LeVasseur's authority to "act as registered owner" of them. These are all said to be hallmarks of a trust relationship. [17] Counsel submits that as a result Mr. LeVasseur is subject to trust obligations that cannot be abrogated by the terms of contracts such as the subscription or voting trust agreements. The most important obligations for the purposes of this petition are his duty to account for his management of the trust property, his fiduciary role in relation to N‑Krypt (which prevents him from exercising his powers in a manner that is detrimental to it), and the requirement that he return the property on N‑Krypt's request. [18] With respect to Mr. LeVasseur's duty to account, N‑Krypt's counsel relies on authorities which he says

establish that a beneficial owner of shares is, at the very least, entitled to the same information that an ordinary shareholder would receive. This is all that N‑Krypt seeks. These usual shareholders' rights, such as to inspect records at the company's registered office and to receive its financial statements after an annual general meeting, are set out in various provisions of the Business Corporations Act. [19] Further, counsel contends that even if the subscription agreement restricts the scope of disclosure, Mr. LeVasseur's duty as trustee still compels him to disclose those documents that concern his management of the trust property. These would include shareholder resolutions, financial statements and correspondence from him in his capacity as registered owner of the shares. However N‑Krypt's counsel emphasizes that none of what he seeks as trust information is actually restricted by the subscriber agreement, which deals only with the right to review the minute book or the company's material contracts. The fact that a particular document is also contained in the minute book would not prevent its disclosure as relevant trust information. [20] With respect to N‑Krypt's right to seek a return of the shares, its counsel relies on the classic principle established by Saunders v. Vautier (1841), Cr. & Ph. 240, 41 E.R. 482, that a beneficiary who has the legal capacity to

possess the trust property and is solely entitled to it may require the trustee to return it. He stresses that this is not a means of subverting any of N‑Krypt's contractual obligations. It is simply the exercise of the beneficiary's right under a trust agreement and does not actually affect any rights under the subscription agreement. [21] In the alternative, he points out that s. 31 of the Trustee Act, R.S.B.C. 1996, c. 464 permits the court to appoint a new trustee if it is "expedient" to do so. The guiding principle in reaching such a determination is the welfare of the beneficiaries. Here, Mr. LeVasseur's status as the largest shareholder means that his interests and those of N‑Krypt may not always align. He could for example enter into unanimous shareholder agreements on N‑Krypt's behalf that reward him disproportionately. Further, there is an overtly hostile relationship between the parties, in which Mr. LeVasseur has refused to provide even the most basic information about the shares and his handling of them. In this situation counsel submits that the appropriate remedy is the appointment of a trustee who can fulfill his duties impartially. [22] Mr. LeVasseur's counsel raises the initial concern that this case is not suitable for summary determination, because of the significant factual disputes in the affidavits and the challenging legal issues that arise. He also

questions why Cirius, which is a party to both agreements, has not been made a respondent to this petition. [23] With respect to the legal framework, he takes the position that despite the terminology used in the agreements, the structure under which these shares are held has not created a trust relationship between the parties. He points out that the only attribute of ownership of which N‑Krypt has been deprived is the right to vote the shares, and argues that the arrangement exists solely to allow Mr. LeVasseur to exercise that particular right, in furtherance of an overall structure under which he exercises the voting rights of all shareholders. N‑Krypt has no particular vulnerability as a result. Mr. LeVasseur also has no right to manage the shares as a trustee would normally manage trust property -- they are simply deposited with him to vote, and no fiduciary duties arise with respect to them. This is therefore more accurately seen as a form of escrow agreement. [24] In counsel's view, it is significant that N‑Krypt has not assailed the agreements based on contractual principles. It has instead sought to rely solely on the existence of a trust relationship, in the mistaken belief that such a relationship supersedes its obligations under the agreements. In fact, N‑Krypt has given up any such rights by entering into these agreements. He challenges N‑Krypt's assertion that

one cannot contract out of what would otherwise be trust obligations, a proposition for which its counsel has not provided any authority. He also notes that N‑Krypt cannot invoke any of the shareholder protections available under the Business Corporations Act, because it is not the legal owner of the shares. [25] As to N‑Krypt's requests for information, the submission is that I should consider the comprehensiveness of the subscriber agreement and its obvious objective of maintaining the confidentiality of Cirius's business information. If my analysis permits me to resort to extrinsic evidence in addition to the language of the agreement, then it is instructive that N‑Krypt has endorsed this objective of confidentiality in other contexts. When I consider the advisability of ordering any disclosure I am also asked to keep in mind N‑Krypt's current status as a competitor of Cirius and the adversarial relationship that now exists between their principals. [26] Counsel submits that a return of the shares pursuant to the rule in Saunders v. Vautier is precluded by the nature of the relationship between the parties here, which is purely contractual. Even if a trust relationship is found, N‑Krypt is not the sole beneficiary -- the shares are also held for Cirius's benefit -- so the rule cannot be invoked. And there is certainly no conflict of interest on Mr. LeVasseur's part that

could make it expedient to appoint a new trustee -- he is doing no more with the shares than the agreements expressly authorize and N‑Krypt has yet to explain how its interests could be prejudiced by the arrangement. In any case, Mr. LeVasseur's counsel points out that N‑Krypt did not actually specify the replacement of the trustee as part of the relief it seeks in this petition, so it would not be appropriate to grant it.

4. DISCUSSION [27] While the evidence about the formation of the agreements and the disputes between the parties since then was helpful in understanding the context for the agreements and the issues underlying this petition, I agree with N‑Krypt's counsel that the central issue to be resolved is the basis on which Mr. LeVasseur holds N‑Krypt's shares and what (if any) duties flow from it. It is impossible on the current evidence to make any findings with respect to the numerous reciprocal allegations of wrongdoing, but fortunately that is not necessary in order to reach a decision and so no referral to the trial list is required. I also do not consider the legal issues that arise to be so complex that they cannot be resolved within the usual petition process. [28] On the other preliminary procedural concern, I do not see the absence of Cirius as a party as a bar in itself to the relief being sought, since N-Krypt is only seeking to compel Mr. LeVasseur to take certain actions in his capacity as trustee. [29] As a threshold issue, I am unable to accept the submission that Mr. LeVasseur does not hold N‑Krypt's shares on a trust basis. Both the express language used in the agreements and, more importantly, the critical separation of legal and beneficial ownership of the shares that has been created allows no other conclusion. The fact that Mr. LeVasseur and Cirius benefit from his

ability to vote the shares and that he does not "manage" them in the usual manner of a trustee are features of this particular arrangement that do not detract from the essential characterization of the manner in which the property is held. [30] The more pressing issue is what trust rights N‑Krypt is able to invoke in this situation. [31] First, I do not think that the rule in Saunders v. Vautier applies here. While, as I have said, this is certainly a trust relationship, the rule deals with situations in which a settlor has placed property in the hands of a trustee for the benefit of a third party beneficiary, who may wish at some point to take legal title to the property. A different analysis is necessary when the settlor and the beneficiary are the same person, and the settlor/trustee has contractually bound themselves to leave the property in the trustee's hands under certain conditions and for a specific period. [32] This point was helpfully explained in Khavari v. Mizrahi, 2016 ONSC 101: [63] [T]he principle in Saunders v. Vautier operates in the circumstances in which a settlor has made an absolute transfer of property to a trustee to be held in trust for a third party beneficiary pending the satisfaction of certain conditions. If, however, the settlor and the beneficiary of a trust are the same party, the issue becomes a simple matter of the contractual interpretation of

the agreement that governs the relationship between the settlor/beneficiary and the trustee. If the settlor/beneficiary reserved a power of revocation, courts will enforce it. If the settlor/beneficiary failed to do so, there is no element of unfairness that compels a court of equity to intervene. Indeed, doing so would rewrite the trust agreement to the potential prejudice of the trustee. And, on the specific facts of that case: [65] [A]s a related matter, it is conceptually incorrect to separate the roles of settlor and beneficiary as [the settlor/beneficiary] seeks to do in asserting the rule in Saunders v. Vautier. In effect, [he] seeks to avoid the absence of an express right of revocation in his favour in his capacity as the settlor of the alleged trust by asserting that he has a separate right as a beneficiary. In his factum, [he] makes a similar argument in suggesting that, as the beneficiary of the alleged trust, he is entitled to disregard the intentions of the settlor even if he is the settlor. I do not think this is possible as a matter of law [33] In other words, in this situation the rule is not a proper means of escaping the overall contractual terms under which the trust property is held. I should say in this regard that I do not think it is possible to analyze the voting trust and subscriber agreements separately in terms of the restrictions they impose on

N-Krypt's ability to collapse the trust, as its counsel submits. The subscriber agreement provides for the shares to be delivered to Mr. LeVasseur in trust for N‑Krypt and requires N‑Krypt to enter into the voting trust agreement. Together the agreements form the overall trust arrangement and define the rights and obligations agreed to under it. [34] I also do not find any evidence of a conflict of interest or impropriety that would make it expedient to replace Mr. LeVasseur with another trustee. N‑Krypt's counsel cited Simpson-Alec v. Ziprick, [1998] B.C.J. No. 685 (S.C.) at para. 13 on this issue, and the excerpt from D.W.M. Waters, Law of Trusts in Canada, 2nd ed. (Toronto: Carswells 1984), at p. 683 that is quoted in that paragraph is helpful: [T]he acts or omissions [of the trustee] must be such as to endanger the trust property, or to show a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity. [35] Nothing of that nature has been shown. The right to vote N‑Krypt's shares at Mr. LeVasseur's discretion is the very purpose of the agreements and exercising that right in a way that may not align with N‑Krypt's preferences is not the same thing as devaluing the trust property or otherwise undermining N‑Krypt's property interests. The hostile relationship between the parties, for which no fault can be ascribed on the current

contradictory evidence, and Mr. LeVasseur's restrictive position on disclosure to N‑Krypt, which has some support in the agreements, are also insufficient reasons to find that he is acting improperly as the trustee. These conclusions make it unnecessary for me to determine whether N‑Krypt gave sufficient notice of its intention to seek this remedy. [36] The more difficult question is what if any additional "trust information" N‑Krypt is entitled to in light of the restrictions in the subscriber agreement. [37] I do not think that the information about a company that would be available to an ordinary shareholder invariably serves as the baseline for what a court will order to be provided to a beneficial owner of the shares. [38] The trustee has a fundamental duty to account for the trust property (see: D.W.M. Waters, M.R. Gillen and L.D. Smiths, Waters' Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012) at pp. 1120-27), and to report on how it has been dealt with (Re Ballard Estate, (1994), 20 O.R. (3d) 350 (Gen. Div.) at 355-6). [39] However the extent of the "trust information" that will be ordered depends on the particular circumstances. In Schmidt v. Rosewood Trust Ltd. [2003] J.C.J. No. 26 (P.C.), the Privy Council held that a beneficiary, simply by asserting a claim, does not have an entitlement to disclosure as of right -- the strength of the claim must be

assessed and balanced against competing interests such as personal or commercial confidentiality. This approach has been referred to with at least implicit approval in two British Columbia decisions: D.M.M. v. R.J.M., 2005 BCSC 207 and Martin Estate (Re), 2009 BCSC 1407, and I find it persuasive in any event. [40] Even before the decision in Schmidt, in Lindholm v. Lindholm, 2000 BCSC 269, a similar balancing of interests -- in that case between the right of the beneficiary to documents showing how his interest had been dealt with and the risk of commercial disruption to the business and trust involved -- led to a decision in favour of disclosure. [41] I think this more nuanced approach is preferable to the general proposition put forward previously in Butt v. Kelsen, 1951 Ch. D.167 at p. 172, that the beneficiaries should be treated as though they were shareholders for disclosure purposes. I note that Butt was the only authority relied on in support of a trust-based obligation to produce corporate documents to the beneficiaries in Bergen v. Goodwyn, [1998] B.C.J. No. 913 (S.C.), a case relied on by N‑Krypt. [42] The further relevant factor is that in this case N‑Krypt has, by an agreement whose binding force has not been challenged, narrowed its right of disclosure to exclude review of Cirius's minute books or of the company's "material contracts". The authors of Waters, 4th

ed. suggest, at p. 1134, that a term denying a beneficiary the information necessary to "enforce" the trust would be declared invalid in Canada, but as I will discuss, I do not think that these restrictions go that far, and sufficient information for that purpose can be provided to N-Krypt despite them. [43] However, the pre-agreement communications between the parties and N‑Krypt's statement in its Ontario pleadings about the purpose of the confidentiality provisions are not admissible to broaden the unambiguous terms of the subscriber agreement to include any wider range of potentially confidential information. There is also no necessity to imply such an additional broad term to give effect to the agreement. Mr. LeVasseur is entitled only to the restrictions that were bargained for and reduced to the agreement. [44] In my view Mr. Choksi has identified legitimate concerns when he deposes, at paragraph 7 of his affidavit of October 2, 2015, that: I have commenced this proceeding for the sole purpose of monitoring and protecting the value of NK's investment in Cirius. I believe it is in NK's best interests to know how its investment is performing, and to ensure that NK's [sic] is treated fairly as a shareholder. [45] And, at paragraph 12 of his affidavit of April 20, 2015: I do not know if shares have increased or decreased in value [or] whether the shares have been

diluted [46] While there is obviously an adversarial business and personal relationship between the parties, Mr. LeVasseur's concerns about the harm that could result from any disclosure to N‑Krypt are quite vague and speculative. [47] In order to engage in a proper balancing of the interests here, I think it is necessary to focus on the shares in their specific capacity as trust property, rather than as a means of participation by N‑Krypt in the corporate governance of Cirius, which is not the purpose of this kind of application. I accept that at some level the management of the company may impact the value of the shares, but such an extensive window into Cirius's operation is not necessary in order to permit N‑Krypt to protect its interests under the trust. In this respect I disagree with N‑Krypt's counsel that information "in respect of the shares", as he terms it, properly includes information such as how they have been voted. It is information about how the shares have been dealt with and their value, specifically as trust property, that falls within the trustee's duty to account and forms part of the core of trust information that it is appropriate to provide here. [48] The general classes of documents that N‑Krypt has requested do not lend themselves to the sort of focused order that is justified in this case. I do not know enough about the information that each type of

document is likely to contain to tailor an order that allows N‑Krypt to "enforce" the trust without giving it material that it has bargained to forego. I think that it would be preferable instead to describe the necessary trust information according to the specific relevant subject-matter with which it deals. Such focused disclosure minimizes the potential for conflict with the terms of the subscriber agreement, which prohibits access to corporate documents by reference to the minute book and its contents.

5. CONCLUSION [49] Accordingly, I order that Mr. LeVasseur provide to N‑Krypt within 14 days of the release these reasons all information within his possession and control that deals with the following matters: · Any change to the value of N‑Krypt's shares in Cirius from the original subscription price (since Cirius is not publicly traded, this will obviously involve the information on which Mr. LeVasseur relies to determine the shares' value) and any change to other benefits that N‑Krypt would receive based on the shares, such as dividends; · Any change in the nature of N‑Krypt's shares in Cirius since the original subscription, including any dilution of them; and · Any actions undertaken by Cirius in relation to N‑Krypt's shares that adversely affected their value or any other benefits that N‑Krypt would receive based on them, or had the potential to do so. [50] N‑Krypt must be provided with updated information on these matters immediately whenever any changes occur. Even if no changes have occurred Mr. LeVasseur must confirm at least once per year that the situation remains the same. [51] By "information" I mean a fully responsive and comprehensible narrative of the relevant facts under each subject heading, together with any documents or relevant portions of documents that support them. It includes changes to the value of the shares or their related benefits in themselves,

and also in relation to shares and related held by other shareholders -- for example Mr. LeVasseur himself. [52] Supporting documents that fall within the definitions in paragraph 12 of the subscription agreement may be omitted, as long as any facts derived from them that are relevant to the subject heading are included in the narrative and the document is referenced in it. This will give the non-disclosure provision continued force without depriving N-Krypt of legitimate trust information. [53] Given the care with which Cirius has defined in the agreement concerning the kind of information that needs to be protected from disclosure in order to safeguard its interests, I see no risk to those interests to also require Mr. LeVasseur to provide N‑Krypt with any information or material since N‑Krypt's subscription that has been provided to other shareholders, solely in their capacity as shareholders, that does not fall within the definitions in paragraph 12 of the subscription agreement. This will continue on an ongoing basis, as any new information or material is provided to other shareholders and, as in the case of the share information, if nothing new is provided then Mr. LeVasseur will confirm that to N‑Krypt annually. [54] I would say that success has been roughly evenly divided here. N‑Krypt failed to achieve the return of the shares or the appointment of a new trustee, but did obtain an order for a meaningful level of disclosure. Therefore the parties will each bear their own costs. The Honourable Mr. Justice T.A. Schultes