J. Q.B. A.D.1996 No. 993 J.C. S. IN THE QUEEN'S BENCH JUDICIAL CENTRE OF SASKATOON IN THE MATTER OF THE BUSINESS CORPORATIONS ACT, S.S. 1979, c. B-10 BETWEEN: ROSETOWN AND DISTRICT COMMUNITY BOND CORPORATION and PRECISION METAL FABRICATING LTD., LOREN KATZENBERGER and SHERYL KATZENBERGER RESPONDENTS L. Jay Litman for the applicant Jay D. Watson for the respondents JUDGMENT KYLE J. June 11, 1996 This motion raises the question of the right of acorporate board to breach its undertaking to remain in a smallcommunity when it had taken advantage of the governmentsponsored community bond program in order to establish itsbusiness. FACTS Precision Metal Fabricating Ltd. ("Precision") entered into Financing Agreement with Rosetown and District Community Bond Corporation ("Bondco") March 14, 1991, under the terms of which Bondco invested $800,200 in Precision. Under its terms, for period of ten years: 5.01 Negative Covenants Project Co. hereby covenants and agrees to and in favour of Bondco that prior to the Termination Date, Project Co. shall not, without the prior written consent of Bondco: (k) sell, dispose or remove from the municipality of Rosetown, Saskatchewan any significant amount of its operating 5.02 Positive Covenants Unless Bondco provides its written consent (which may be withdrawn at any time as to future events) Project Co. shall, until the Termination Date: (f) maintain in ordinary operation in the Rural Municipality of St. Andrews in the Province of Saskatchewan. No written consent has been sought or given under these provisions. Bondco was formed pursuant to The Community Bonds Act, S.S. 1990-91, c. C-1.1 the long title of which is "An Act respecting Investments by Saskatchewan Residents in Support of Community Diversification and Environmental Protection". Its clear purpose was to lend government assistance and support to locally based industrial and commercial development programs to the end that Saskatchewan's essentially rural agricultural economy might diversify, providing off farm employment and lending vitality to centres which can take advantage of its provisions. The objective of the Financing Agreement was in part to assure that Precision would not "take the money and run". The Shareholders' Agreement obliged all shareholders to vote their shares so as to confirm the nominees of certain shareholders, thereby freezing the board composition without regard to its performance. An unusual restriction indeed. As result the board was dominated by the original Precision group of shareholders and even though Bondco and eventually the Government of Saskatchewan are entitled to enough votes to exercise control of the company, they cannot change the board and if they try to dictate policy they do not have the usual ways of enforcing their wishes. Loren Katzenberger was at all material times President and CEO of Precision. The six member board was controlled by him and his associates. In December, 1994, local media reported that Precision had decided to move part of its operation to Saskatoon, city of 200,000 inhabitants about 80 miles from Rosetown. Rosetown has perhaps 3,000 residents. Katzenberger advised Bondco, upon inquiry, that Precision had leased manufacturing facility in Saskatoon. It appears that, absent written consent by Bondco, this was in breach of the Financing Agreement covenant. Members of Bondco by January, 1996, were concerned that jobs were being obtained in Saskatoon at the expense of Rosetown jobs and that the economic spin-offs expected to flow from their investment were not being realized in Rosetown due to the opening of the Saskatoon facility. On February 5, 1996, board resolution directed that all plans to move the plant operation to Saskatoon would be put on hold and no further movement was to take place. On February 29, Reinie Janke, Bondco director, wrote to the CEO confirming that the move to Saskatoon was in breach of the Financing Agreement and referring to legal advice that action could be taken to prevent the move. Bondco's concerns were well founded. Mr. Katzenberger's 1996 projection document contained the following paragraph: "Precision Metal Fabricating Ltd. plans to consolidate its operations to the Saskatoon location. This will be done systematically through 1996 with the offices moving early in the year and our production facilities following in practical manner as production permits. While Mr. Katzenberger, through his counsel, stated that no further moves were planned, it was acknowledged that it was his intention ultimately to move to Saskatoon and that if this Court or Bondco prevents him from doing so now, he will do it after ten years. ISSUES By this application Bondco seeks:1. A restraining order enforcing the covenant describedherein;2. An order appointing new directors to replace the CEOand his wife;3. An order of compensation for breach of contract;4. An order directing the closure of the Saskatoonoperation and the return of company assets to the RuralMunicipality of St. Andrews (Rosetown District) unless writtenconsent to such operation in Saskatoon is granted by Bondco. DISCUSSION This application is made under s. 234 of The BusinessCorporations Act, S.S. 1979, c. B-10 which provides that ifthe Court is satisfied that an act of the corporation effectsa result or if its affairs have been conducted in a manner, orif the directors have exercised their power in a manner thatis oppressive or unfairly prejudicial to, or which unfairlydisregards the interests of a security holder, the Court maymake an order to rectify the matters complained of. Some of its options are set out in subsection (3) of s. 234 and they give this Court almost unlimited power to make changes in the corporation's affairs so as to resolve the problem. The Court has, specifically, the right to amend the articles or bylaws or unanimous shareholders' agreement. It may also make changes in the board of directors. The facts of this case are not in dispute. The rationale of the decision of the directors to act in breach of the Financing Agreement is that the company's best interests are served by its being in Saskatoon because facilities, and perhaps labour, are in better supply there. The clear purpose of The Community Bonds Act was to bring about the continued economic development of regions such as Rosetown. It is not breach of the duties of director to condition his response to business questions by adhering to the principles of that Act. The commitment to operate in Rosetown was valid corporate interest, it formed the basis of the financing. Breach of so fundamental an obligation of the corporation could not be justified by conjuring up some project which can better be handled elsewhere. If it were otherwise, government incentive financing would not exist and companies such as the respondent would not be formed. While the long term value of such programs is sometimes questioned, once the commitment is made it should be complied with. The thrust of the respondents' argument was that the breach of the commitment to remain in Rosetown was in the interests of the corporation and the directors should be obliged to consent thereto. totally reject this line of reasoning. If the facilities in Rosetown and district are inadequate, they could be provided. At any event, it is unlikely that any material component of the company's requirements has disappeared from the Rosetown environment since the decision was taken to use $800,000 of Rosetown money. The actions of Mr. Katzenberger and his supporters on the board have been high-handed and oppressive and the complainant Bondco is fully entitled to the assistance of the Court in rectifying the matters complained of. DECISION It is therefore ordered, pursuant to s. 234(2) of TheBusiness Corporations Act, as follows:1. The Shareholders' Agreement is hereby amended bydeleting paragraph 3. Board of Directors and substitutingtherefor: 3. Board of Directors: The affairs of the Corporation shall be managed by board of directors of such number as the shareholders shall from time to time determine, to be elected at an annual general meeting of the corporation at which all Class "A" and Class "B" shareholders shall be entitled to such votes as are contemplated by their agreement, the Financing Agreement and the Articles of the company. Casual vacancies arising between annual meetings may be filled by the continuing members of the board. 2. The provisions of Articles 2.03, 3.02 and 3.03 of theArticles of Continuance as amended are suspended until theTermination Date as defined by the Shareholders' Agreement. 3. The present board of directors is suspended pendingthe election of directors to take place at a special meetingof the shareholders to be convened at such place and time asBondco, as represented by Reinie Janke, shall direct, but inany event before July 31, 1996. The secretary, Sheryl Katzenberger, is directed, with such legal assistance as may be required, to convoke the said meeting. 4. The respondent, Precision Metal Fabricating Ltd. andits officers and employees, are hereby enjoined from:(a) moving any of its operations from Rosetown or themunicipality of St. Andrews;(b) transferring employees or hiring further employees at anyplace other than Rosetown or the municipality of St. Andrews;unless the written consent of Bondco has been obtained andfiled with the Court. It is not my intention to displace Mr. Katzenbergeras Chief Executive Officer. His dedication to the welfare of the company, company he no doubt regards as his, is not questioned. The purpose of the order now made is to place him on notice that the will of the shareholders and the contracts under which the company was formed are not to be brushed aside. I am not directing the closure of the Saskatoonoperation. If it is the will of the board elected pursuant to the above order to withdraw from Saskatoon, it may do so. Bondco shall be entitled to recover its taxable costs against the individual respondents.
The question was whether a corporate board could breach its undertaking to remain in a small community when it had taken advantage of the government sponsored community bond program in order to establish its business. The Shareholders' Agreement obliged all shareholders to vote their shares so as to confirm the nominees of certain shareholders, thereby freezing the board composition without regard for its performance. As a result the board was dominated by the original Precision group of shareholders and even though the Government of Saskatchewan and Bondco were entitled to enough votes to exercise control of the company, they could not change the board and did not have the usual ways of enforcing their wishes. Members of Bondco were concerned that jobs were being obtained in Saskatoon at the expense of Rosetown jobs and the economic spin-offs expected from their $800,000 investment were not being realized in Rosetown due to the opening of the Saskatoon facility. An application was brought under s234 of the Business Corporations Act. They sought a restraining order enforcing the covenant, an order appointing new directors, an order of compensation for breach of contract and an order directing the closure of the Saskatoon operation and the return of company assets to Rosetown district unless Bondco granted written consent. HELD: It was ordered that 1)the Shareholders Agreement was amended deleting the offending paragraph concerning the Board of Directors and substituting a new paragraph; 2)certain provisions of the Articles of Continuance as amended were suspended until the Termination Date; 3)the present board was suspended pending the election of directors at a special meeting of shareholders; 4)the respondent was enjoined from moving its operations and from transferring or hiring employees at any place other than Rosetown District unless Bonco's written consent was filed with the Court. 5)The Chief Executive Officer was not displaced nor was the Saskatoon operation directed to be closed.  6)Bonco was entitled to its taxable costs against the individual respondents.