B.C. Supreme Court Dismisses Application by Cactus to Withhold Financial Statements from Shareholder, Earl’s

Article Content

Author: Anthony Pugh and Sarah McMahon, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In Cactus World Holdings Ltd. v. Earl’s Holdings Ltd. et al., the British Columbia Supreme Court dismissed a petition by Cactus World Holdings Ltd. which sought to waive the statutory obligation of its director to produce audited financial statements to the company’s shareholders, which include Earl’s Holdings Ltd., except on certain terms.

The Court held that the evidence did not establish that releasing the financial statements to the shareholders would cause significant harm that would outweigh the benefits to the shareholders.  There was no evidence of competitive disadvantage or any harm to Cactus, rather than mere possibility of a detriment for Cactus.

Key Facts

Cactus World Holdings Ltd. (“Cactus”) and Earl’s Holdings Ltd. (“Earls”) are competitors in the “premium” casual dining market.  Earls owned about half the shares in Cactus. The directors of Earls are also directors of another restaurant competitor, Joey Restaurant Group (“Joey”).  

The Cactus shareholders agreement contained a confidentiality clause which prevented associates with Joey from accessing financial statements or information contained in the financial statements, so that Joey did not receive a competitive advantage.

Cactus commenced a petition seeking an order under s. 200(1)(b) of the BCA to waive the obligation of its sole director to produce audited financial statements to Earls, except on strict conditions, including an order prohibiting Jeffrey Fuller, a director of Earls and Joey’s CEO, from receiving the financial statements.  Cactus alleged that Joey would receive a competitive advantage if it received the financial statements through Fuller. It also complained that Earls breached the confidentiality clause but did not frame its petition as breach of contract.

Under subsection 200(1)(b) of British Columbia’s BCA, a court may waive the directors’ obligation to produce audited financial statements to the corporation’s shareholders. Cactus argued such an order was necessary to prevent disclosure of the financial statements to Joey. Cactus complained that, in breach of the confidentiality clause in the shareholder agreement, Joey was able to access the financial statements, giving it a competitive advantage in the marketplace.

Earls opposed the order.  It argued that this was not an appropriate use of the s. 200(1)(b) exemption, as an exemption under s. 200(1)(b) should not be used to enforce the terms of the shareholder agreement or to be used as a remedy for breaching provisions of the shareholder agreement. They also argued that the financial statements did not contain information that could assist Joey competitively and that the proposed order would be harmful to their interest as shareholders.

Joey did not gain a competitive advantage by receiving Cactus’ financial statements

Cactus argued that Joey could learn about the cost of sales, labour costs, earnings, revenues and other financial information from reviewing financial statements. Cactus also argued that being able to look at the financial statements on a year-to-year basis would allow Joey to draw comparatives, leading to a much fuller picture of a Cactus’ financial and operational game plan. 

Earls took the position that receiving Cactus’ financial statements did not help Joey competitively.  It argued that the keys to a restaurant’s success, such as décor, staff training, the menu and location could not be found in a restaurant’s financial statement.  

Earls also argued that receiving the financial statements was critical so that it could make informed decisions about its investment in Cactus, understand the value of its investment in Cactus and decide whether to trigger, or how to respond to, the shareholder agreement’s “shot gun” clause.

The Court held that the evidence did not show that there was any evidence of detriment to Cactus. Rather, this only resulted in a “mere possibility of detriment” to Cactus.

Harm to the company must outweigh the benefit to the shareholder

The Court read s. 200 along with s. 198, which is the provision that requires the directors of a company to publish annual financial statements unless they are relieved of the obligation under s. 200. The Court noted the importance of a shareholder’s right under s. 198 to receive financial statements and held that the interpreting the Act to benefit the company would not be the intention of the legislature.

Although not articulating a firm threshold, the Court held that, to be successful for an order under s. 200(1)(b) of the BCA, the party seeking the order must demonstrate that the cost or harm to the company from production of its audited financial statements to its shareholders outweighs the benefit to its shareholders receiving the statements.  

Since Cactus did not show any detriment, it was not necessary for the Court to consider the benefit to shareholders.  However, it observed that the need for shareholder oversight was significant because Cactus had only one director.

Subsection 200(1)(b) not intended to enforce the terms of a contract

The Court held that s. 200(1)(b) is not intended to enforce the terms of a contract and the use of this waiver provision not the proper method for Cactus to enforce a contractual clause.

The Court observed that the rationale of the proposed order would be to enforce the confidentiality clause, and that, if Cactus framed its claim as breach of contract, it would seek an interlocutory injunction (although it would be required to show proof of irreparable harm).