Cumming J., of the Ontario Superior Court of Justice, found that the Ford Motor Company had the statutory right to force minority shareholders to sell their shares to the company, but the shareholders had the right to claim not only for the present value of the shares but for historical oppression because of Ford’s transfer pricing system.
Ford Canada, (this term is used to simplify a complex structure), was a publicly traded company that wanted to go private. By 1995, the valuation date, Ford U.S. (a similarly simplified term) had acquired 93.85% of the publicly held shares. Of the balance of 6.17% or 511,319 shares, approximately 28,717 shares were held by the Ontario Municipal Employees Retirement Board (OMERS).
Pursuant to s. 190(1) of the OBCA, Ford U.S., on going private, had the right to squeeze out the minority shareholders without their consent or without offering replacement securities but had to purchase their shares for fair value.
Ford U.S. obtained two valuation reports respecting the value of the shares: CIBC Wood Gundy valued the shares at $170 to $200; Salomon Smith Barney valued them at $110 to $150.
OMERS obtained a report that said they were valued at $642.50 per share.
Ford brought an Application to have the value of the OMERS’ shares determined as of September 11, 1995 at the value of $185 per share.
OMERS disputed the Ford valuation of the shares and brought a counterclaim for oppression caused by Ford’s inter-corporate transfer price system and also alleged historical oppression.
The novel point in this case was the allegation, not that Ford did anything active to oppress the minority, but that it failed to take appropriate action to correct a system that became unfair because of external conditions.
Ford introduced its transfer pricing system in 1965. However, between 1985 and 1995, because the exchange rate went against the Canadian dollar, the system allegedly became unfair.
Cumming J. applied a principal enumerated by Socrates 2,500 years ago which is still one of the primary bases for attacking competing conclusions: identify the fundamental assumption. In this case the difference in the opinions was based on assumptions about the transfer pricing system: the Ford experts assumed that Ford’s transfer pricing policy was fair while OMERS’ experts assumed it was unfair.
Both Ford U.S. and Ford Canada functioned in three divisions: manufacturing, assembly and distribution. Each division was treated as independent in that it had to purchase products from the other. The value of the purchase price was determined by Ford’s transfer pricing policy.
The distribution division sold cars externally to the Ford dealerships. The alleged unfairness related to the price by which Ford Canada distribution purchased vehicles from Ford U.S.
Cumming J. examined several factors relevant to the issue of fairness:
– the historical record showed that Ford Canada distribution was always in a loss position since 1977 and Ford U.S. was always in a profit position. If the pricing system had been based on market factors, there would be no reason for Ford to continue in Canada. Thus Ford Canada must have actually been profitable despite what appeared on its books. Ford Canada paid 3.5 billion dollars in development costs to Ford U.S. which Cumming J. found was significantly more than was reasonable. This item alone made Ford Canada unprofitable.
– transfer pricing arrangements with arms length corporations such as Mazda and Kia were arranged on a flexible basis and reviewed depending on changing market conditions but this was not done with Ford Canada;
– Chrysler and General Motors adjusted their transfer pricing system over time and changing conditions.
The fact that the U.S. and Canadian tax authorities had not challenged the transfer pricing system was not relevant. Ford acted so that it paid all of its taxes in the U.S. and not in Canada. The U.S. tax department would not object to this. Was the Canadian tax department asleep at the switch? Cumming J. was too polite to call attention to this point; however, he mentioned that the Canadian tax authority had never fully investigated the transfer pricing system. In any event, the tax department’s concerns were not fairness to minority shareholders.
One might ask parenthetically that if it is true that patriotic Ford artificially arranged its affairs to pay no taxes in Canada, would that fact, if known to Canadian consumers, affect sales in Canada?
The business judgment rule also did not provide Ford U.S. with immunity from examination of its policy from the aspect of shareholder oppression. The court stated that if Ford U.S. and Ford Canada had really acted at arms length, there would have been adjustments to the transfer pricing system:
“Why would the management of any truly independent
entity in Ford Canada’s position continue to tolerate an
inter-corporate pricing arrangements that leaves it with
a staggering aggregation of losses carried forward and
with the only reasonable expectation for the future being
that of continuing mammoth losses?” [para. 300].
Cumming J. found that it was Ford’s inaction that caused the oppression. Shareholders have reasonable expectations that management would act in the best interest of the corporation which meant all of the shareholders and take all
the reasonable steps to enhance profitability by changes to the inter-corporate pricing system.
The question became what is the monetary value of the shares given the oppression. OMERS claimed a component for historical oppression between 1985 to 1995 and one for loss of future value.
The Court accepted evidence on the best estimate of a proper pricing system and its effect on profitability. The limitation period restricted the historical claim to a period between 1994 and 1995 and was determined to be about $25 per year or $52.07 a share.
The “go forward” value was $207 for a total of $262.36 per share.
The legislature has created a palm tree justice jurisdiction for the oppression remedy. The statute itself says essentially no more than that oppression is unfair treatment. The case law has suggested that oppression is a violation of the complaining shareholder’s reasonable expectations. It does not seem to this writer that reasonable expectation adds much to the concept of unfairness. Both ultimately turn on what a judge thinks is fair in the circumstances.
It appears that when a complaint is financial, the principle is that one group of similar shareholders cannot be given a financial advantage over another group. Any defences to such treatment such as the business judgment rule will not prevail. The Ford case indicates that it does not matter if the unfairness results from active or passive means.