1Court File No. 12345/04/CMONTARIOSUPERIOR COURT OF JUSTICEBETWEEN:Warm and Cold Corporation PlaintiffandAndy Able and Specialty Sheet Metal LimitedDefendantsAND BETWEEN:Andy AblePlaintiff By CounterclaimandWarm and Cold Corporation, Bob Barber and Chuck ComfortDefendants by CounterclaimFACT SITUATIONWarm and Cold Corporation (“WCC”) is a distributor and developer of sheet metalproducts operating throughout Canada in the heating and air conditioning industry.WCC has been very successful because its product lines afford greater ease of usageand flexibility on job sites. While WCC does not manufacture products it designs andresearches products which it then contracts out to be manufactured. These productsare sold by WCC through its three divisions to end user contractors mostly forB2commercial construction.WCC has three shareholders, each of whom, through a personal holding company,owns a one-third interest in the share capital of WCC. As of the date of trial, theDefendant, Andy Able (“Able”) remains a shareholder together with his former friends,Bob Barber (“Barber”) and Chuck Comfort (“Comfort”).WCC operates its business through three divisions. One division operates in Quebecand the Eastern provinces and is headed up by Barber (the “Eastern Division”). Ontarioand Manitoba form a second division that is run by Comfort (the “Central Division”). Thethird division is comprised of the three Western provinces of Saskatchewan, Alberta andBritish Columbia and was operated by Able (the “Western Division”).At the time WCC was incorporated, each of Able, Barber and Comfort determined thatthey would have complete autonomy within their respective divisions. They did notobtain legal advice and did not consider it important, to have a shareholders agreement,at the time. All of their dealings were conducted orally, which occasionally werereduced to e-mails or a cryptic written note. Thus, the informal structure theyestablished granted each of them final responsibility for all sales, business developmentinitiatives and expenses within their own division.However, each division also took responsibility for a specific part of the business. TheEastern Division, in addition to dealing with its own sales and business development,took responsibility for research and development. In particular, it developed a uniqueproduct that extruded various sheet metal fittings that made installations more efficientand thereby enhanced the sales and profitability of WCCThe Central Division had responsibility for all accounting functions. It had invested inhardware and software to centralize invoicing and inventory control and maintain theoverall books and records of WCC.The Western Division had primary responsibility for centralizing the inventory andensuring product availabity. Because the cost of leasing was lower in Saskatchewan,the Western Division maintained a central warehouse for the inventory and it shipped3product to each division or, if instructed, directly to end use customers of the otherdivisions.Each division had the responsibility of promoting the product line to local contractorsand those that had a national presence such as PCL, Eastern Construction and others.The three shareholders all understood that a fair amount of wining and dining wasrequired to land the big national accounts. Able enjoyed and was very good atdeveloping business and was well known in Calgary business circles for hisflamboyancy, wild parties and his “spare no expense” business development.When the financial statements of WCC were completed following the end of the fiscalyear, bonuses/dividends were paid to each of the shareholders based upon the successof their particular division. The shareholders went on an annual junket to Las Vegas tocelebrate their collective success and to divvy up the profit earned during the previousyear. They discussed, over expensive dinners (and much wine), among other things,how best to compensate the contributions of each of the division heads during theprevious year. They took into account business development, profit and overallcontribution of each division to the success of WCC. In the years in question thebonuses ranged from $200K to 400K.Because of the differences between the geographic regions, the profits earned in eachdivision varied. Generally speaking, from an historical perspective, while sales in theCentral Division were always much higher, margins were smaller. However, overall itwas the most profitable and Comfort almost always received a larger bonus than eitherAble or Barber. Barber was a very close friend of Comfort and always supported him ondecisions regarding year-end bonuses. Over the years, tensions arose between Ableon one side, and Barber and Comfort on the other. Able developed the view that hisefforts in landing national accounts and running an efficient warehousing and shippingsystem were not fully appreciated by Barber and Comfort, nor did they appear tounderstand the money that Able had made for WCC.In 2002, the Western Division’s profits declined substantially, notwithstanding that WCCwas doing well in the other divisions and the economic cycle in construction was still4high. Able explained to his fellow shareholders during their Las Vegas junket that timeswere tough, competition from new companies was intense and business opportunitieswere hard to find. The decline in the fortunes of the Western Division continued through 2003. Barberand Comfort became suspicious and sent an auditing team to Calgary to review thebooks and records. The inspection team came from WCC’s auditors, Tick Check LLP(“Tick”). Tick found $500,000 in payments for credit cards for Able for 2003. Almost$300,000 of this amount was debited to an account entitled “Sales and Promo WCC”and many of the payments were to bars, strip clubs and restaurants. In addition, Tickreviewed an outside operation, Specialty Sheet Metal Limited (“Specialty”), operatingfrom premises sublet from WCC in Calgary.Specialty was a company believed to be 50% owned by Able’s holding company. Tickfound that funds advanced by WCC to Specialty had been used to purchase equipmentused by Specialty and to pay operating expenses of Specialty. Barber and Comfortwere aware of the existence of Specialty, but believed it was only a shell corporationused by Able to shelter income and year-end bonuses. When confronted by Tick aboutSpecialty, Able refused to