Gregory M. Prekupec, Farai Munyurwa

The recent decision in Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, provides critical insights into the enforceability of restrictive covenants within business purchase and sale agreements. The case highlights several important principles that not only clarify the legal framework but also has significant implications for buyers and sellers.

The Facts

In July 2017, Dr. Sims purchased all the shares of Dr. Cooke’s dental practice for $1.1 million. The agreement contained a non-competition clause prohibiting Dr. Cooke from directly or indirectly practicing dentistry within a 15 km radius of the acquired practice for a period of five years. Further to that clause, Dr. Cooke was to remain employed by the dental practice for a period of two years or until employment was terminated with sufficient notice. Two and a half years later, Dr. Sims gave a notice of termination to Dr. Cooke and he stopped working in the practice at that time. Months later, Dr. Cooke expressed his intention to practice dentistry at a practice 3.3 km away from the recently acquired practice, asserting that the non-competition clause was unenforceable. Dr. Sim’s rejected this assertion and brought legal proceedings against Dr. Cooke which were decided in Dr. Sim’s favor. Dr. Cooke appealed this decision citing that the trial judge erred in concluding that the clause in the agreement was reasonable.

Findings and Key Takeaways

The Ontario Court of Appeal dismissed the appeal and awarded costs to the respondent citing that the trial judge had not erred in concluding that the clause was reasonable in terms of duration and geographic scope. This decision reinforces the Courts long standing position that it will not interfere and invalidate restrictive covenants in cases where both parties willing and freely enter into a contract agreement with adequate legal representation and equal bargaining power. This reinforces the autonomy of parties in crafting agreements that protect their interests.

In terms of geographic scope and duration, the Court’s decision sets a benchmark for future transactions by establishing that such covenants are reasonable in this context. This is especially important in industries where client relationships and trust take years to build and the activities of a seller post-sale can affect the value of the acquired practice.

This case will set a precedent that will guide future cases on the enforceability of restrictive covenants. By focusing on reasonableness, the Court offers a reference point in future cases deciding similar issues.

Overall, this decision underscores the importance of drafting, clear, reasonable covenants to protect business investments by reiterating that restrictive covenants will be enforced, given that they are indeed reasonable and mutually agreed upon.

We understand the pivotal role that well-drafted restrictive covenants play in protecting business investments. For more information on the enforceability of restrictive covenants or to discuss the implications of recent legal decisions, contact Gregory Prekupec at [email protected].

Gregory Prekupec,  Rahul Gupta

1. The Importance of the Ontario Securities Commission TestLab

The Ontario Securities Commission (the “OSC”) is continuously looking for innovative ways to reduce the regulatory burden for businesses to raise capital and accelerate innovation. One way this is accomplished is through the OSC TestLab; a platform for the OSC to experiment with new initiatives that aid early-stage capital raising.

Recently, the OSC announced 4 new test policies to help achieve this end:

A. the early-stage business registration exemption (Ontario Instrument 32-509 Early-Stage Business Registration Exemption (Interim Class Order)),
B. the angel investor group registration exemption (Ontario Instrument 32-508 Not-For-Profit Angel Investor Group Registration Exemption (Interim Class Order)),
C. the self-certified investor prospectus exemption (Ontario Instrument 45-509 Report of Distributions under the Self-Certified Investor Prospectus Exemption (Interim Class Order)), and
D. simplified distribution reporting (Form 32-509F2/45-509F1 Alternative Report of Exempt Distribution)

Early-Stage Business Registration Exemption

Prior to this policy, businesses looking to raise capital may have become “in the business of trading” securities which would require them to register as a dealer. The OSC expanded the list of available exemptions to allow for capital raising for up to $3M and certain marketing activities. This exemption applies when: (i) where the business is working through a registered dealer or (ii) where the business is working with an intermediary who is exempt from registration.

Angel Investor Group Registration Exemption

Not-for-profit angel investor groups provide capital, education, and other vital support to early-stage businesses. Similar to the above, angel investors may also become “in the business of trading” securities which would require registration. The OSC now temporarily allows angel investors to use the new dealer registration exemption.

Self-Certified Investor Prospectus Exemption

Previously, exempt issuers which distribute securities were required to file Form 45-106F1 within 10 days of any distribution. This new test policy exempts issuers from this filing requirement to reduce the regulatory load.

Simplified Distribution Reporting

The OSC has released a simplified e-form for quarterly distribution reporting which does not carry an associated fee for companies that are using any of these new test policies.

2. Potential Opportunities to Propel Your Business

New businesses play a crucial role in advancing Ontario’s innovative and competitive edge. The test policies that the OSC released are intended to allow early-stage businesses to raise capital with less regulatory burden. The temporary nature of these policies will allow the OSC to analyze their efficacy to take a balanced approach for implementing long-term solutions.

We recognize the critical role securing the right capital providers plays in business growth. For more information about the capital raising process or any of the new policies, contact practice partner Gregory Prekupec at [email protected].

Avram Musafija, Gregory Prekupec 

Background of the Cameo Knitting vs. Kodiak Legal Dispute
In a recent and noteworthy legal dispute, 4207602 Canada Inc., operating as Cameo Knitting, found itself entangled in a legal battle with Kodiak Group Holdings Co. This legal tussle, adjudicated by the Superior Court of Quebec, arose from Kodiak’s unilateral decision to terminate its longstanding partnership with Cameo Knitting—a distributor of socks and other apparel featuring Kodiak’s trademarks across North America.

Causes Behind the Sudden Dissolution of the Partnership
The sudden dissolution of this two-decade-long collaboration stemmed from various factors, including conflicts over royalty payments, the terms of their renewal agreement, and allegations of Kodiak negotiating in bad faith. Cameo Knitting’s strategic move to withhold royalty payments, safeguarding these funds in trust during renewal negotiations, highlights the intricacies of maintaining long-term business partnerships. Exacerbating the situation were disagreements over renewal terms, claims of Kodiak’s bad faith negotiations, and significant shifts in business strategies—most notably, the cessation of Kodiak boot distributions through major retailers like Costco and Walmart, resulting in substantial business losses for Cameo Knitting.

The Impact of Kodiak’s Actions on the Partnership and Business Strategy
Despite the extended duration of their partnership, Kodiak’s actions unequivocally conveyed that “business is still business,” emphasizing that even longstanding associations are susceptible to breakdowns, irrespective of accumulated goodwill.

Legal Proceedings: The Quebec Superior Court’s Provisional Injunction
The Quebec Superior Court’s provisional injunction in favour of Cameo Knitting, halting Kodiak’s termination notice, underscores the delicate balance courts must strike between enforcing contractual obligations and recognizing the fluid nature of business dynamics.

Lessons for Businesses in Contract Renewals and Dispute Resolution
This interim decision spotlights the critical importance of clear communication and maintaining good faith in negotiations, while also acknowledging the potential harm that abrupt terminations can inflict on a company’s operations and reputation. This case serves as a cautionary tale for businesses navigating the complex terrain of contract renewals and disputes, underscoring the need for foresight and fairness in commercial dealings.

Relevance of the Cameo Knitting Case for Businesses Across Jurisdictions
Although this legal precedent may not directly apply in Ontario, its lessons hold significant relevance for business owners across various jurisdictions. The emphasis on meticulous contract drafting, the imperative of sustaining good faith throughout negotiations, and the nuanced judicial considerations involved in resolving commercial disputes should not be underestimated.

Key Takeaways from the Legal Dispute Between Cameo Knitting and Kodiak

• Causes of Dissolution: The termination resulted from conflicts over royalty payments, disagreements on renewal terms, and accusations of Kodiak negotiating in bad faith.
• Business Impact: The cessation of Kodiak boot distributions through major retailers like Costco and Walmart significantly impacted Cameo Knitting’s business, leading to substantial losses.
• Legal Proceedings: The Quebec Superior Court granted a provisional injunction in favour of Cameo Knitting, emphasizing the delicate balance courts must maintain between enforcing contractual obligations and recognizing the dynamic nature of business.
• Importance of Communication and Good Faith: The critical role of clear communication and maintaining good faith in negotiations is highlighted, underscoring the potential harm abrupt terminations can cause to a company’s operations and reputation.

Conclusion: Avoiding Contractual Conflicts Through Clear Agreements and Negotiations
The content of this article is meant for general information purposes and is not to be regarded as a legal opinion. Individuals are encouraged to seek legal advice pertaining to their specific circumstances. If you seek legal assistance, please reach out to Gregory M. Prekupec at [email protected].