Canadians no longer allowed to apply to be on Jeopardy!

Canadians no longer allowed to apply to be on Jeopardy!

December 31, 2007

A Superior Court decision in a shareholder dispute raises the novel issue of whether an equity kicker can be considered interest pursuant to the Criminal Code, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

The matter of Bimman v Neiman, 2015 ONSC 2313 (CanLII) involved Sasha Bimman and his numbered company which commenced an oppression remedy action pursuant to s. 248 of the Ontario Business Corporations Act.

Horst, a partner with Shibley Righton LLP, says one of the more interesting issues addressed in Bimman is whether an equity incentive in connection with a shareholder loan would be considered a criminal interest rate as set out in s. 347 of the Code.

This section of the Code makes it a criminal offence to enter into an agreement or arrangement to receive, or to actually receive, interest on credit in excess of 60 per cent per annum of the total value of the credit advanced, Horst explains.

“The courts have viewed interest as being quite wide-reaching. It's not just the typical interest — it's also all of the fees and everything else that is charged in connection with a loan,” he says. “The maximum interest that you can charge is 60 per cent, which sounds high, but you can get to that amount fairly quickly. The borrower has to pay the legal fees of the lender, and there might be monitoring fees plus interest as well.”

He says one area that has been unclear is equity kickers.

“What happens is you enter into a loan and you loan money to the borrower and the borrower then issues to the lender either shares or warrants in the company. In this particular case, shares were issued at less than market value,” he says.

“So the question then becomes whether or not that difference between the market value of the shares and the issue price is considered interest.”

Horst says that difference in value is a benefit that flows to the lender and it has been a long-running question whether or not that would be considered interest.

“There hasn’t been many cases on whether or not that is interest and Bimman dives into it,” says Horst, who did not act in the matter and makes his comments generally. “What Justice Arthur Gans says in the ruling is essentially that it's not interest — which is good from the lender’s perspective.”

Horst notes the judge essentially said it wasn't the borrower that was paying the interest, it was the other shareholders. Because shares were being issued at below market value, the other shareholders suffered but the borrower itself didn't suffer.

“This reasoning allowed the judge to get to the right place in my opinion, which is that an equity kicker is not interest for the purposes of the Criminal Code,” Horst says.