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Requisitioned meeting breaks deadlock

A deadlocked board of directors, talk of a “public flogging”, and a court reluctant to intervene. The case of Goldstein v. McGrath is a colourful recent example of a requisitioned public company shareholders’ meeting, with the twist that the requisitioning shareholders were represented by or aligned with three of the company’s six directors.

The decision provides three helpful reminders for boards, shareholders and their advisors: the right of shareholders to requisition (i.e. demand) a meeting can be a powerful tool, especially in the context of junior public companies; courts are generally reluctant to exercise their authority to call shareholders’ meetings; and a court will need strong evidence that an incumbent chair may engage in impropriety before appointing an independent chair for a shareholders’ meeting.

Read the full article on dentons.com.

Requisitioned meeting breaks deadlock

Court Refuses to Invalidate Proxies Obtained Via Deficient Proxy Circular

Overview

In Weyburn Inland Terminal Ltd. v The Director of Corporations for Saskatchewan, 2014 SKQB 46, the Court of Queen’s Bench for Saskatchewan ordered dissident shareholders of Weyburn Inland Terminal Ltd. (the “Company”) to revise their proxy circular which suggested how shareholders should vote but not why they should vote against a certain transaction proposed by the Company.  However, the Court did not go the extra step of disallowing proxies which had been obtained pursuant to the deficient circular.

Discussion

The Company called a special meeting of shareholders (the “Meeting”) in order to obtain approval for a plan of arrangement with respect to a sale of all the outstanding shares of the Company (the “Plan”). Certain of the Company’s shareholders and former directors (the “Dissidents”) opposed the Plan and began soliciting proxies for the Meeting. The Dissidents’ proxy circular (the “Circular”) stated that its purpose was to solicit votes against the Plan.  The Circular also set out procedural information for voting but did not provide information explaining why shareholders should vote against the Plan. The Company applied for the court’s intervention in respect of the solicitation.

The Court held that the Circular was deficient as it did not provide any information setting out the Dissidents’ plan for the Company and thus, did not allow shareholders to form a reasoned and informed judgment of the Plan. The Court ordered that the Dissidents cease soliciting proxies based on the Circular and amend it to include the Dissidents’ proposals for the Company in the event the Plan was defeated. The Court further ordered the Dissidents to distribute the revised Circular together with a letter of explanation and a revocation of proxy form. The Court made this order pursuant to its general remedial jurisdiction, sections 144 and 148 of The Business Corporations Act (Saskatchewan), the regulations thereunder and applicable securities legislation.

The Court expressly refused to invalidate proxies obtained pursuant to the Circular or halt future proxy solicitation by the Dissidents, as the order would address any deficiencies which might have misled a shareholder.

Comment

Although this case was decided pursuant to the SBCA, the relevant provisions are essentially identical to those in the Canada Business Corporations Act (the CBCA contains certain exceptions which are not relevant to the facts in this case). This case demonstrates that the purpose of the court’s supervision of proxy fights is to ensure that shareholders are able to make a reasoned and informed judgment, not to ‘punish’ a party for providing deficient materials. Here, the Court took the least intrusive step in ordering that shareholders be provided with additional information and did not impose further sanctions. However, the deficiencies in this case were those of omission, not commission. Had the Dissidents provided inaccurate (as opposed to incomplete) information, the Court may not have allowed previously solicited proxies to stand.

Court Refuses to Invalidate Proxies Obtained Via Deficient Proxy Circular

Company Press Releases during Proxy Fights may not be Proxy Solicitations

Overview

In Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc., 2014 ONSC 324, the Ontario Superior Court of Justice held that a press release issued by Equity Financial Holdings Inc. (the “Company”) which defended its board’s actions was not a proxy solicitation and was thus permitted under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”).

Discussion

Smoothwater Capital Partners LP I, a dissident shareholder of the Company (the “Dissident”), issued a press release critical of the Company’s board and soliciting proxies in support of its efforts to replace the board. The Company responded with its own press release defending its board’s actions and criticizing the Dissident (the “Press Release”). The Press Release stated that the Company would “provide a management information circular that will be mailed to shareholders”. It did not contain a request for proxies.

The Dissident applied to Court for an order that the Company comply with, and be restrained from, acting in breach of s. 150 of the CBCA. The Dissident asserted that section 150 of the CBCA prohibited the Press Release, as the Company solicited proxies before delivering a management proxy circular. The Company responded that the Press Release was intended to inform its shareholders and rebut inaccurate statements made in the Dissident’s press release, but did not solicit proxies.

Justice McEwen held that while “solicitation” under the CBCA should be defined broadly, no such solicitation had taken place in this case. The test of whether a document solicits proxies is based on its “principal purpose”, not whether it had been created during a proxy fight. In the context of this case, the principal purpose of the Press Release was to provide certain explanations and defend the Company’s historical position, not to solicit proxies. Justice McEwen found that the Company was thus entitled to respond to the Dissident’s allegations in a single press release, but noted that he was not asked to consider whether multiple press releases could constitute a proxy solicitation.

Justice McEwen distinguished the decisions in Western Mines Ltd. v. Sheridan, [1975] B.C.J. No. 54 (S.C.), Brown v. Duby, 1980 CanLII 1734 (Ont. S.C.J.) and Polar Star Mining Corporation v. Willock, 2009 CanLII 11436 (Ont S.C.J.) as the press releases in those cases expressly referenced an intention to solicit. He further distinguished these cases – and an additional American case cited by the Dissident – on the grounds that the press releases therein were issued by shareholders and there was thus no corporate position to defend.

Comment

This case stands for the proposition that a corporation is entitled to defend itself from attacks during a proxy fight provided that the principal purpose of the communication is not to solicit proxies. It appears that the Company’s decision not to request proxies in the Press Release and not to issue further press releases on this matter were factors in Justice McEwen’s finding that the Press Release was not a proxy solicitation.

Company Press Releases during Proxy Fights may not be Proxy Solicitations

Court Upholds AGM Chair’s Rejection of Proxies Due to Material Misrepresentations in the Dissidents’ Circular

Overview

In Hastman v. St. Elias Mines Ltd., 2013 BCSC 1069, dissident shareholders, with proxies representing over 90% of the vote, attended the Annual General Meeting (the “AGM”) of St. Elias Mines Ltd. (the “Company”). The Chair presiding at the AGM refused to accept these proxies due to material misrepresentations in the dissidents’ information circular (the “Circular”). The B.C. Supreme Court upheld the Chair’s ruling.

Discussion

The Company was a junior mining company incorporated under the British Columbia Business Corporations Act (the “BCBCA”). In 2012, certain shareholders expressed their dissatisfaction with management. After the dissidents proposed their nominees to the Company’s board (the “Nominees”), the Company stated in its management information circular that two of the Nominees were ineligible to serve. The dissidents subsequently published their own Circular which disagreed with this position.

The day after the Circular was published on SEDAR, the Company wrote to the dissidents pointing out that the Circular contained serious and material misstatements, ranging from misstating educational credentials to incorrectly stating that none of the Nominees will be unable to serve.

At the AGM, the Chair rejected the dissidents’ proxies as being invalid due to uncured misrepresentations in the Circular. She considered that the dissidents had been given an opportunity to rectify these issues but had failed or refused to do so in advance of the AGM. She also was concerned that two of the Nominees would be unable to serve. As such, the management nominees were elected.

The dissidents brought an application under section 227 of the BCBCA for a remedy in oppression against the Company, the Chair and certain other individual respondents. Justice Steeves of the British Columbia Supreme Court determined that the Circular contained material misrepresentations.

Justice Steeves held that while “a proxy battle does not always operate by Marquess of Queensberry Rules” it is important that information circulars “be complete and accurate”, noting that the dissidents should have ensured the Circular was correct or, at minimum, issued a press release.

Comment

The dissidents argued that Kluwak v. Pasternak (2006), 26 B.L.R. (4th) 215 (Ont. S.C.J.) applied. In Kluwak, while the judge found the dissidents’ circular contained material misrepresentations, she nonetheless overturned the chair’s decision to disallow the proxies. Justice Steeves distinguished Kluwak on two grounds. In Kluwak, the Court had found that it would be unfair to allow management to “wait in the weeds” and only raise concerns about the dissidents’ circular at the meeting at issue. However, in this case, management immediately informed the dissidents about the problems with their Circular. Additionally, Justice Steeves held that there is no equivalent provision in the BCBCA to section 107 of the OBCA which grants the Court broad discretion in “determining any controversy” regarding an election. Note, however, that the oppression remedy has been described by commentators as: “beyond question, the broadest, most comprehensive and most open-ended shareholder remedy in the common law world … unprecedented in its scope.” Had the Company’s management behaved as the management in Kluwak had, it is quite possible that Justice Steeves might have been persuaded to engage the broad oppression remedy powers to make an appropriate order.

This decision illustrates the importance of ensuring the accuracy of an information circular in a proxy contest. Even though 90% of the votes had been cast for the dissidents, the Court still upheld the Chair’s decision to reject those proxies due to material misrepresentations made in the Circular. The decision also illustrates that if management believes there are problems in the dissidents’ materials, management must be proactive in alerting dissidents to these problems rather than waiting in the weeds.

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Court Upholds AGM Chair’s Rejection of Proxies Due to Material Misrepresentations in the Dissidents’ Circular

Telus and Mason: Courts Are Concerned By “Empty Voting” But Cannot Stop It

In TELUS Corporation v. Mason Capital Management LLC, 2012 BCCA 403, the Court of Appeal for British Columbia held that a shareholder does not have to be the beneficial owner of the shares held in order to requisition a shareholders’ meeting pursuant to the British Columbia Business Corporations Act (the “BCBCA”), and that the right to requisition is not limited by the small size of a beneficial owner’s net financial stake in the company.

For historical reasons, TELUS Corporation (“TELUS”) had two classes of shares: common shares and non-voting shares. The non-voting shares traded at a slight discount relative to the common shares. TELUS proposed an arrangement to convert all non-voting shares to common shares on a one-to-one basis, which required a two-thirds majority vote in each share class. Following the announcement, the price differential between the common shares and the non-voting shares immediately narrowed.

Mason Capital Management LLC (“Mason”), a New York-based hedge fund, realized that this presented an arbitrage opportunity. Mason purchased approximately 18.7% of TELUS’ common shares but sold short a similar number of common and non-voting shares, which resulted in Mason’s net investment being a mere 0.21% of TELUS’ capital. Due to this hedging, Mason would essentially break even if TELUS’ shares either rose or fell, but would profit if the historic price differential between the two classes of shares re-emerged. Mason thus intended to thwart TELUS’ arrangement to profit from this arbitrage plan.

In the face of Mason’s opposition, TELUS withdrew its proposal but indicated it would still try to implement a one-for-one share exchange. In response, CDS & Co. (“CDS”), the registered holder of Mason’s shares, requisitioned a shareholders’ meeting to prevent the share exchange. TELUS declined to schedule this meeting and obtained an order from the B.C. Supreme Court allowing it to hold its own shareholders’ meeting to approve the new share exchange plan (this time without requiring a two-thirds majority vote of the common shares). CDS called a meeting on the same day as TELUS’ meeting.

After the B.C. Supreme Court quashed Mason’s meeting, both CDS and Mason appealed.

Section 167 of the BCBCA provides that a registered holder of more than 1/20 of a company’s shares may requisition a shareholder’s meeting. The Court of Appeal rejected TELUS’ argument that section 167 should be construed so as to allow only a person who is both the registered and beneficial holder of the requisite shares to requisition a shareholders’ meeting. The definition of “shareholder” in the BCBCA refers only to registered shareholders; there is no additional requirement for beneficial ownership. Nor does the BCBCA’s clear and unequivocal language require that the beneficial owner of the shares be identified in the requisition. Although there may be “rare cases” where such an identification “may be critical” in rejecting inappropriate requisitions, courts are not entitled to expand the requirements the BCBCA clearly sets out.

Likewise, Mason should not be prevented from requisitioning a shareholder’s meeting because of its very limited net financial interest in TELUS. While the Court of Appeal repeatedly acknowledged that it was concerned about this so-called “empty voting”, it concluded that as the wording of the BCBCA was clear, the solution to “empty voting” must come from the legislature and regulators, not the courts.

While Mason may have won the battle, TELUS may have won the war – its second arrangement passed at the shareholders’ meeting (albeit without a two-thirds majority). Both parties have returned to the courts to continue the fight.

 

Telus and Mason: Courts Are Concerned By “Empty Voting” But Cannot Stop It