Canada: Court Upholds Board's Last-Minute Advance Notice Policy

In a recent decision of the Supreme Court of British Columbia, the Honourable Mr. Justice R. Punnett dismissed an application brought by a dissident shareholder, Northern Minerals Investment Corp. (NMI), (i) to prevent Mundoro Capital Inc. from postponing its annual general meeting of shareholders and changing the record date for the meeting, and (ii) for a declaration that an advance notice policy previously approved and announced by Mundoro's board of directors was unenforceable. The Court dismissed NMI's application in its entirety.

NMI wanted to replace the board of directors of Mundoro by nominating a new slate from the floor at the AGM. The AGM was originally scheduled to take place on June 26, 2012. Mundoro, however, presumably suspected that a dissident shareholder was waiting in the shadows, because on June 11, it announced the adoption of the policy by the board, to be effective immediately.

The policy included a provision that would require advance notice to Mundoro for shareholder nominations of directors other than pursuant to a requisition of a meeting or a shareholder proposal. In the case of an annual meeting, notice would have to be made not less than 30 days or more than 65 days prior to the date of the meeting. NMI was forced to seek a court order that the policy was unenforceable in order to propose its own nominees for election at the Meeting.

On June 14, Mundoro announced that the AGM would be postponed to August 27, 2012 and that a new record date would be set.

On the issue of whether the policy was unenforceable, NMI argued that British Columbia's Business Corporations Act expressly provides that the election and removal of directors must occur in accordance with the articles. According to NMI, Mundoro was using the policy to try to prevent what is expressly permitted by corporate and securities laws applicable to proxy contests, resulting in the entrenchment of its board members. NMI argued that a change to the articles of Mundoro required approval of a special resolution of shareholders and, thus, in order to implement the policy, a special resolution would be required.

Ultimately, however, the Court found that "neither the Act nor the articles expressly preclude directors from creating such a Policy. Nor has [NMI] provided any authority for the proposition that only the shareholders can create an advance notice policy."

It appears that the decision to uphold the enforceability of the policy was predicated on the concepts of full disclosure and orderly conduct in the context of a proxy contest. As Justice R. Punnett noted:

In this case it has not been established that the Policy is one that infringes shareholder rights. Rather, the Policy in fact ensures an orderly nomination process and that the shareholders are informed in advance of an AGM what is in issue. In doing so the Policy prevents a group of shareholders from taking advantage of a poorly attended shareholders meeting to impose their slate of directors on what could be a majority of shareholders unaware of such a possibility arising.

The way in which the policy was adopted at the last minute by the board in the face of a potential challenge seems to go against British Columbia's Business Corporations Act and Mundoro's articles. We support that the proper approach would be to seek the approval of shareholders at the meeting. As the articles are essentially a contract between the company and the shareholders, allowing the directors to materially alter the effect of the articles would seem to breach that contract. 

Interestingly, Justice R. Punnett noted that the fact that Mundoro intended to seek shareholder approval and confirmation of the policy at the AGM evidenced good faith and the reasonableness of the policy. He did not, however, state that shareholder approval or confirmation was required. The decision does not address whether the policy could be applied to the AGM if not approved by the shareholders of Mundoro at the meeting.

Based on this decision, in the face of a potential ambush, an issuer may postpone its meeting, set a new record date for the meeting (if necessary) and promptly have its board adopt an advance notice policy. In doing so, the issuer is effectively able to extinguish the possibility of an alternate slate being proposed by a dissident at the meeting.  It remains to be seen whether the decision on the enforceability of the policy will be overturned in a subsequent case or on appeal.

As such, we recommend that issuers planning to implement advance notice provisions for a British Columbia company follow the conservative approach of seeking shareholder approval for an amendment to their articles. If an issuer is concerned that a dissident is lurking in the weeds or it does not believe it can obtain the requisite level of shareholder approval for the amendments, it may wish to consider adopting an advance notice policy and hope that Mundoro would be upheld if it were challenged. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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