Canada: Shareholder Activism Continues To Sizzle In Canada - The Bioniche Decision

Shareholder activism in Canada continues to sizzle this summer with another dispute making its way through the courts. The Ontario Superior Court released its decision on July 22, 2013 dismissing the demand by two dissident shareholders of Bioniche Life Sciences Inc. that a shareholder meeting be held by no later than August 30, 2013. Once again shareholders are expressing their dissatisfaction with corporate performance and seeking to directly effect change.

The Court considered what constitutes a valid shareholder requisition, when a board is required to call a requisitioned meeting and the appropriate length of time until the meeting is held, and whether a shareholder may call the meeting directly if the board refuses to do so.

Background to the Court Proceeding

Bioniche Life Sciences Inc. is a biotech company based in Belleville, Ontario and incorporated federally under the Canada Business Corporations Act ("CBCA"). Its dispute is with two shareholders, William Wells and Greg Gubitz, who first approached Bioniche a year ago with a proposal to acquire the commercialization rights to Bioniche's animal health and food safety products. Discussions between the parties broke down in March 2013, and Bioniche subsequently retained an investment bank to find a purchaser for its Animal Health unit, its largest revenue-generating division. 

On April 25, Wells requisitioned a meeting to replace the Bioniche Board. The Board determined the requisition to be invalid as Wells was a beneficial rather than registered shareholder, and the requisition did not provide the names of his proposed nominees. At the same time as making this determination, the Board fixed November 5 as the date for the corporation's next annual meeting and published on May 4 notice of the record date; though Bioniche's annual meeting is typically held in early November, notice of the record date is usually given much later in late August or early September.

In response, Wells transferred his shares into his own name and submitted another requisition on May 14, this time providing information on six of the seven proposed director nominees (the name of the seventh nominee followed one week later). Bioniche again rejected the request for a meeting on the basis that it had already called a meeting for the following November.

On June 7 the dissidents commenced a court proceeding to require the Board to call the meeting or, alternatively, to have the Court call a meeting. About a month later on June 27, Wells himself called a meeting for August 27 on the basis that he was entitled to do so under the CBCA since the Board refused to do so.

Takeaways from the Decision

Mr. Justice D.M. Brown of the Ontario Superior Court made the following findings:

1. The first requisition was invalid.

• Though a corporation may accept a shareholder requisition from a beneficial shareholder (and the evidence showed that Bioniche was satisfied that Wells was a beneficial shareholder), a corporation is only required to accept a requisition from a registered shareholder.
• The requisition must contain sufficient detail to enable the directors to determine how to respond to the requisition and to issue notice of the requisitioned meeting.  Naming the dissident's proposed nominees to a board and providing some biographical information is essential to the validity of a requisition seeking change to a board. Though this information should be included in the requisition, it must at least be provided before the directors meet to consider the requisition.

2. The second requisition was valid but Bioniche was justified in not calling an earlier meeting.

• The CBCA permits a board to refuse to call a requisitioned meeting if a record date for a meeting has already been fixed and notice given.  However, the Court cautioned not to strictly rely on this exemption since it does not specify an outside date for giving notice of a record date and could lead to abuse.  The Court concluded that the evidence "strongly indicated" that Bioniche's objective in setting the November meeting date was to give it time to pursue its sale strategy; though the Board did not commit to seeking shareholder approval of a sale transaction when it fixed the record date, it later announced this commitment and the Court took this into account in determining the reasonable timeliness of the meeting.  Mr. Justice Brown called this a "close case" but ultimately determined that the Board had reasonably exercised its business judgment.  For a board to rely on the exemption, the scheduled meeting must be held in a timely and expeditious manner which will be a fact-specific determination. 
• The Court repeatedly commented on the "massive" redactions to the minutes of meetings of the Board and Special Committee which prevented it from weighing some of Bioniche's assertions. This is another reminder for issuers to prepare well-drafted minutes of meetings that clearly demonstrate the directors' deliberations on key issues and may be presented as evidence.

3. Based on the evidence, the dissidents could not convene their own meeting.

• Even if the directors are permitted to refuse to call a meeting under the CBCA (because the record date has been fixed and notice given or one of the other enumerated reasons applies), the Court held that this does not completely disqualify a shareholder from calling a meeting itself if it can demonstrate that material prejudice would otherwise result. Note that corporate statutes in other Canadian jurisdictions explicitly limit the shareholder's right to call a meeting to circumstances where the directors have wrongly failed to call the meeting.
• Mr. Justice Brown determined that the dissidents would not suffer material prejudice by the meeting being held at a later date, taking into account that the dissidents had not demonstrated extreme urgency (e.g., they took a month to call a meeting directly), that shareholders would have the opportunity to approve a sale transaction, the testimony of the Chair of the Board that a break fee was unlikely, and the cost of convening a meeting in light of Bioniche's operating loss.  It is critical for a dissident to show immediacy in its actions when requisitioning a time-sensitive meeting.

4. There was no evidence of oppression to warrant the Court ordering an earlier meeting.

Though the battle over the date of the shareholder meeting may have been won by Bioniche, the war is undoubtedly not over. The dissidents will not be at the table in negotiating a sale transaction but, at the end of the day, the shareholders will determine the outcome.

Gowlings Expertise

Gowlings has an experienced multi-disciplinary team that has represented issuers, dissidents, investors and transfer agents in numerous proxy contests and other situations of shareholder activism, including proceedings before the courts and securities regulators. Please contact us for strategic and practical legal advice in the context of proposed or actual shareholder action or to plan for or against any potential action.

This article was originally published in the MarketCaps @ Gowlings newsletter.

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