The Ontario Superior Court of Justice recently issued its decision in Goodwood Inc. v. Cathay Forest Products Corp. The decision is noteworthy in that it could have significant and practical implications for dissident shareholders (and target companies) in respect of reimbursement of expenses by a target company.
Cathay Forest Products Corp. is a commercial forest products company incorporated under the Canada Business Corporations Act(CBCA). Cathay's last annual meeting of shareholders took place in June 2010, and the company's board of directors hasn't held an annual meeting since. The company also failed to take steps to call and hold a meeting of shareholders that was requisitioned by a shareholder under section 143(1) of the CBCA.
Upon application to the Ontario Superior Court of Justice, the Court ordered, under section 144(1) of the CBCA, that a meeting of Cathay's shareholders be held on July 30, 2012. Despite the Court order, the incumbent directors took no steps to facilitate a meeting. Rather, it was left to the requisitioning shareholder, with the assistance of its shareholder advisor, VC & Co. Incorporated, to bring about the court-ordered meeting. Prior to the July 30 court-ordered meeting, the incumbent directors of Cathay resigned, leaving Cathay without any directors. At the meeting, Cathay's shareholders elected four new directors supported by the requisitioning shareholder.
Following the successful election of the requisitioning shareholder's proposed slate of directors, the requisitioning shareholder brought a motion before the Court for an order requiring Cathay to reimburse it for the costs it incurred in connection with its activities and the calling and holding of the court-ordered meeting.
Issue before the Court
Given that the Court had ordered the shareholders' meeting under section 144(1) of the CBCA, as opposed to the requisitioning shareholder itself having called the meeting under section 143(4) of the CBCA, is the requisitioning shareholder nonetheless entitled to recover the expenses it incurred from Cathay?
Analysis and Decision
Under section 143(4) of the CBCA, if a corporation's directors do not call a meeting of shareholders within 21 days of receiving a valid requisition, any shareholder who signed the requisition may call the meeting. Section 143(6) deals with the issue of the reimbursement of the costs of the requisitioning shareholders and provides that "unless the shareholders otherwise resolve at a meeting called under [section 143(4)], the corporation shall reimburse the shareholders the expenses reasonably incurred by them in requisitioning, calling and holding the meeting".
As noted above, the incumbent board of directors of Cathay took no steps to facilitate the requisitioned meeting under section 143(4) and, consequently, upon a successful motion to the Court, it was left to the requisitioning shareholder, with the assistance of its shareholder advisor, to bring about the court-ordered meeting.
Section 144 of the CBCA authorizes a court to order a meeting of a corporation to be called and held upon the application of a shareholder, but unlike section 143(6) of the CBCA, section 144 does not contain any express provision regarding reimbursement of the costs of the applicant shareholder.
The Court concluded that, in such specific circumstances, the requisitioning shareholder should be able to recover from Cathay costs similar to those it would have been entitled to recover had it been practicable for the requisitioning shareholder to call the meeting itself under section 143(4) (which in the circumstances it was not). The Court specifically noted that the court's power under section 144(1) of the CBCA to "order a meeting of the corporation to be called, held and conducted in the manner that the court directs" includes the power to require the corporation to reimburse the [requisitioning] shareholder for the "expenses reasonably incurred" in respect of "requisitions, calling and holding the meeting".
Consequently, the Court reviewed all of the expenses incurred in connection with the meeting, which consisted primarily of printing costs, the costs associated with the court-appointed independent chair of the meeting, the fees of the shareholder advisory firm and all legal fees. The Court ordered the full reimbursement of expenses relating to printing and the court-appointed independent chair. However, with respect to legal fees, the Court concluded that "the level of reimbursement available for 'expenses reasonably incurred' in respect of legal fees cannot exceed actual docketed time and incurred disbursements". Consequently, the "success fee" (which was originally negotiated between the requisitioning shareholder and its legal counsel) was not recoverable.
The main analysis with respect to reimbursement of fees focused on the fees paid by the requisitioning shareholder to the shareholder advisory firm, VC & Co. Incorporated. The Court ordered reimbursement for the fees that it considered were related to the costs of "requisitioning, calling and holding the meeting", such as (i) making the formal requisition; (ii) retaining the firms who would deal with the mechanics of the meeting; (iii) retaining the independent chair of the meeting; and (iv) coordinating the mechanics of holding the meeting. It is important to note that the Court did not order the reimbursement of fees related to (i) the production of evidence by VC & Co. for the requisitioning shareholder in support of the court-ordered meeting; (ii) providing strategic advice to the requisitioning shareholder before the requisition was made; or (iii) providing strategic advice to the proposed slate of directors about matters which would arise after to the July 2013 shareholders' meeting.
The Court concluded its analysis by stating that it did not think that section 143(6) of the CBCA, or in the present case section 144, were "aimed at enabling dissident or activist shareholders to secure recovery from the corporation of all costs they incurred to bring about the desired governance change in the corporation". The Court went on to say that "the ambit of allowable recovery under the statute is much narrower: the costs of "requisitioning, calling and holding the meeting".
The decision of the Court clarifies that under the CBCA, all of the costs incurred by a successful activist shareholder in effecting the desired governance change may not necessarily be reimbursable since it limits statutory reimbursement of expenses to those costs associated with "requisitioning, calling and holding the meeting". While the decision dealt specifically with a meeting requisitioned under section 144(1), the principles would conceivable apply equally to one requisitioned under section 143(4).
For target companies, this case could have an impact on how they deal with reimbursing activist shareholders. If an activist shareholder does not apply to the court for an order seeking reimbursement, a target company may be well-advised to review the expenses carefully to ensure they fall within the ambit of those associated with "requisitioning, calling and holding the meeting". This may be particularly important given that activist shareholders often request full reimbursement when they are successful in board called meetings, and broader reimbursement of expenses when negotiating settlements with target boards.
For activist shareholders, this case could impact their negotiating strategy with target boards regarding expense reimbursements and it may impact the types of expenses that a target board may be ultimately willing or able to reimburse.
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