There are important lessons in a recent Ontario Superior Court decision examining defensive tactics taken by a board in the context of a contested shareholders' meeting.
In Concept Capital Management Ltd. v. Oremex Silver Inc., 2013 ONSC 7820, the board of Oremex – during a contested election — postponed a shareholders' meeting and issued shares to a third party, GRIT, in a financing transaction that closed in escrow on the same date as the revised record date for the meeting. Oremex took the view that the new shares could be voted at the contested meeting.
There were two principal issues before the court.
Was the Oremex Board's Postponement of the Shareholders' Meeting Valid? Yes
The applicants argued that the board improperly postponed the shareholders' meeting so that it could issue shares to GRIT (and dilute Oremex's other shareholders) in advance of the meeting.
The Court confirmed that a board of directors has the authority to postpone an already called shareholders' meeting in appropriate circumstances. Although a court will closely scrutinize such a decision, an applicant that challenges a postponement must demonstrate that the board exercised its corporate power unfairly or inequitably.
In the circumstances, the Court expressed concern regarding the decision to postpone the meeting. However, as a result of the thin evidentiary record before it, the Court was unable to make a definitive finding that the postponement of the shareholders' meeting was motivated by an improper purpose or bad faith. As a result, the Court upheld the postponement of the meeting.
Was GRIT entitled to vote the dilutive shares at the postponed meeting? No
The applicants argued that the shares issued in the GRIT transaction could not be voted because Oremex issued the shares to dilute its existing shareholders and influence the outcome of the contested vote.
The Court focussed on the board's decision to close the GRIT transaction and issue Oremex shares in escrow on the same day as the revised record date for the meeting even though (i) the conditions to the GRIT transaction were not yet satisfied by that date and (ii) an escrow closing was not contemplated by the agreement between the parties or consistent with commercial practice. The Court also questioned whether the shares had been validly issued given that the ultimate consideration for the shares would not be received by Oremex until the escrow conditions were satisfied.
In the circumstances, the Court had little difficulty concluding that the issuance of the shares in escrow "was improper, and...amounted to an attempt at the late manipulation by the Directors of the voting process...by diluting the shares of the company".
As a result, the Court ordered the record date to be revised to the date that was two days prior to the issuance of the dilutive shares, so that the shares issued to GRIT could not be voted at the contested meeting.
Lessons from Oremex
When exercising corporate power during a proxy contest, the board must of course act honestly and in good faith with a view to the best interests of the corporation. In carrying out that duty, it is clear that the board has the power to postpone a shareholders' meeting and also to issue new shares. However, a board should expect that a court will closely scrutinize these actions to ensure that they have been taken in the best interests of the company rather than to unfairly entrench the power of the board.
For instance, in Icahn Partners LP v. Lions Gate Entertainment Corp., 2010 BCSC 1547, the British Columbia trial court upheld the issuance of dilutive shares in advance of a contested election. The court accepted that the board's primary purpose was to deleverage the company, which was clearly in the company's best interests. Similarly, in Ewart v. Higson-Smith, 2009 CanLII 38517, the court upheld the adjournment of a shareholders' meeting shortly before an anticipated shareholder ambush (as the adjournment would allow shareholders to become more informed), but made clear that the "result would be otherwise if there were no significant interests of the shareholders served in postponing the...meeting".
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