Canada: Ontario Courts Provide Guidance On Proxy Contest Issues

Last Updated: February 5 2014
Article by Daniel Wakeling and Neill May

Two recent Ontario Superior Court decisions provide important guidance on key issues commonly arising in proxy contests. In addition to the specific guidance provided, the decisions indicate that:

  • Ontario courts are taking a practical, purposive approach to the interpretation of the statutory rules governing proxy contests; and
  • dissident shareholders must discharge a significant burden to challenge actions taken by corporations in responding to dissident activity.

Additionally, the two decisions are themselves indicative of a trend of increased incidence of shareholder activism, and the use of the courts to resolve disputes arising from shareholder activist activity.

Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc.

The key issue in Equity Financial was whether a press release issued by Equity Financial Holdings Inc. constituted an illegal solicitation of proxies. This issue often arises in proxy contests because "solicitation" is defined very broadly, and corporate legislation contains detailed rules concerning solicitations.

Smoothwater Capital Partners LP I, a shareholder of Equity Financial, requisitioned a meeting and then issued press releases criticizing Equity Financial's board. Equity Financial responded with a press release defending its board's historical actions and criticizing Smoothwater for initiating a costly and unnecessary proxy fight before any meaningful conversation with Equity Financial or its board had taken place.

Smoothwater alleged that Equity Financial's press release was an improper solicitation because it was (in the language of the Canada Business Corporations Act) a communication "calculated to result in the procurement or withholding of a proxy" completed without the company having previously filed a management information circular for the meeting.

The Court concluded that the company's press release did not constitute a "solicitation," in view of its nature and the circumstances of its release. Notably, the Court appeared to distinguish communications by shareholders from communications by corporations, on the basis that, unlike shareholders, corporations have a "corporate position to defend," and could not use statutory exemptions available only to shareholders to shelter their communications.

The Court noted that Equity Financial's release did not refer to any specific intention to solicit and looked favourably on the fact that the release stated that an information circular would be provided. Because the Court concluded there was no solicitation, it unfortunately did not address whether a solicitation by a corporation is "cured" by a subsequent filing of a management information circular.

Concept Capital Management Ltd. v. Oremex Silver Inc.

The facts in the dispute between Oremex Silver Inc. and its shareholder, Concept Capital Management Ltd. ("CCM"), are complex and unique. The case addresses a corporation's latitude to respond to, and defend itself against, the result sought at a requisitioned meeting.

CCM sent a requisition for a shareholder meeting on September 26, 2013, and publicly disclosed the requisition on September 27, 2013. The requisition was not received by Oremex until September 30, 2013. The Oremex board called an annual and special meeting on September 27, 2013, the date of CCM's press release, with a record date of October 25, 2013. On November 7, 2013, Oremex announced that the meeting would be postponed to December 31, 2013, with a record date of November 29, 2013. Despite the meeting postponement, CCM and other dissident shareholders, held a meeting on November 26, 2013, where the participating shareholders (more than had participated at the prior Oremex shareholder meeting) voted to replace the board.

Through the same period, Oremex was in discussions with a potential investor, Global Resources Investment Trust Plc ("GRIT"), concerning a financing transaction. Under the financing transaction, GRIT would subscribe for units (shares and warrants) issued by Oremex in exchange for shares of GRIT (which Oremex would monetize for needed funds through the London Stock Exchange). The GRIT financing closed on November 29, 2013 (the record date for the postponed meeting). However, since the required regulatory approvals had not been obtained, the Oremex shares and warrants were issued into escrow, and GRIT issued subscription receipts (exchangeable by Oremex for shares in GRIT on satisfaction of the transaction conditions).

CCM and the dissident shareholders argued that because the meeting was called in response to the CCM requisition, Oremex's rescheduling was improper and the outcome of the November meeting should be confirmed. Alternatively, they alleged that the rescheduled meeting should proceed with an independent chairman and with a record date before the GRIT closing date so that the shareholders would not be diluted by the shares issued to GRIT.

The Court held that Oremex was justified in not calling the requisitioned meeting. The Court found that the originally scheduled meeting had not been called in response to CCM's requisition. The company had been arranging to convene a shareholder meeting before it received the requisition, and committed to do so in correspondence with the TSX Venture Exchange. Significantly, the Court concluded that the company could rely on an exemption from the statutory obligation to call a meeting in response to a requisition. While the company had not yet fully complied with the exemption requirements, the Court considered the purpose of the exemption; that there is no need to call a meeting when one is already being convened.

Having determined that Oremex's actions to convene a meeting in November excused it from any obligation to respond to CCM's requisition, the Court considered whether the company could postpone that meeting. The Court stated that directors have the authority to postpone a shareholder meeting (including a requisitioned meeting), though the actions of the board are subject to scrutiny and should be overturned where the directors acted for an improper purpose or in bad faith. Despite the natural inference that the postponement was motivated to permit the issuance to GRIT, and the Court's finding that the directors' stated reason for the postponement was "weak," the Court found that there was insufficient evidence to hold that the Oremex board improperly postponed the meeting.

However, the Court concluded that the purpose of the escrowed closing of the GRIT financing was to dilute the dissident shareholders' voting power at the shareholder meeting, and granted the shareholders' request to re-set the record date to before the issuance to GRIT. The Court was influenced by the fact that: (i) the transaction was structured differently than all of GRIT's similar financings, (ii) the documentation did not contemplate any escrow or subscription receipts, and (iii) the structure cast doubt on whether the Oremex shares had been properly issued. In the circumstances, the implication was that the closing was intended to dilute the dissident shareholders.

Conclusions

With increasing shareholder activism, the incidence of litigation involving proxy contests appears to be on the rise. These two cases, in addition to addressing commonly arising issues (i.e., solicitation and the rules for convening and rescheduling meetings), more generally reflect the courts' practical, purposive approach to statutory rules governing proxy contests; focusing on the law's intention rather than its literal requirements. It also appears that courts will give companies some leeway in responding to dissident activity, disturbing corporations' responses only where there is very clear evidence of an improper purpose or bad faith.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions