Canada: Top 10 Contentious Issues In The Boardroom

Introduction

Difficulties arise for Corporations which lack a formal process governing the calling and conduct of board meetings. Issues arise unexpectedly at meetings and therefore, we have chosen our top 10 contentious issues to discuss in this two part series. We will discuss the first five in this issue and the last five in the next issue of Directors' Briefing. It is boards of private, public, and not-for-profit corporations.

1. Right to Attend Board Meetings

Meetings of the board of directors may be attended only by the directors of the corporation. Other persons such as counsel for a party may be admitted with the consent of the meeting.1 This is however subject to the provisions of the by-laws of the corporations, which can provide that other individuals may attend, such as an executive director. Directors and officers are under a duty of confidentiality, which others such as the media or special guests are not. At times, guests, like observers, are asked to sign confidentiality agreements.

Every director has the right to attend and participate in all meetings of the board of directors. As such, a director cannot be excluded from meetings.2

It is however important to note that, although directors may miss board meetings, they would be wise to attend as many meetings as possible since they may be held liable for decisions that are made in their absence.

This right to attend board meetings is not qualified. It is not open to a corporation to exclude any director from a board meeting on the basis that the director is unfit, has allegedly engaged in misconduct, or also sits on the board of a competitor, subject only to the conflict rules of the corporate statutes discussed below in point 4.

2. No Attendance by Proxy

The law is settled on the issue that a director cannot attend a meeting by proxy. This is largely due to the fact that the directors cannot delegate their duties to a third party.3 The law providing that directors may not attend a meeting by proxy extends to resolutions in writing which cannot be signed on behalf of a director by power of attorney.

3. Who Can Chair the Meeting

The following is a quotation from an Australian case:

It is an indispensable part of any meeting that a chairman should be appointed and should occupy the chair. In the absence of some person (by whatever title he or she be described) exercising procedural control over a meeting, the meeting is unable to proceed to business.4

Most by-laws provide that the chair of the board, if present and willing, will preside at meetings of the board. In the absence or refusal of the chair to preside, or to continue presiding, the president shall preside, unless the constitution provides otherwise. If no such provision exists, a remaining quorum of the board may elect a new chair from among the directors.5

In the B.C. case of Hastman v. St. Elias Mines Ltd.,6 the applicants sought to set aside a shareholders meeting. They alleged that the chair was not a lawyer and therefore was not qualified to rule on the validity of proxies. The Court rejected this argument provided that

. . . from a policy point of view, it would not be desirable to restrict the group of people who could be chairs of a corporation to lawyers. The authorities are replete with situations where chairs of companies are not lawyers and I was not given any authorities to contradict that history.7

The chair should, however, consider having counsel to advise on issues that may arise at a meeting.

4. Conflict of Interest

Pursuant to corporate statutes, directors must disclose their interest at the meeting of directors and must also refrain from voting on any contract in which they may have an interest.

There are situations that can arise in which two directors refrain from voting on their own contracts, however, they agree to vote in favour of each other's contracts in a "you scratch my back, I'll scratch yours" situation. The courts frown on such agreements and will likely declare both contracts void.8

In addition, the Ontario Business Corporations Act9 "OBCA") provides that a director cannot attend any part of a board meeting where the contract in which he or she has an interest is being discussed.10 This provision is stricter than that of the Canada Business Corporations Act10 ("CBCA"), which only provides that the director may not vote on the contract. By-laws could be expanded to incorporate the provisions of the OBCA.

5. Quorum Issues

A quorum must be maintained throughout a meeting of directors. If a quorum is not maintained, the business conducted would not be lawfully transacted. In the case of Mega Blow Moulding Ltd. v Sarantos12, the Court addressed the validity of a resolution passed where the quorum was not achieved at a board meeting. In reaching its decision, the Court referred to subsection 114(2) of the CBCA, which provides:

Subject to the articles or by-laws, a majority of the number of directors or minimum number of directors required by the articles constitutes a quorum at any meeting of directors, and, notwithstanding any vacancy among the directors, a quorum of directors may exercise all the powers of the directors.

The Court found that the meeting of the directors did not comply with the quorum requirements and accordingly ruled that the resolution passed at the meeting was invalid.

The number of shareholders or members that constitute a quorum is determined by the governing statute, the by-laws, and by any unanimous shareholder or member agreement. At common law, absent any other provision in the constating documents, a quorum is a majority of the shareholders. Subsection 139(4) of the CBCA and subsection 101(4) of the OBCA each provide that two persons form a quorum for a shareholders' or members' meeting (Canada Not-for-Profit Corporations Act13 ("CNCA"), s.164(2), Ontario Not-for-Profit Corporations Act14, s. 57(1)). Of course, in some larger corporations, the quorum is often specified to be a stipulated percentage of shareholders' shares or members represented at the meeting.

Where a shareholder or member attends only to protest the meeting, such person or such person's shares should not be counted for quorum purposes.

One issue that arises from time to time is that of the "disappearing quorum." That refers to the situation where a quorum is present at the start of the meeting but the quorum is lost at some point during the meeting itself. At common law, unless the corporation's constitution provides otherwise, the loss of a quorum during a meeting deprives the meeting of its authority. It has to be adjourned and any business transacted after the quorum is lost is invalid.

Furthermore, at common law, following the commencement of the meeting, there is no obligation to ensure that a quorum is present thereafter. If a quorum is present at the start of the meeting and no quorum count is demanded or taken, a quorum is presumed to have been present throughout.

This is no longer the case under the CBCA, the OBCA, or the CNCA. The three aforementioned statutes provide that, if a quorum is present at the opening of the meeting of shareholders or members, the shareholders or members present may proceed with the business of the meeting even if a quorum is not present throughout the meeting. However, this is subject to by-laws which could provide otherwise.

In some cases, the articles or by-laws impose a quorum higher than the general one prescribed in respect of certain matters that are considered to be of special importance.

Originally published by Directors' Briefing.

Footnotes

* The writers wish to express their appreciation to Joshua Disenhouse, student-at-law at Minden Gross LLP, for his assistance in the preparation of this article.

1 Mayor, Alderman and Burgesses of Tanby v. Mason, [1908] 1 Ch. 457 (CA).

2 Hayes v. Bristol Plant Hire Ltd., [1957] 1 All ER 685 (Ch D).

3 McGuire & Forester Ltd. v Cadzow [1933] 1 D.L.R. 192 (Alb. C.A.).

4 Colorado Construction Pry. Ltd. v. Platus (1966), 2 N.S.W.R. 598 at 600.

5 Klein v. James (1986), 36 B.L.R. 42 (B.C.S.C.) affirmed (1987), 37 B.L.R. (XXV1) (B.C.C.A.).

6 2013 B.C.S.C. 1069.

7 Ibid. at para 139.

8 See Re North Eastern Insurance Co., [1919] 1 Ch 198.

9 R.S.O. 1990, Ch. B. 16.

10 OBCA at s. 132(5).

11 R.S.C 1985, c. C-44.

12 [2001] 16 B.L.R. (3d) 52.

13 S.C. 2009 c. 23.

14 S.O. 2010 Ch. 15.

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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Ira Stuchberry
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