1. INTRODUCTION*
Difficulties arise for corporations which lack a formal process governing the calling and conduct of corporate meetings. By-laws should (but rarely do) provide that all meetings are to be governed by specific Rules of Order such as Robert's Rules of Order or Nathan's Company Meetings for Share Capital and Non-share Capital Corporations. A group of individuals who, for some reason, wish to discredit a corporation, can, if the corporate records are in disarray, easily challenge the board, the officers and the senior managers. They can, for example, allege that the board was not properly constituted, a shareholders' or members' meeting did not have a quorum present, or that the officers were not duly appointed by a validly elected board at a properly called board meeting. Certain formal requirements relating to board, shareholders' and members' meetings are common to private companies, public companies, and not-for-profit corporations ("NFP's").
As you may be aware the Canada Not-for-Profit Act ("CNCA") came into effect in October, 2011. The Ontario Not-for-Profit Act or ONCA has been passed but not has not been proclaimed and died on the order table due to the election call in Ontario.
2. RIGHT TO ATTEND BOARD MEETINGS
(a) Who is entitled to attend?
Meetings of the board of directors may be attended only by the directors of the corporation. At common law, other persons may be admitted with the consent of the meeting.2 This is however subject to the provisions of the By-laws of the corporation. Standard form by-laws often provide for attendance of others with the consent of the Chair or of the meeting. Directors and officers are under a duty of confidentiality which others such as special guests are not. It would not be unusual to require that a guest sign a confidentiality agreement
(b) Director's right to attend
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 of the board.3
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 participate in management and 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.
(c) No attendance by proxy
What if a director cannot attend a meeting or be able to phone in, can he or she send a proxy?
The law is settled on the issue that a director cannot attend a meeting by proxy.4 This is largely due to the fact that the directors cannot delegate their duties to a third party. This extends to resolutions in writing which cannot be signed by power of attorney. A shareholders resolution could be signed by power of attorney.
(d) In Camera Meetings
The term is used in two senses.
In camera sessions can be meetings where the independent directors might have an opportunity to meet without management present. In camera sessions can also consist of a series of meetings between the independent directors and key stakeholders such as the CEO, internal and external auditors, the chief risk officer, etc. This provides the independent directors an opportunity to meet with these individuals privately and to have a candid discussion about the affairs of the company without other parties being present. However, these latter meetings may not have a quorum present.
A recent situation I had to deal with was an unpopular president of a minor hockey league. It was alleged the president had breached the league's Code of Conduct. The president had two supporters on the board. A meeting was held without them and the president. A decision was made to suspend the president as a member, thus disqualifying him as president. Apart from the issue of lack of natural justice, I advised that the in camera decision made had no legal effect at law. I recommended a full board meeting be held.
3. CHAIR OF MEETINGS
(a) Who is Entitled to Chair Meetings and Role of Chair
I would like to start with 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.5
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.6
(b) The Chair Need Not be a Lawyer
In the B.C. case of Hastman v. St. Elias Mines Ltd.7, the applicants sought to set aside a shareholders meeting. They alleged the Chair was not a lawyer and basically was not qualified to rule on the validity of proxies. The Court rejected this argument and stated:
...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. 8
The Chair should, however, consider having counsel to advise on issues.
(c) Authority of Chair
The Chair must not act to frustrate the expression of the wishes of the meeting by leaving the Chair, refusing to put proper motions to a vote, acting in an oppressive manner to end discussion or refusing to have votes counted. In American Aberdeen-Angus Breeders' Ass'n v. Fullerton 9, it was stated:
The right of the majority of the members to control the action of the meeting cannot be questioned. A presiding officer cannot arbitrarily defeat the will of the majority by refusing to entertain or put motions, by wrongfully declaring the result of a vote or by refusing to permit the expression by the majority of its will. He is the representative of the body over which he presides. His will is not binding on it, but its will, legally expressed by a majority of its members is binding.
A Court may set aside a meeting for the failure of a Chair to preside at the meeting in a proper manner and allow questions to be put or to allow questions to be answered, if the conduct was such as to affect the outcome of the meeting itself. 10
The Delaware decision in Portnoy v Cryo-Cell International, Inc.11 is an example where the Court ordered a new election with a new chair at the expense of the management due to the improper behavior of the Chair at a shareholder meeting in trying to maintain control of the board. The Chair, Mercedes Walton and the management groups devised a plan to buy up stock and bolster their position in a proxy contest. Going into the annual meeting at 10:00 a.m. the Chair sensed defeat and did not want to close the polls and count the vote when the scheduled presentations at the meeting were over. So she had members of her management team make long, unscheduled presentations to give her side more time to gather votes and ensure that they had locked in two key blocs. She overruled motions to close the polls. Even after filibusters, Walton still harbored doubt that the Management Slate would prevail if the vote was counted and the meeting was concluded. So, at around 2:00 p.m. Walton declared a very late lunch break, supposedly in response to a request made much earlier.
In fact, Walton called the break, so that she would have more time to seek votes and so that she could confirm that the major blockholders had switched their votes to favour the Management Slate. Only after confirming the switches did Walton resume the meeting at approximately 4:45 p.m., declare the polls closed, and have the vote counted.
The judge had harsh words to say about the Chair's behavior in finding a serious breach of fiduciary duty which tainted the election of directors. The Court ordered a new meeting with a new Chair at management's cost.
The Chair must enforce designated rules of order and must preserve and maintain order and do all things necessary for the proper conduct of the meeting. The Chair may call the speakers, regulate the length of the speeches, deal with points of order and control the arrangements for any vote that may be taken. He or she may judiciously attempt to regulate interruptions from the floor. The Chair must combine fairness with tact.
The right of the majority of the members to control the action of the meeting cannot be questioned. A presiding officer cannot arbitrarily defeat the will of the majority by refusing to entertain or put motions, by wrongfully declaring the result of the vote, or by refusing to permit the expression by the majority of its will. The Chair is the representative of the body over which he or she presides. His or her will is not binding on it, but its will, legally expressed by a majority of its members is binding.
(d) Removal of Chair
A Chair appointed by the meeting can be replaced by the meeting. If the by-law provides who is to chair, a resolution cannot be passed to remove that person and appoint another as Chair. All one can do is to bring a motion in Court to order a new meeting.
(e) Casting Vote of Chair
At common law, the Chair did not have a second or casting vote12 if directors were equally divided on a question. There is no provision for a casting vote in the corporate statutes. If the Chair is to have a casting vote, it is to be provided for in the By-laws. If there is provision for the Chair to have a casting vote it is meant to be used to remedy occasional tie votes13, not to deal with a continuous and settled deadlock condition.14 Some people think the Chair only has a vote if the Chair has a casting vote. This assertion is wrong. A Chair must act in good faith in casting a tie-breaking vote, but is not compelled to cast the tie-breaking vote.
If it is intended that consensus be achieved amongst the directors, the occurrence of a tie vote shows that obviously consensus has not been achieved. Those who are of the consensus view would argue that the Chair should not have a casting vote or exercise a casting vote in order to break a deadlock.
(f) Appeals from Chair's Rulings
The rulings of the Chair related to procedural matters may be appealed to the meeting. The best practice is for the person acting as Chair of the meeting to vacate the chair while a vote is taken. The appeal of such procedural rulings by the Chair should not involve speeches. A majority vote is required to vary or reverse the Chair's ruling.
There is a presumption that the Chair's decision was a correct one. There have been several pronouncements in cases to this effect. For example, In the Re Indian Zoedone Co.15 case in the English Court of Appeal, Cotton L.J. stated:
Whether the objection depends on the form of the document or on the general point of law, the Court can decide, and is bound to decide, when the question comes before it, whether the decision of the chairman was right or wrong; but until the contrary is shown his decision must be held to be right, that is to say, the Court must decide the questions between the parties, but not until those who object to his decision satisfy the Court before whom the question comes that his decision was wrong.
4. PROCEDURAL ISSUES
(a) Calling of Meetings
Notice of the time and place of a meeting of the board of directors must be given to all directors, otherwise the business transacted thereat is invalid.
Most by-laws allow notice to be sent by fax and by e-mail. If the corporation is old, the by-laws may not provide for this process.
There is also nothing in the Ontario Business Corporations Act ("OBCA") or Canada Business Corporations Act ("CBCA") that requires a notice to be signed. If one is preparing a notice of a meeting of directors or if one is a dissenting director it is essential to review the by-laws to determine whether any matters must be specified in the notice. A meeting may be invalidated if the notice fails to comply with the by-law.
It is imperative that there be no surprises at a meeting.
The desirable practice is that an agenda should be circulated along with the notice to advise directors of the matters to be dealt with at the meeting.
(b) Conflicts 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 can arise situations where two directors refrain from voting on their own contracts, however they vote in favour of each other's contracts, being a "you scratch my back, I'll scratch yours" transaction. The Courts frown on such agreements and will likely declare both contracts void.16
In addition to this, the 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.17 This provision is stricter than that of the CBCA, which only provides that the director may not vote on the contract. By-laws could be expanded to provide as the OBCA does.
(c) Dissent Votes
A director is often faced with a position put forward at a meeting with which he or she does not agree. That person should vote "NO" to the resolution and request that his or her dissent vote be recorded in the minutes. Failure to do so may lead to potential liability since the corporate Acts deem the director to have consented to the resolution if the dissent is not recorded in the minutes.18
A director not present at such meeting is deemed to have consented unless, within seven days after becoming aware of the resolution, the director, causes his or her dissent to be placed within the minutes of the meeting; or submits his or her dissent to the corporation and that should be done at the meeting.
An unusual situation could arise if a board consisted of 5 with 3 forming a quorum. If two were absent and the vote went 2 to 1 in favour of the resolution at the meeting, the resolution would pass. If the two absent directors requested their dissents be recorded afterwards, the question that arises is if this could make a difference in the vote. Since the meeting was over, this would not affect the vote. Their dissent may, however, protect these two directors from liability.
(d) Abstentions
Another option for directors would be to abstain from voting on a motion. An abstention is defined as "the refusal to vote either for or against a motion."
A director at a meeting may be "sitting on the fence" or just does not want to offend one faction or another so he or she decides not to vote at all on a proposed resolution. I am not referring at this point to abstention from voting for a director who is in a conflict situation, as that is statutorily mandated under the corporate Acts.
A director may well be deemed to have consented unless the abstention is recorded. As such, it would appear to be prudent for the undecided director to at least request that an abstention is recorded instead of "doing nothing", even though that may not act as a liability shield for a director who did not dissent. However a director who wishes to abstain (and to have the abstention recorded) has the right to do so.
In my opinion, an abstention is not necessarily the equivalent to a "no" vote as such, but may have that effect in some circumstances. If for example, a matter under the By-laws must be passed unanimously by all of the directors then in office and not just by all directors who form a quorum, an abstention will be considered a "no" vote.19
As an example, a By-law may provide for the directors to approve any resolution by at least 2/3rds of the votes cast by the directors who voted in respect of that resolution. The underlining makes it clear that an abstention does not count at all in this circumstance. There are no provisions in corporate statutes as to how votes are to be conducted at directors' meetings. Generally, voting is carried out by show of hands and each director has one vote.
If the matter is a sensitive one, there is a question of whether there can be a secret ballot at a meeting of directors, so directors would not be aware of how other directors have voted. Only the Chair who counts the ballots would know, assuming directors' names were on the ballots.
In my opinion, the call for a secret ballot is within the discretion of the Chair, but a secret ballot could give rise to problems. How does one dissent in a secret ballot so that the dissent can be reflected in the minutes of the meeting?20 A person who has dissented could insist that his or her dissent be recorded in the minutes. My view is that secret ballots should be used only in exceptional circumstances.
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Footnotes
1 Mr. Nathan is a senior partner of Minden Gross LLP and is Editor-in-Chief of the Directors Manual.
2 Mayor, Alderman and Burgesses of Tenby v. Mason, [1908] 1 Ch. 457 (CA)
3 Hayes v. Bristol Plant Hire Ltd., [1957] 1 All ER 685 (Ch D).
4 See David Greenberg v Harrison (1956), 124 Atl. Rep (2nd) 216 (Conn) and McGuire & Forester Ltd. V. Cadzow, [1933] 1 D.L.R 192 (Alta CA).
5 Colorade Construction Pry. Ltd. v Platus (1966), 2 N.S.W.R. 598 at 600.
6 Klein v. James (1986), 36 B.L.R. 42 (B.C.S.C.) affirmed (1987), 37 B.L.R. (XXV1) (B.C.C.A.).
7 2013 B.C.S.C. 1069.
8 Ibid at para 139.
9 (1927), 156 N.E. 314 (Ill. Sup. Ct).
10 See Re: Canadian Pacific Ltd. (1997), 30 B.L.R. (2d) 297 (Ont. Ct. Gen. Div.).
11 (2008), 940 A.2d 43 (Del.Ch.).
12 Nell v. Longbottom, [1894] 1 Q.B. 767 (Q.B.D.).
13 Re: Citizen's Coal v. Forwarding Co., [1927] 4 D.L.R. 275 (Ont. Co. Ct.).
14 Re: Daniels and Fielder (1988), 65. O.R. (2d) 629 (Ont. H.C.).
15 (1884), 26 Ch. D. 70.
16 See Re North Eastern Insurance Co., [1919] 1 Ch 198.
17 OBCA at s. 132(5).
18 OBCA s 135, CBCA s 123, CNCA s 147.
19 See Municipal Mutual Insurance Ltd. v. Harrop [1998] B.C.L.C. 540 (UK Ch. D.).
20 For example, shareholders may decide to sue directors for breach of their fiduciary duties.
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.
