In Paquette v Zaio Corporation, the applicants held almost 40% of the 10% secured convertible debentures (the "Debentures") issued by the respondent, Zaio Corporation ("Zaio"). The Debentures ranked as first secured debt and StableView Asset Management Inc. ("StableView") held subordinate debentures and ranked as second secured debt.
In 2016, the Board of Zaio prepared a debt reduction strategy which included an effort to convert the Debentures into common shares before they matured. In furtherance of the strategy, Zaio and StableView entered into a "quid pro quo" agreement wherein StableView agreed to contact current security holders of Zaio to try to obtain their agreement to convert or extinguish their securities. In exchange, StableView would receive one Zaio common share for each 10 shares underlying the successfully converted or extinguished securities. An additional benefit to StableView was that if the Debentures were converted into shares, the StableView facility would move into first secured position. The Court found that the strategy was at least partially conceived by Colin Fisher ("Fisher") who ran StableView and was a "control person" of Zaio. Zaio never disclosed this agreement publicly or to its security holders.
A shareholders meeting was held to vote on the extraordinary resolution to convert the Debentures into common shares. A portion of the applicants completed a proxy in favor of Steve Ruff ("Ruff") while another portion completed a proxy in favour of Richard Paquette ("Paquette"). The night before the meeting, Fisher called the CAO of Zaio, Phillip Wazonek ("Wazonek"), advising him that Ruff and Paquette were "leading a group of debenture holders opposed to the .... resolution and that the group was working together" and had "colluded beyond the legal limit".
At the meeting, Wazonek did not make any independent inquiries regarding Fisher's allegations, and did not contact Ruff or Paquette, but was advised by Zaio's legal counsel that there was a basis to conclude that solicitation of proxies had occurred. Thus, Wazonek announced that the proxies held by Ruff and Paquette would be disallowed. Even though two of the individuals who had submitted proxies were subsequently able to attend the meeting and vote on the resolution, Wazonek also excluded their votes. It was clear that, had those two individuals been able to vote their debentures, the resolution would have failed.
The issue in the application became: a) whether Ruff and Pacquette had improperly solicited proxies; and b) if so, whether the decision to disallow the proxies was oppressive.
Decision
Neither Ruff nor Paquette acted as a proxy for more than 15 debenture holders. As such, the Court held that even if there was solicitation, under ASC NI 51-102 a dissident circular would not have been required. Nonetheless, Zaio argued that Ruff and Paquette were acting in concert and it was a fiction to consider the two groups separately. The Court disagreed with Zaio's argument, holding that Zaio's allegations were merely speculation unsupported by facts or persuasive evidence. Thus, the Court held that Wazonek was wrong to disallow the proxies at the meeting.
With respect to whether the decision to disallow the proxies constituted oppressive conduct, the Court held that it did. In order to establish oppression, the Applicants must satisfy the court that:
a) they possessed a reasonable expectation that could give rise to a claim for oppression, assessed on an objective basis; and
b) that reasonable expectation was violated by conduct falling within the terms "oppression", "unfair prejudice" or "unfair disregard" of a relevant interest.
Reasonable Expectations
Zaio argued that the applicants could not have had a reasonable expectation that their votes would be counted, given that there had been the improper solicitation of proxies. Upon finding that there was no improper solicitation of proxies, the Court held that the applicants had no reason to assume that their proxies would be disallowed, and therefore they possessed a reasonable expectation that their votes would be counted.
Conduct Falling Within the Meaning of Oppression
The Court held that it was manifestly unfair to disallow the proxies without notice, on the basis of a lack of evidence and an incorrect interpretation of securities law, without giving the applicants notice of the concern and an opportunity to defend against it or remedy the situation. Accordingly, the Court found that the applicants had established oppression. Contributing to this finding was the fact that the party raising the improper solicitation concern, Fisher, had an undisclosed financial interest in the proceedings, and therefore his concerns should have been subject to further scrutiny. As a remedy, the Court set aside the resolution.
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