Litigating Proxy Fights – Strategic Considerations and Recent Trends


Published on

In this presentation, FMC partner Matthew Fleming reviews strategic considerations and recent trends in litigation arising from proxy battles for corporate control.

Published in: Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Litigating Proxy Fights – Strategic Considerations and Recent Trends

  1. 1. Litigating Proxy Fights – StrategicConsiderations and Recent TrendsAdvocates’ Society Securities Litigation SymposiumSeptember 13, 2012Presented by: Matthew Fleming, Partner, Fraser Milner Casgrain LLP 1
  2. 2. Types of Proxy Fight Litigation• Requisitions for Shareholder Meetings• Unlawful Proxy Solicitation• Misrepresentation in a Circular• Disputes at the Shareholder Meeting 2
  3. 3. Shareholder Requisitions (CBCA s. 137and s. 143)• Holders of 5% of shares may requisition the directors to call a meeting for the purposes stated in the requisition• Directors shall call a meeting unless a meeting already called or the primary purpose is to enforce a personal claim or secure publicity; the proposal is unrelated to the business or affairs of the corporation; the person previously failed to present the same proposal; or it is already the subject of the meeting• If directors do not call a meeting within 21 days, the shareholder may call the meeting 3
  4. 4. Invalid Requisitions• Requisition must state purpose of meeting and business to be transacted; if requisition is to replace board, it must specify the proposed nominees (Reichert v. Richtree Inc., 2003 CarswellOnt 9374 (S.C.J. - Comm. List))• No obligation to call a meeting where a shareholder involved in litigation against company sought to ask detailed questions about company’s financial statements – not bona fide purpose relating to company’s business (Watkin v. Open Window Bakery Ltd., 1996 CarswellOnt 838 (Gen. Div. – Comm. List)) 4
  5. 5. Valid Requisitions• Not a personal claim where proposed business was mandated by requirements for public companies; related party had requisitioned meeting to replace board and approve transaction converting its debt to equity; transaction required shareholder approval (Burnham v. Augen Capital Corp., 2010 ONSC 783 (S.C.J.))• The mere fact that directors, like other shareholders, will receive a dividend does not mean their requisition of a meeting is a personal claim (Eckberg v. MTW Solutions Online Inc., 2000 CarswellOnt 2978 (S.C.J. - Comm. List)) 5
  6. 6. Obligation to Call Meeting• Obligation to “call a meeting” met if meeting date announced; date is within discretion of directors exercising business judgment honestly, in good faith and in best interests of the corporation, provided date falls within a range of reasonable alternatives (Paulson & Co. v. Algoma Steel Inc., 2006 CarswellOnt 41 (S.C.J.))• Where meeting called by dissident, court unwilling to prevent meeting from occurring: “In my view this is a matter that should be decided by the shareholders. Notice has been duly given, both [parties] sent out circulars, both [parties] sent out press releases and there is no reason to believe that the shareholders are uninformed” (Coronation Minerals Inc. v. Guyana Goldfields Inc., 2008 CarswellOnt 8428 (S.C.J. – Comm. List)) 6
  7. 7. Obligation to Deliver Circular WhenSoliciting Proxies (CBCA s. 147 and s. 150)• A person shall not solicit proxies unless a management or dissident circular sent to shareholders; “solicit” defined broadly to include: a) a request for a proxy whether or not accompanied by or included in a form of proxy, b) a request to execute or not to execute a form of proxy or to revoke a proxy, c) the sending of a form of proxy or other communication to a shareholder under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy, and d) the sending of a form of proxy to a shareholder under section 149 of the CBCA 7
  8. 8. Exceptions to Obligation to Send Circular• Dissident may solicit 15 shareholders or less (CBCA, s. 150(1.1))• Dissident may solicit by public broadcast, speech or publication, provided information sent to Director and identity of those making and paying costs of the solicitation is provided with details of any material interest of those involved (CBCA, s. 150(1.2), CBCA Regs., s. 69 and Form 51-102F5)• A public announcement of how shareholder intends to vote and reasons for decision (CBCA, s. 147 and CBCA Regs., s. 67) 8
  9. 9. Exceptions to Obligation to Send Circular (cont’d)• Communications to shareholders regarding a company’s business and affairs, concerning the organization of a dissident’s solicitation, or by a person who does not seek the power to act as proxy, subject to exceptions (CBCA, s. 147 and CBCA Regs., s. 68)• Technical Exemptions (unsolicited requests, professional services, registered shareholders sending documents to beneficial shareholders, etc.) 9
  10. 10. Proxy Solicitation• It is not a “solicitation by or on behalf of management” obligating management to deliver circular if board has knowledge of proxy solicitation but cannot exercise control over it (JLL Patheon Holdings, LLC v. Patheon Inc., 2009 CarswellOnt 7315 (S.C.J. – Comm. List))• Issuing press releases reporting that shareholder support has been secured to replace incumbent directors and referring shareholders to a proxy solicitation firm, without the prescribed information, amount to steps in the chain of communication “reasonably calculated to result in the procurement” of a proxy (Polar Star Mining Corporation v. Willock, 2009 CarswellOnt 1416 (S.C.J. – Comm. List)) 10
  11. 11. Proxy Solicitation (cont’d)• Proxies will be disallowed where they are granted under a proxy solicitation system (TeleVote) that: a) allows a grant of proxy to be authorized orally and no reliable method of confirming the authorization (such as a unique identifier) or a record of the grant of authority exist b) only permits shareholders to vote for one competing slate and lacks safeguards to ensure shareholders could make their choices privately, on a fully informed basis and without undue pressure from a proxy solicitor; and c) is not disclosed in the management proxy circular or otherwise (International Energy and Mineral Resources Investment (Hong Kong) Company Limited v. Mosquito Consolidated Gold Mines Limited, 2012 BCSC 1191) 11
  12. 12. Misrepresentation in a Circular• A circular must contain full, fair and plain disclosure and include information concerning the pertinent matters with sufficient detail to permit shareholders to form a reasoned judgment (Kluwak v. Pasternak, 2006 CarswellOnt 7766 (S.C.J. – Comm. List))• Circulars must balance between providing too much information and too little; however, courts are unlikely to interfere with the sufficiency of a circular unless it is “plain that there are good reasons to be concerned about the adequacy of the disclosure” (First Marathon Inc., Re, 1999 CarswellOnt 2295 (S.C.J. – Comm. List)) 12
  13. 13. Misrepresentation in a Circular – When Will a CourtIntervene?• Backdating a circular after director’s resignation not a misrepresentation and court will intervene only in “clear and unusual cases where there is a substantial risk of harm to the corporation or to the shareholders as a group, or where it is patently clear that the conduct in issue has been illegal or abusive” (Lei v. Noble China Inc., 1996 CarswellOnt 2314 (Gen. Div. – Comm. List))• Statement in dissident circular that dissidents intended to vote for member of incumbent board not misleading even where director stated after dissident circular released that he would resign if dissident slate elected ( v. Brown, 2010 ABQB 365) 13
  14. 14. Misrepresentation in a Circular – When Will a CourtIntervene? (cont’d)• Based on advice of special committee and recommendation of independent financial advisors, company closed bought deal rather than rights offering; dissidents issued circular suggesting that management’s circular misrepresented financial advisor’s opinion (but omitting the advisor’s conclusions); court ordered that a notice be sent to shareholders correcting the dissidents’ misrepresentations (AnorMED Inc. v. Baker Bros. Investments, LP, 2006 BCSC 755)• Dissident circular suggested fees paid to entities controlled by chair were unreasonable but failed to disclose that dissident had entered into agreement which provided that fees would be charged and that fees had been approved by shareholders at prior meeting (Kluwak, supra) 14
  15. 15. Disputes at Shareholder Meetings• “In the absence of demonstrated impropriety, the court should not interfere with the operation of the exercise of the shareholders’ right to design their corporate constitution and electoral process” (Maudore Minerals Ltd. v. Harbour Foundation, 2012 ONSC 4255)• The Chair of a shareholder meeting is not disqualified simply because he/she is partial to one side; the Chair’s duty is “one of honesty and fairness to all individual interests, and directed generally towards the interests of the company” (Blair v. Consolidated Enfield [1995], 4 S.C.R. 5) 15
  16. 16. Disputes at Shareholder Meetings – Validity of Proxies• The Chair may disallow “omnibus” proxies delivered by the registered shareholder listing the NOBOs on behalf of whom the registered shareholder purports to hold shares, even where the NOBOs delivered a letter to the registered shareholder authorizing it to take instructions from a specific individual and authorizing that individual to vote the shares at the meeting (Ebrahim v. Continental Precious Metals Inc., 2012 ONSC 2918) 16
  17. 17. Disputes at Shareholder Meetings – Validity of Proxies (cont’d)• “The conduct of business has for many years been enhanced by technological improvements in communication. Those improvements should not be rejected automatically... They should be considered and, unless there are compelling reasons for rejection, they should be… approved… [i]n the absence of specific provisions to the contrary” (See Beatty v. First Exploration Fund 1987 & Co., 1988 CarswellBC 158 (S.C.) and United Canso Oil & Gas Ltd., Re, 1980 CarswellNS 29 (T.D.)) 17
  18. 18. Disputes at Shareholder Meetings – Validity of Proxies (cont’d)• STAC Proxy Protocol (referred to in International Energy and Mineral Resources Investment (Hong Kong) Company Limited v. Mosquito Consolidated Gold Mines Limited, supra)• There is a general presumption in favour of accepting the proxy and giving effect to the security holder’s intention where possible 18
  19. 19. Disputes at Shareholder Meetings –Quorum• Special quorum requirement of persons holding 50% of company’s shares in connection with resolution to remove, elect, appoint or change number of directors is not contrary to shareholders’ reasonable expectations and not oppressive if special quorum was disclosed and approved by shareholders (Ebrahim v. Continental Precious Metals, supra)• A shareholder is entitled to revoke proxies immediately prior to the shareholder meeting in order to prevent quorum from existing at meeting; board may not respond by approving resolution amending by-laws to reduce quorum because shareholders will not have had proper notice of amendment (Wells v. Melnyk, 2008 CarswellOnt 4438 (S.C.J. – Comm. List)) 19
  20. 20. Potential Remedies• Section 144 of CBCA provides that director or shareholder entitled to vote at a meeting may apply for an order that a meeting be held and specifying procedure prior to and at meeting; the court’s broad discretion should be exercised “cautiously” (Airline Industry Co. v. Air Canada, 1999 CarswellOnt 3020 (S.C.J. – Comm. List)); court should not intervene where another corporate remedy exists and application is made by one faction against another faction (Ebrahim v. Continental Precious Metals, supra)• Section 145 of CBCA provides that a corporation, shareholder or director may apply to determine a controversy with respect to a meeting and the court may make any order it sees fit; broad discretionary power based on principle that remedy should be available to enable shareholders to freely exercise their voting rights in accordance with their instructions (Mason v. Augen Capital Corp., 2010 ONSC 5319) 20
  21. 21. Potential Remedies (cont’d)• Under s. 154 of the CBCA, where a form of proxy, management or dissident circular contains an untrue statement of material fact or omits to state a material fact an “interested person” may apply to court which may make any order it sees fit; an “omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote” (AnorMED Inc. v. Baker Bros. Investments, supra)• Section 247 of the CBCA permits a “complainant” to apply for an order directing a corporation, director, officer and others to comply with, or restraining them from breaching, the Act, Regs., articles or by-laws; s. 247 does not apply to a shareholder or to a director acting “qua shareholder” when soliciting proxies (Polar Star Mining Corporation, supra) 21
  22. 22. Potential Remedies (cont’d)• Under oppression remedy in s. 241 of CBCA, the court must first consider whether a reasonable expectation exists and has been breached and if so, whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” (BCE Inc. v. 1976 Debentureholders, 2008 SCC 69)• In the proxy fight context, the court should consider “business realities, not merely legal realities” (Ebrahim v. Continental Precious Metals, supra) 22
  23. 23. Choose Your Forum Carefully• Court - May be reluctant to intervene? (Lei v. Noble China, supra, etc.)• OSC - Public interest jurisdiction but other limits on ability to intervene? (Re Vengrowth Funds (Special Committee of Directors), 2011 34 O.S.C.B. 6755))• Director under CBCA - Prosecution unlikely? (Polar Star Mining Corporation v. Willock, supra) 23
  24. 24. Thank you!
  25. 25. The preceding presentation contains examples of thekinds of issues companies dealing with Litigation ProxyFights could face. If you are faced with one of theseissues, please retain professional assistance as eachsituation is unique.