Ontario court provides clarification on requisitioned shareholders' meetings

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Lenard Norris
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1 August 2013 securities bulletin Ontario court provides clarification on requisitioned shareholders' meetings The recent decision of the Ontario Superior Court of Justice in Wells v Bioniche Life Sciences Inc 1 has provided some clarity and guidance on how a Court will interpret the relevant provisions of the Canada Business Corporations Act ("CBCA") in determining whether a dissident shareholder has the right to requisition and call a shareholders' meeting. the facts Bioniche Life Sciences Inc. ("Bioniche") is a CBCA company that develops, manufactures and markets biopharmaceuticals for animals and humans. In April 2013, William Wells ("Wells") acquired just over 5% of the outstanding common shares of Bioniche. The day after Wells' share purchase settled, he sent Bioniche a requisition to call a meeting of shareholders to replace all of the directors of Bioniche (the "First Requisition") while holding his shares through an intermediary. The board of Bioniche (the "Board") declared the First Requisition invalid because it was made by a beneficial shareholder and not a registered shareholder, and did not provide adequate information to allow shareholders to make a decision. Specifically, the First Requisition did not provide names or any other information regarding the proposed nominees. At the same time, the Board also announced that it had called its annual ONSC McMillan LLP Brookfield Place, 181 Bay Street, Suite 4400, Toronto, Ontario, Canada M5J 2T3 t f Lawyers Patent & Trade-mark Agents Avocats Agents de brevets et de marques de commerce Vancouver Calgary Toronto Ottawa Montréal Hong Kong mcmillan.ca

2 Page 2 meeting of shareholders for November 5, 2013 (a date more than six months following receipt of the First Requisition) and fixed September 9, 2013 as the record date for such meeting. In May 2013, following the rejection of the First Requisition, Wells registered most of his shares under his own name and submitted a second requisition once again requesting the removal of the directors, and also identifying new proposed directors (the "Second Requisition"). The Board also rejected this Second Requisition on the grounds that the Board was under no legal obligation to call a meeting of shareholders, as the record date was already fixed for a scheduled meeting relating to the election of directors with notice to the shareholders. Additionally, the Board rejected the Second Requisition because in exercising its business judgment, it determined that it was not in the best interest of Bioniche and its shareholders to proceed with a special meeting given that the company's annual general meeting was already scheduled for November After the second rejection, in June 2013, Wells together with another shareholder (the "Dissident Shareholders") commenced an application to the Court seeking an order requiring the directors of Bioniche, or alternatively the Court, to call a special meeting of shareholders to vote on the removal and election of directors. Twenty days later, Wells called a special meeting of shareholders for August 27, 2013 and the Dissident Shareholders amended their application to seek a declaration that they were entitled to call such meeting. In response, Bioniche applied to the Court requesting that the meeting called by the Dissident Shareholders be declared invalid. the findings regarding the first requisition The Court confirmed previous court decisions in Canada to hold that the First Requisition was invalid for two reasons: 1. Only registered holders of at least 5% of outstanding voting shares are entitled to requisition a meeting. Section 143(1) of the CBCA entitles the "holders" of not less than 5% of the outstanding voting shares of a corporation to requisition

3 Page 3 directors to call a meeting of shareholders. As "holders" is not defined in the CBCA, the Court looked to other sections of the CBCA and case law to find that it is within the powers of a CBCA corporation to proceed on the basis that "holder" means the registered holder of the shares. 2 As the registered shareholder is the person exclusively entitled to vote and exercise all rights and powers of an owner of a security, Bioniche was entitled to find that Wells, as a beneficial owner, was not a "holder" carrying the right to vote at a meeting as set out in section 143(1) of the CBCA. The Court confirmed that although Bioniche had the option to treat a beneficial holder as a "holder" under section 143(1), it was entitled to decline to do so as well. 2. A requisition that does not provide adequate information permitting shareholders to make an informed decision concerning the business stated therein is invalid. The Court found that sections 135 and 143 of the CBCA strongly suggest that the requisition must contain sufficient detail to allow shareholders to make an informed decision about the business proposed to be transacted at the meeting by the requisitioner. If the requisition calls for a meeting to elect new directors, sufficient detail would include the names and qualifications of the proposed new directors. The Court rejected the argument that a requisition would be valid as long as the nominee directors' names and background information are provided sufficiently before the board prepares its management proxy circular, noting that such information could well be relevant to a board's consideration of how to respond to a requisition. Accordingly, the Court found that the Dissident Shareholders did not have good reason to leave out the names and biographical information of the proposed directors, and that this lack of information was enough to invalidate the First Requisition even if Wells had been a registered holder at the time. 2 See Greenpeace Foundation of Canada v Inco Ltd, [1984] OJ 274 (HCJ) and Verdun v Toronto-Dominion Bank, [1996] 3 SCR 550.

4 Page 4 the findings regarding the second requisition The Board did not take the position that the Second Requisition was invalid, instead arguing that it was under no legal obligation to call a meeting of shareholders in response to it. The Court confirmed that the Board was entitled to deny the Second Requisition pursuant to section 143(3)(a) of the CBCA, which provides a statutory exception to the obligation for directors to call a requisitioned meeting if a record date for a shareholders' meeting has already been fixed and notice of it has been given. The Board complied with the CBCA in setting the record date for the November meeting not less than 21 days and not more than 60 days before the date of the meeting. Bioniche had also given notice of the record date within the prescribed period and by the required means through notice in the Globe and Mail and press release. As Bioniche had fixed and given notice of the record date for its November annual general meeting before it had received the Second Requisition, it thereby brought itself within the exception offered by section 143(3)(a). However, the Court recognized the principle stated in Paulson & Co Inc v Algoma Steel Inc that a qualifying shareholder's right to requisition a meeting "is only meaningful if it can be exercised in a timely and expeditious manner," 3 and found that directors should only be allowed to rely on the exceptions under section 143(3) of the CBCA if the meetings they have called, or have affixed a record date for, will occur in a "timely and expeditious manner." 4 The Court emphasized that section 143(3)(a) is to be interpreted as containing a requirement of reasonable timeliness so that directors may only rely on it if the meeting for which they have fixed a record date is scheduled for a time reasonably soon after the receipt of the requisition. The range of reasonableness will take into account the need for shareholders to possess sufficient information to form a 3 Paulson & Co Inc v Algoma Steel Inc (2006), 76 OR (3d) 191, 14 BLR (4th) 104 (SCJ) at para Ibid.

5 Page 5 reasoned judgment before they vote on the subject matter of the requisition. In determining whether Bioniche's November meeting fell within the range of reasonable timeliness, the Court looked to see if the timing of the meeting would prejudice the interest of a requisitioning shareholder. The Court found that on the facts of the matter, determining whether the November meeting fell within the range of reasonable timeliness was a "close call," but ultimately concluded that the Board's actions in rejecting the Second Requisition was a reasonable exercise of its business judgment sufficient to bring it within the exception set out in section 143(3)(a). dissidents' ability to call a meeting where the board fails to do so In a novel addition to the current law in this area, the Court found that the obiter reasoning in Airline Industry Revitalization Co v Air Canada was powerful and persuasive in arguing that shareholders who can garner sufficient support to meet the 5% threshold should be able to call a meeting under section 143(4) of the CBCA, even if the directors have correctly relied on a section 143(3) exception to decline to call the requisitioned meeting. 5 The Court noted that while the Business Corporations Act (Ontario) and Business Corporations Act (British Columbia) explicitly limit the ability of shareholders to call a meeting to circumstances where the board refuses to call a meeting without justification, the CBCA does not set any similar limitation. As a result, the Court found that requisitioning shareholders could exercise their right to call a meeting even where the directors were able to use a section 143(3) exception to justify failing to call the requisitioned meeting. However, on the facts of the case, the Court ultimately granted the declaration sought by Bioniche and held that the Dissident Shareholders could not proceed with the August meeting. This decision turned on a few key points. As neither requisition had set a date or deadline by which the requisitioned meeting should be held, the Dissident Shareholders' complaint that the Board was not acting 5 Airline Industry Revitalization Co v Air Canada (1999), 45 OR (3d) 370 (SCJ) at para 48.

6 Page 6 in a timely fashion and that there was an urgent need for a shareholders' meeting lost its force. Also, the Dissident Shareholders waited a month after the denial of the Second Requisition to invoke their right to call a meeting, resulting in only a two month gap between the proposed shareholders' meeting and the already scheduled November meeting. The evidence given by Bioniche showed that there would be no substantial prejudice to the Dissident Shareholders in waiting to consider the election of directors they proposed until the November meeting. In light of this, and combined with the weak evidence showing an urgent need to hold a meeting in August, the Court found that there was no evidence to justify the significant costs of holding two meetings in such close proximity and determined that the Dissident Shareholders were not entitled to proceed with the August meeting. significance of the decision The Bioniche decision provides some key factors that boards and shareholders of CBCA corporations should keep in mind when determining whether dissident shareholders will have a right to requisition a meeting. The decision confirms that although a board may opt to accept a meeting requisitioned by a beneficial holder, it is not obligated to do so as only registered shareholders are entitled to requisition shareholders' meetings under the CBCA. The decision also confirms that a valid requisition regarding a meeting to elect directors should contain the names and some biographical details of the proposed nominees, and suggests that a requisitioning shareholder may call a meeting pursuant to section 143(4) of the CBCA even if the directors validly relied on a section 143(3) exception to decline to call the requisitioned meeting. On the facts of this case it is clear that key details, such as setting in a requisition a date or deadline for a meeting that reflects the urgency of the situation, can potentially determine whether a dissident shareholder will be successful or not. The decision also demonstrates the Court's efforts to balance the rights of shareholders against the business judgment of a board: while

Page 7 Courts will try to ensure that the voice of shareholders is not overpowered by a board where it would be unjust, unfair or substantially prejudicial to the shareholders' interests, they are

7 Page 7 Courts will try to ensure that the voice of shareholders is not overpowered by a board where it would be unjust, unfair or substantially prejudicial to the shareholders' interests, they are also extremely reluctant to interfere with the business judgment of a board where there is no compelling reason to do so. For more information on this topic, please contact: Toronto Sandra Zhao sandra.zhao@mcmillan.ca a cautionary note The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained. McMillan LLP 2013

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