For all the talk of proxy access in the U.S., and now Canada (see DLA Piper’s 2016 and 2017 publications on this point), one of the more powerful tools available to shareholders of Canadian companies is the power to requisition a meeting. Under the Ontario Business Corporations Act ("OBCA”) and similar federal and other provincial legislation, shareholders holding 5% of the company’s shares have the power to requisition a meeting to consider shareholder proposals, including potentially replacing the Board. This is a powerful tool in the hands of an aggrieved shareholder, who is not required to wait for the next annual meeting to seek to replace the Board.
There are, however, statutory exceptions to this right. Legislation allows the Board to refuse a shareholder’s request for a meeting where the same issue has been put to shareholders either by management or dissidents in the prior two years. The Board may also refuse where a meeting has already been called. And, interestingly, the Board may refuse where the shareholder is not really advancing matters related to the business and affairs of the company, but rather, advancing a personal grievance.
Lower courts have given some guidance over the years as to what constitutes a “personal grievance”. Now an Ontario appellate court has weighed in. Describing the right to call a meeting a “fundamental right” of shareholders, the Court found the Board must meet a high threshold to establish an exemption to that right – indeed, the statute says that it must be “clearly apparent” the shareholder is advancing a personal grievance or personal claim. The Court also provided guidance on how to distinguish between a personal grievance and a matter properly put before shareholders, particularly in circumstances where the shareholder advancing the proposal is a significant shareholder.
The Court adopted comments made in another decision that “[t]he right to call a special meeting is a substantive one and is not lightly to be interfered with.” It refused to apply the business judgment rule to the decision of the Board in assessing the shareholder proposal. And, as a result, the Court overturned the lower court, ordering the company to hold the meeting.
The statutory right to call a meeting
Section 105(1) of the OBCA confers the right to call a meeting of shareholders. It reads:
The holders of not less than 5 per cent of the issued shares of a corporation that carry the right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition.
Upon receiving the requisition, the directors are required to call the meeting of shareholders to transact the business set out in the requisition, except in three situations. One of those situations relates to the content of the shareholder resolution. The directors are not required to utilize corporate funds to call and hold a shareholder meeting where “the business of the meeting as stated in the requisition includes matters described in clauses 99(5)(b) to (d)”. Those clauses read:
(b) it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a personal grievance against the corporation or its directors, officers or security holders;
(b.1) it clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation;
(c) not more than two years before the receipt of the proposal, a person failed to present, in person or by proxy, at a meeting of shareholders, a proposal that, at the person’s request, had been included in a management information circular relating to the meeting; or
(d) substantially the same proposal was submitted to shareholders in a management information circular or a dissident’s information circular relating to a meeting of shareholders held within two years preceding the receipt of the shareholder’s request and the proposal was defeated
In a decision released on May 18, 2017, Koh v. Ellipsiz Communications Ltd., 2017 ONSC 3083, the Ontario Divisional Court gave greater clarity on what constitutes a “personal grievance” as described in subparagraph 99(5)(b) of the OBCA. As we explain below, the court significantly narrowed the scope of this exemption.
The Facts of Koh v. Ellipsiz Communications
Tat Lee (Michael) Koh (“Koh”) was the major shareholder of Toronto-headquartered Ellipsiz Communications Ltd. (“Ellipsiz”). He held about 42% of the outstanding shares of the company. The next major shareholder of Ellipsiz was the president of a Taiwanese operating subsidiary of Ellipsiz, Chong Gin (Sam) Tan (“Tan”). Tan held 26.6% of the company’s outstanding shares.
Ellipsiz is a small company, with a market cap of around $5 million. Its shares were listed on the TSX Venture Exchange in 2015, following completion of a reverse takeover. The company held its first AGM in 2016, where the management slate of directors were elected. Koh opposed that election, but did not wage a proxy fight at that time.
Koh was not particularly supportive of the new slate of directors, and sent a letter through his counsel on August 22, 2016, demanding that the Board resign. The Board politely declined, so about a week later Koh formally submitted a requisition for a shareholder meeting. The requisition proposed two resolutions: the first was to remove three of the five Ellipsiz directors; and the second was to elect three new directors in their place.
The Board met twice to consider the requisition, and advised Koh about a month later that it was declining the requisition. It relied on the personal grievance exemption described above, stating that Koh was really advancing the following personal interests:
(a) Koh wanted to be the chairman of Ellipsiz and its subsidiary.
(b) Koh wanted to be Ellipsiz’s chief negotiator in respect of a potential acquisition by Ellipsiz of an unrelated company.
(c) Koh wanted to arrange financing for Ellipsiz.
(d) Koh asked Ellipsiz’s investor relations firm to promote alleged illegal trading of Ellipsiz’s shares.
(e) Koh insisted on reimbursement of expenses that were related to Ellipsiz.
Koh brought an application to the Ontario Superior Court of Justice for a declaration that the proposed shareholders’ meeting was validly called. That application was dismissed, with the applications judge finding that Koh was really advancing a personal grievance. Koh appealed the decision to the Ontario Divisional Court, which is an intermediate appellate court in Ontario.
The right to requisition a meeting is a fundamental right
The appellate court adopted a number of principles for considering whether a Board has properly relied on an exemption:
(a) The right of dissident shareholders to requisition a meeting of shareholders is a “fundamental right” of shareholders. It is a “substantive” right, and is “not lightly to be interfered with".
(b) There is a very high threshold for boards to rely on exemptions, given that the statute require it be “clearly apparent” the shareholder is advancing impermissible concerns.
(c) The court will not give deference to a Board applying an exemption, and will not employ the business judgment rule. The Board must be correct in its decision.
(d) The court will look beyond the language of the resolutions to determine the “primary purpose” for which they are put forward.
(e) The determination on whether to apply the exemption must be based on objective evidence.
(f) The onus of proof rests on the Board, not the dissident.
The difference between “personal grievances” and the affairs of the corporation
The Court then went on to give some considerations on how to differentiate between “personal grievances” that are not properly matters for a shareholder meeting, and the business and affairs of the company, which are proper matters. The Court put the issue this way:
It seems to me that one of the indicators of a person[al] grievance is that the subject matter of that grievance bears no real or direct relationship, not is it otherwise integral, to the business and affairs of the company, or, for that matter, to the griever’s role as a shareholder. In other words, while the grievance may bear some connection to the business and affairs of the company, that is not at the heart of the grievance.
The Court gave some examples based on prior case law. “Personal grievances” included shareholder requisitions that were related to a wrongful dismissal action, or that were designed to provide leverage in separate litigation. By contrast, it was not “personal grievances” where the shareholders wanted to replace the directors to declare a dividend, or to represent those shareholders’ views. In the present case, Koh’s complaints involved “who should be directors, who should occupy corporate positions, and whether a significant transaction should be entered into,” and thus properly matters for consideration by shareholders.
The Court made a few other findings in passing. First, the Court agreed with the lower court that it may be relevant to consider whether the dissident has other shareholder support: “[t]o the degree that other shareholders are of the same view on an issue … it would make it more difficult, it would seem, to characterize the issue as 'personal'.” Second, it is not enough to show that the dissident merely has a “personal interest” in the matter, because this would expand the scope of the exemption too broadly. Third, the Court should consider the motivations of the directors in utilizing the exemptions: courts should be concerned about Board and management entrenchment. Finally, on the question of onus, any doubt on the application should be resolved in favour of the meeting being held.
Prior decisions of the Ontario courts have applied rigorous technical scrutiny to shareholder requisitions, leading some commentators to conclude that this requisition right may not be that useful in practice. But there has been a noticeable change in how courts have been approaching shareholder meetings in Canada. For example, some Canadian courts have started to question the utility of certain types of fairness opinions included in material for shareholder meetings, finding that the right to vote can only be meaningful if it is a properly informed vote.
It might be tempting to conclude that the Divisional Court’s stance is an “activist” position, breaking with decades of judicial subservience to the business judgment of directors and a general reluctance by the courts to interfere in matters of business. But that is not what is really going on. Canadian courts have long since recognized that shareholder meetings are the forum in which shareholders exercise their business judgment. Further, the courts have for decades expressed concern about board or management entrenchment.
This decision gives further effect to a long-held view of the Canadian courts that their role is to referee the disputes, but not to take an active role in the disputes themselves.