Course:Business Organizations - LAW 459/Unit 6

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UNIT 6 (weeks 8 & 9): THE LEGAL ARCHITECTURE OF BUSINESS GOVERNANCE

Unit-6-360x265.jpg

Figure 6: A ballot sheet

ALT: A ballot with a pencil lying on top. The ballot contains two choices, “Bad Choice” or “Worse Choice”.

 

Source of image – Morguefile <a href="http://www.morguefile.com/archive/display/578770">http://www.morguefile.com/archive/display/578770</a> Image URI: <a href="http://mrg.bz/TX0sAT">http://mrg.bz/TX0sAT</a>

 

 

 

 

UNIT OVERVIEW:

In this unit the general structure of the board/ management-shareholder relationship and, in particular, how and to what extent management is subject to the direction of, and accountable to, the shareholders will be considered. These issues involve investigations of the nature of the corporate constitution and the internal architecture contemplated as the norm by corporate law. The extent to which, by contract or otherwise, that architecture may be modified will also be considered.

The student will also go into some detail about corporate directors, their qualifications, disqualifications, election and removal and their compensation; and the “principle” of “majority rule” as well as its limits.

 

UNIT OUTCOME:

By the end of this unit you will appreciate that in a sense we have come back to where we started in our look at company law. That is a reliance on the human personality to determine corporate outcomes. However you will comes to understand how the law imposes governance processes that seek to constrain, at least in theory, the excesses of how humans use corporate vehicles. In particular, you will be in a position to reflect on the roles and responsibilities of directors, shareholders and management on the life of a company. You will notice where those roles can overlap as well as the governance vulnerabilities that the doctrine of separate corporate personality inevitably imposes.

 

UNIT READINGS:

Casebook pages 95-105; 110-126 paying particular attention to the judgment in the Canadian Jorex case on CB pages103-105; 304-308; 311; 314-426; 429-432; 438 to 444; 494-502.

BCBCA sections 1(1), 2(b), 120-122, 124, 128, 130-138, 140-142 166-191, 259, 301; CBCA sections 2(1), 102, 105, 106, 107, 109-110, 114, 121-122, 137, 143, 146, 173; BC Partnership Act section 27(e); BC Securities Act sections 1(1), 161(1).

Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090 <a href="http://canlii.ca/t/fs46d">http://canlii.ca/t/fs46d</a>

Official Receiver v Wadge, Rapps & Hunt [2003] UKHL 49.

Chell v. The Queen, 2013 TCC 29 <a href="http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do">http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do</a>

You will also examine portions of the standard B.C. Articles of Incorporation.

You may also find it useful, as well, to look at the sort of documentation that a publicly listed corporation must send to its shareholders in connection with a meeting at which directors are to be elected.

For a recent example, see: “Information Circular” of Absolute Software Corporation

<a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf</a>

“Proxy” of Absolute Software <a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=13&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Cproxy.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=13&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Cproxy.pdf</a>

National Policy 58-101 <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

National Instrument 52-110  <a href="https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/">https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/</a>

Financial Post article dated April 25, 2013 “Shareholder proposals declining in Canada” <a href="http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1">http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1</a>

You will also be asked to work through in a semi-guided manner an exercise intended to provide some context to the mechanics of company meetings.  For this purpose some hypothetical facts are provided so that you can explore some of the procedural implications of those facts, and their variations.

 

 

TOPIC 1: Introduction TO GoVERNANCE

Please read pages 98 - 105 of the Casebook. You will see that the corporate governance model common in Canada is now virtually universal.

Some of its important elements:

  1. Day-to-day business decisions are generally within the exclusive authority of the directors/management. Shareholders do not have a role.

Contrast this to partnership. See section 27 (e) of the Partnership Act, RSBC 1996, c. 348 which provides:

27.  Subject to any agreement express or implied between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership must be determined by the following rules:…

(e) every partner may take part in the management of the partnership business;”

Thus absent contrary agreement every partner may take part in the management of the partnership business.  Entitlement flows from being a partner.  Shareholders do not have a comparable right simply because they are shareholders.

 

  1. The Board of Directors chooses and supervises executives and management. 

See BCBCA section 141(1):

141. (1) Subject to subsection (3) and to the memorandum and articles of a company, the directors may appoint officers and may specify their duties.”

There is a similar provision in CBCA section 121:

“121. Subject to the articles, the by-laws or any unanimous shareholder agreement,

(a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corporation, except powers to do anything referred to in <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec115subsec3_smooth">subsection 115(3)</a>;”

Note that the word “officer” is defined in section 2(1) of the CBCA as anyone appointed under section 121, and can include a number of specific offices – president, secretary, managing director etc.

 

  1. The role of shareholders is to elect directors and to remove them.  As well there are certain powers expressly reserved to them by statute, e.g., amendments to constitution, other “fundamental” changes such as approving sale of undertaking. See as partial examples BCBCA section 259; CBCA section 173 (reproduced below):

 

         “Alteration to articles

  1. (1) A company may resolve to alter its articles

(a) by the type of resolution specified by this Act,

(b) if this Act does not specify the type of resolution, by the type of resolution specified by the articles, or

(c) if neither this Act nor the articles specify the type of resolution, by a special resolution.

(2) A company may alter its articles to specify or change the majority of votes that is required to pass a special resolution, which majority must be at least 2/3 and not more than 3/4 of the votes cast on the resolution, if the shareholders resolve, by a special resolution, to make the alteration.

(3) A company may alter its articles to specify or change the majority of votes that is required for shareholders holding shares of a class or series of shares to pass a special separate resolution, which majority must be at least 2/3 and not more than 3/4 of the votes cast on the resolution, if

(a) the shareholders resolve, by a special resolution, to make the alteration, and

(b) shareholders holding shares of that class or series of shares consent by a special separate resolution of those shareholders…”

 

“PART XV

FUNDAMENTAL CHANGES

Amendment of articles

  1. (1) Subject to <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec176_smooth">sections 176</a>and <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec177_smooth">177</a>, the articles of a corporation may by special resolution be amended to

(a) change its name;

(b) change the province in which its registered office is situated;

(c) add, change or remove any restriction on the business or businesses that the corporation may carry on;

(d) change any maximum number of shares that the corporation is authorized to issue;

(e) create new classes of shares;

(f) reduce or increase its stated capital, if its stated capital is set out in the articles;

(g) change the designation of all or any of its shares, and add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued;

(h) change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series;

(i) divide a class of shares, whether issued or unissued, into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;

(j) authorize the directors to divide any class of unissued shares into series and fix the number of shares in each series and the rights, privileges, restrictions and conditions thereof;

(k) authorize the directors to change the rights, privileges, restrictions and conditions attached to unissued shares of any series;

(l) revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k);

(m) increase or decrease the number of directors or the minimum or maximum number of directors, subject to <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec107_smooth">sections 107</a> and<a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/#sec112_smooth"> 112</a>;

(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or

(o) add, change or remove any other provision that is permitted by this Act to be set out in the articles.

province to receive licences, permits, grants, payments or other benefits by reason of attaining or maintaining a specified level of Canadian ownership or control;

(d) the issue, transfer or ownership of shares of any class or series in order to assist the corporation to comply with any prescribed law.

(e) the issue, transfer or ownership of shares of any class or series to enable the corporation to be a registered labour-sponsored venture capital corporation under Part X.3 of the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html">Income Tax Act</a>.”

 

  1. What/who is a shareholder?

The definition in BCBCA section 1(1):

"shareholder"…means a person whose name is entered in a securities register of a company as a registered owner of a share of the company…” (emphasis added)

Oddly there is no comparable provision in CBCA but the essential proposition seems to effectively operate in the same way.

 

  1. Shareholders have a right to receive certain basic information relevant to the conduct of the corporation’s business by the directors – e.g. annual and, in the case of publicly traded corporations, quarterly financial information.

We will come back to this.

 

TOPIC 2: Division of powers between directors and shareholders – THE “BOARD CENTRIC” MODEL

For a preliminary introduction to subject please read page 102 of the Casebook.

BCBCA section 136(1) provides:

         Powers and functions of directors

136  (1) The directors of a company must, subject to this Act, the regulations and the memorandum and articles of the company, manage or supervise the management of the business and affairs of the company.”

 

The standard form BC Articles provide:

16.1 Powers of Management

The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.”

The CBCA deals with the duty to manage or supervise management

“102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”

The standard form Federal Bylaws provide:

4.1 Duties of Directors

The board must manage or supervise the management of the business and affairs of the Corporation.”

Please read Canadian Jorex Ltd. v. 477749 Alberta Ltd. (1991) 85 Alta. L.R. (2d) 313 at pages 103-105 of the Casebook.

The case determined that the directors of a federal corporation could cancel a special meeting called by them in advance of its scheduled date.

Canadian Jorex Ltd. argued that nothing in the company’s bylaws, the CBCA or any Unanimous Shareholders Agreement (USA) restricted the ability of the directors to cancel special meetings called by them.  Accordingly, given corporate model embraced by the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a>, they claimed to have this power. In particular, see s<a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html#sec102_smooth">ection 2(1) and 102</a>(1) of the CBCA:

“2. (1) “affairs” means the relationships among a corporation, its affiliates and the shareholders, directors and officers of such bodies corporate but does not include the business carried on by such bodies corporate;

  1. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”

The Petitioners argued that unless the <a href="http://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html">CBCA</a> or the company’s bylaws contained an express power to cancel meetings, such a power does not exist. Their position was that there are elaborate procedures prescribed for meetings and the only powers of the directors on the subject of meetings can be those expressly stipulated.

Under the CBCA corporate model - residual power to manage the corporation's affairs rests with the directors. This power is given by statute and is not derived from the delegation of powers by the shareholders. This must be contrasted with the British model of corporate law under which the directors enjoy only those powers delegated to them by the shareholders.

 

Now please read Northern Minerals Investment Corp. v. Mundoro Capital Inc. 2012 BCSC 1090 which flows from Canadian Jorex Ltd. v. 477749 Alberta Ltd. and can be found here: <a href="http://www.canlii.org/en/bc/bcsc/doc/2012/2012bcsc1090/2012bcsc1090.html">http://www.canlii.org/en/bc/bcsc/doc/2012/2012bcsc1090/2012bcsc1090.html</a>

The Facts in this case were that there was a notice of the Annual General Meeting to be held on June 26 of a BC Company,  “Mundoro Capital Inc.”. The “record date” was of the meeting was to be May 22.  The business of the Annual General Meeting was to receive financial statements, elect directors and reappoint auditors.

A June 11 press release announced that the directors of Mundoro Capital Inc. had adopted an “Advance Notice Policy” by which shareholders were required to submit nominations for directors had to do so by a deadline. Only such nominated persons would be eligible to be elected as directors. Others were not eligible for election.

A June 14 press release announced that the Annual General Meeting was being postponed to August 27, with the record date changed to July 27.  The business of the meeting was to also include shareholder approval of “Advance Notice Policy”.

Northern Minerals Investment Corp., a shareholder in Mundoro Capital Inc. sought to restrain the postponement or adjournment of the June 26 AGM,  and an order from the court preventing any change to the record date.

The shareholder, Northern Minerals Investment Corp., argued that under the BCCA directors have only those powers granted to them by the articles of the company. In other words, that directors’ powers must be expressly conferred and that directors under the British Columbia Business Corporations Act have no residual powers.  Because the scheme of the Canada Business Corporation Act is different by giving directors residual powers the decision in Canadian Jorex ltd. v. 477749 Alberta Ltd. would be inapplicable.

The company, Mundoro Capital Inc., argued that section 15.1 of the articles of Mundoro Capital Inc. specifically and expressly reserved to the directors of Mundoro Capital Inc. all residual powers. Those powers are those that are not required to be exercised by the shareholders either by the British Columbia Business Corporations Act or the articles of Mundoro Capital Inc. See refer to section 16.1 of the model articles to same effect provided in Unit 2  and also reproduced below:

 

16.1 Powers of Management

The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.”

Mr. Justice Punnett found the articles and Act, and the residual “basket clause” in the articles and the Act are to be read as was done the case in Canadian Jorex ltd. v. 477749 Alberta Ltd. and the case of

Oppenheimer & Co. v. United Grain Growers Ltd. (1997), 120 Man. R (2d) 281, 2 W.W.R. 9 (Q.B.). The court held that as a matter of contractual interpretation the directors’ powers flow from the Act and articles in which the directors are in fact granted residual powers. The court thus treats BC and CBCA models as substantially similarBoth are accordingly, essentially, board centric.

 

TOPIC 3: LIMITATIONS OF BOARD-CENTRIC MODEL AND RE-DESIGNING THE ARCHITECTURE  

  1. Close Corporations

In the realities of the corporate world the same people are shareholders, directors and officers.  In a corporation with few shareholders, they will tend to elect themselves as directors and, instead of the board choosing officers who may or may not be directors and shareholders, shareholder/directors will typically select themselves as officers.  So shareholders often view themselves as running the business as owners – just as with partners.

Which bridges directly to the question - do board’s serve any purpose?  Why do I need a board if I’m an owner/shareholder/officer?

Corporate law has largely given up on attempting to impose board centred model on close corporations except as a default rule. Some (very few) statutes allow shareholders in close corporations to dispense with a board. More common however, is to allow shareholders to make agreements which dictate who will be directors and what decisions the directors shall make.

 

  1. Publicly Held Corporations

Publicly traded corporations or those with a large number of shareholders.

The theoretical model: Power flows from the shareholders, who decide who will be directors, to directors, who choose officers and set policies, to the officers who implement the policies.

The reality: In practice, the officers, particularly the chief executive officer (CEO), commonly decide who will be the directors and what policies the corporation will pursue.

In relation to this please read the excerpt from “Mace, Directors: Myth and Reality” at pages 304-308 of the Casebook.

All of which really just begs the question: Why does the theoretical model and the reality diverge?

Three possible reasons:

(i) Shareholders in publicly held corporations are typically “rationally apathetic”; i.e. they tend to think it is not worthwhile to spend much time or effort worrying about control over the corporations they are shareholders in.

(ii) The cost of changing management is quite high, largely because support must be sought from numerous other scattered other shareholders. Moreover the rewards to changing management are quite low, since the other shareholders will reap most of the gains.  In the end it is usually just cheaper and easier to sell ones shares.

(iii) Incumbent shareholders, directors and officers effectively control the “voting machinery”. For example, consider:

(a) the “Advance Notice Policy” in Northern Minerals Investment Corp. v. Mundoro Capital Inc.

(b) that the company bears costs of management’s legal and other fees – while challengers must bear own costs (unless they win);

Accordingly there is a significant financial disincentive for anyone to challenge the incumbent board.

(iv) There is also one other reason. Just as is the case in Close Corporations, even in large public traded companies there is often at least one person who is at the same time a shareholder, a director and an officer. That person is the C.E.O – fact that may be interpreted as either a cause for, or a reaction to, the “rock star” status that CEO’s have often been cloaked with in the present corporate age. The cultish status of the powerful superstar CEO is a significant counterweight to the theoretical model where the locus of the power of appointment is intended to be in the shareholders. Arguably CEO’s in public companies have more real world impact on their shareholders, then their shareholders would have on them (though most CEO’s would conveniently deny that suggestion).

 

TOPIC 4: Re-designing the architecture OF GOVERNANCE

Read BCBCA section 137 (1):

the articles of a company may transfer, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the company to one or more other persons.” (Emphasis added).

What is the effect of such a provision?  See 137 (2) of the BCBCA states:

 

“(2) If the whole or any part of the powers of the directors is transferred in the manner contemplated by subsection (1),

(a) the persons to whom those powers are transferred have all the rights, powers, duties and liabilities of the directors of the company, whether arising under this Act or otherwise, in relation to and to the extent of the transfer, including any defences available to the directors, and

(b) the directors are relieved of their rights, powers, duties and liabilities to the same extent.”

 

Blog Activity 6.2:

Please consider the following two questions:

  1. Why do you think section 137(2)(b) of the BCBCA is necessary and worded the way it is? 
  2. What would be the effect of an agreement to transfer powers of the directors to manage or supervise the management of the business to one or more other persons if that agreement was not included in articles?

Please blog your views on these questions and your reasons in less than one page under the heading “Transferring Directors Powers”.

 

 

Turning now to the similar provisions of the CBCA:

  1. “146.(1) An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid.

(2) If a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement…

(5) To the extent that a unanimous shareholder agreement restricts the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, parties to the unanimous shareholder agreement who are given that power to manage or supervise the management of the business and affairs of the corporation have all the rights, powers, duties and liabilities of a director of the corporation, whether they arise under this Act or otherwise, including any defences available to the directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under section 119, to the same extent.

(6) Nothing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a unanimous shareholder agreement.” (Emphasis added).

Note in particular that under the CBCA there is no requirement that the articles of a company may transfer” as under section 137 (1) of the BCBCA. Rather, the CBCA allows that a “lawful written agreement among all the shareholders” will do the trick.

 

 

TOPIC 5: Directors

 

Before starting into this topic please read the following short Huffington Post article: “Venture Capital Firm Hires Artificial Intelligence To Its Board Of Directors” at <a href="http://www.huffingtonpost.co.uk/2014/05/15/artificial-intelligence-board-directors_n_5329370.html">http://www.huffingtonpost.co.uk/2014/05/15/artificial-intelligence-board-directors_n_5329370.html</a>

Please reflect on whether you think this is a good idea, as well as why or why not? Armed with those thoughts lets tackle the legal rules, procedures and limitations respecting Directors.

 

  1. Must a Company Have Directors?

BCBCA s. 120; CBCA 102 (2)

Public/distributing company (publicly distributed or traded) have to have at least 3 directors; others only1.

Why must “public” companies have at least 3 directors?

 

  1. What is a Director?

Statutory definitions not helpful:

CBCA section 2 (1):  a person occupying the position of director by whatever name called”. 

BCBCA Section 1 (1):  “an individual who is a member of the board of directors of the company as a result of having been elected or appointed to that position”. 

 

Are we assisted in our understanding by either BCBCA 136  (1) or CBCA 102 (1) which set out that directors “must…manage or supervise the management of the business and affairs of the company” (BCBCA); the directors shall manage, or supervise the management of, the business and affairs of a corporation” (CBCA)? Probably not.

BCBCA s. 138 (1) provides:

 

138.  (1) Without limiting section 137 but subject to subsection (2) of this section, if a person who is not a director of a company performs functions of a director of the company, sections 142, 231, 234, 251, 335, 347 and 354 and Divisions 3 to 5 of this Part apply to that person

(a) as if that person were a director of the company, and

(b) in relation to, and only to the extent of, those functions.”

 

If a person who is not a director of a company performs functions of a director of the company, sections 142, 231, 234, 251, 335, 347 and 354 and Divisions 3 to 5 of this Part apply to that person

(a) as if that person were a director of the company, and

(b) in relation to, and only to the extent of, those functions”

Does this add anything to the definition in section 1(1)?

It probably does because of the limitation in the definition to persons elected or appointed.

 

  1. Categories or Kinds of Directors

There are many different types of directors. They can be characterised either:

(I)      by reference to some legal status, e.g. de jure, de facto, nominee, shadow; or

(II)     reference to function e.g. inside, outside, executive, non-executive.

Exact name or title is actually immaterial. They are all directors.

With respect to the legal status of directors consider the following terms:

(a) De jure director

A “de jure” director is one who has been elected or appointed by a proper procedure. In comparison consider those performing the functions of directors per BCBCA s. 138(1).

In Chell v. The Queen, 2013 TCC 29 (<a href="http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do">http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/31073/index.do</a>) the following definition was provided by the court:

 

“A de jure director is an individual who has been appointed as such pursuant to the corporate law of the jurisdiction in which the corporation was created or continued, as the case may be.”

(b) De facto director

A de facto director is one who has not been legally appointed but acts as if they have been or assumes the position. A de facto director openly acts as though validly appointed despite a lack of authority and right to act. A director whose appointment is irregular falls into this category; also a person who is not appointed at all but is held out as a director.

(c) Shadow director

In British Columbia Securities Commission v. Alexander, 2013 BCCA 111 per Madam Justice D. Smith:

 

“The legal test for a finding that an individual acted as a de facto director or officer is “’whether, under the particular circumstances, the alleged director is an integral part of the mind and management of the company, taking into account the entirety of the alleged director’s involvement within the context of the business activities at issue.  In Re IMAGIN Diagnostic Centres Inc., 2010 LNONOSC 632, the Ontario Securities Commission said (at para. 138) that a de facto director is one “...who maintains control over the affairs of the company and exercises the powers of a director and/or officer...”.

This suggests a slightly different understanding of “de facto directors”, generally referred to in England as “shadow directors” – statutorily defined as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act.”

A shadow director is different from “de facto directors” because they do not purport to act as directors. On the contrary, they claim not to be directors and so seek to hide behind those who are. In that sense, they “lurk in the shadows". They are persons "in accordance with whose directions or instructions the directors of the company are accustomed to act”. 

(d) Nominee director

This is someone who represents the interests of a “stakeholder”.

For a discussion of the duties of a nominee director, please read Deluce Holdings Inc. v. Air Canada, 98 D.L.R. (4th) 509 (1992) at pages 494-502 of the Casebook.

In Deluce Holdings v. Air Canada, the conduct of Nominee Directors was found to be unacceptable.  The facts were that Air Ontario was owned 75% by Air Canada and 25% by Deluce Holdings.  Air Canada had seven nominee directors on the board of directors of Air Ontario and Deluce Holdings had 3 nominee directors on that board.  When Air Canada acquired an interest in Air Ontario an Agreement had been entered into which included the employment of Mr. Deluce who was the owner of Deluce Holdings, which itself was the previous owner of Air Ontario.  The agreement also provided that on the expiration of Mr. Deluce’s employment contract, Air Canada would be granted an option to purchase the remaining shares of Air Ontario. The Board of Air Ontario, comprised as mentioned of a majority of Air Canada nominee directors terminated Mr. Deluce’s employment contract and Air Canada exercised its option to purchase the remaining shares. It is important to note that at some point before the dismissal of Mr. Deluce, Air Canada changed it’s internal policies determining it would henceforth would fully own without minority shareholders all regional carriers including Air Ontario.

The court found that Air Canada’s nominees were carrying out Air Canada’s agenda. Interestingly there was scant reference to what might have been in the actual best interests of Air Ontario. Accordingly the law has become reasonably clear.  A nominee director must always put the best interest of the company they are a director of first, ahead of the company that may have nominated them.  Notwithstanding this constraint, you should probably not expect that the practice of placing nominee directors on boards would go away any time soon.

 

(e)     Alternate director

Here is what the standard form BC articles says about “Alternate Directors”:

15.1 Appointment of Alternate Director

Any director (an “appointor”) may by notice in writing received by the Company appoint any person (an “appointee”) who is qualified to act as a director to be his or her alternate to act in his or her place at meetings of the directors or committees of the directors at which the appointor is not present unless (in the case of an appointee who is not a director) the directors have reasonably disapproved the appointment of such person as an alternate director and have given notice to that effect to his or her appointor within a reasonable time after the notice of appointment is received by the Company.”

 

  1. Qualifications and Disqualifications of Directors

In general there are few prescribed qualifications to be a director. It is felt that the shareholders are best equipped to decide who ought to be a director.

(I)  Individuals and corporations

          BCBCA 124  (1):   “an individual who is qualified” to act.

          CBCA 105. (1):  “person who is not an individual” is disqualified.

Blog Activity 6.3:

Consider whether a corporation can be a “Shadow Director” of another corporation? Please blog your views on these questions and your reasons in less than one page under the heading “Shadow Directors”.

 

(II) Qualifications – residency

CBCA section 105 (3) requires that at least 25% of a company’s directors must be “resident Canadians” (defined in section 2 (1)) though in certain prescribed businesses a majority of resident Canadians is required.

There used to be similar requirement in the BCBCA, but no longer.

Note that under CBCA s. 114, subject to certain exceptions, directors may not transact business unless at least 25% or a majority, as the case may be, of the directors present satisfy the residency requirement.

What is the justification for residency requirements? Consider how you feel about them.

Avoiding residency requirements:

  1. Incorporate in, say, B.C., which has none.
  2. Adopt USA - transfer directors' duties to manage and supervise the management of the corporation to shareholders. Number of Canadians on the board becomes irrelevant.

 

(III) Qualifications – competence

Corporate legislation is generally silent on experience or competence that must be satisfied as a condition of eligibility to become a director.

Why would this be (especially given the many corporate scandals witnessed over the years)?

There are several possible answers. When it comes to publicly traded corporations the stock exchange must be satisfied that corporate management, including board of directors, have adequate experience and technical expertise relevant to the company's business and industry as well as adequate public company experience.

There is also the training available through the Institute of Directors that has become a prestigious thing to do and in some cases is a practical requirement for anyone aspiring to be a “professional” director. See: <a href="http://www.iod.com">http://www.iod.com</a> for more information.

 

The notion of competence must obviously be somehow connected to the statutory duty of care and skill…doesn’t it? 

BCBCA section 142 provides: 

142.  (1) A director or officer of a company, when exercising the powers and performing the functions of a director or officer of the company, as the case may be, must

 (b) exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances,…”

 

Note that the CBCA 122 is nearly identical in its wording:

“122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall

 (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

Emphasis added. Underling added to show subtle differences in wording. Can you envision any situations where these differences might be relevant?

The implications of the standard of care, diligence and skill are discussed in the cases of Soper v. Canada (we will get there shortly) & Peoples Department Stores Inc. v. Wise (the “three Wise brothers” case where we have already visited) at pages 319-330 of the Casebook.

 

(IV) Qualifications – independence.

(a) Selection

For publicly traded companies, directors are to be selected by a nominating committee composed of non-management directors. In 1994, a committee sponsored by the Toronto Stock Exchange published a report entitled Where Were the Directors?” (also known as the “Dey Report”). The Dey Report contained 14 recommendations relating to corporate governance, including the following:

Guideline 4

The board of directors of every corporation should appoint a committee of directors composed exclusively of outside, i.e., non-management, directors, a majority of whom are unrelated directors, with the responsibility for proposing to the full board new nominees to the board and for assessing directors on an ongoing basis.

Guideline 5

Every board of directors should implement a process to be carried out by the nominating committee or other appropriate committee, for assessing the effectiveness of the board as a whole, the committees of the board and the contribution of individual directors.

Guideline 6

Every corporation, as an integral element of the process for appointing new directors, should provide an orientation and education program for new recruits to the board.”

 

Also relevant is National Policy 58-101 of the Ontario Securities Commission which is referred to at page 316 of the Casebook and which can be found here: <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

 

(b) Credentials

The securities regulators recommend publicly traded companies have a certain number of independent directors. Please read pages 307-308 of the Casebook where there is a discussion of the relevant requirements can be found.

National Instrument 58-101 “Disclosure Of Corporate Governance Practices” defines “Independence” as follows:

 

1.2 Meaning of Independence --

(1) In a jurisdiction other than British Columbia, a director is independent if he or she would be independent within the meaning of section 1.4 of NI 52-110.

(2) In British Columbia, a director is independent if

(a) a reasonable person with knowledge of all the relevant circumstances would conclude that the director is independent of management of the issuer and of any significant security holder, or

(b) the issuer is a reporting issuer in a jurisdiction other than British Columbia, and the director is independent under subsection (1).”

 

Section 1.4 of National Instrument 52-110 provides:

 

1.4 Meaning of Independence

 

(1) An audit committee member is independent if he or she has no direct or indirect material relationship with the issuer.

 

(2) For the purposes of subsection (1), a “material relationship” is a relationship which could, in the view of the issuer's board of directors, be reasonably expected to interfere with the exercise of a member's independent judgement.

 

(3) Despite subsection (2), the following individuals are considered to have a material relationship with an issuer:

 

(a) an individual who is, or has been within the last three years, an employee or executive officer of the issuer;

 

(b) an individual whose immediate family member is, or has been within the last three years, an executive officer of the issuer;

 

(c) an individual who:

 

(i) is a partner of a firm that is the issuer's internal or external auditor,

(ii) is an employee of that firm, or

(iii) was within the last three years a partner or employee of that firm

 

and personally worked on the issuer's audit within that time;

 

(d) an individual whose spouse, minor child or stepchild, or child or stepchild who shares a home with the individual:

 

(i) is a partner of a firm that is the issuer's internal or external auditor,-5-

(ii) is an employee of that firm and participates in its audit, assurance or tax compliance (but not tax planning) practice, or

(iii) was within the last three years a partner or employee of that firm

 

and personally worked on the issuer's audit within that time;

 

(e) an individual who, or whose immediate family member, is or has been within the last three years, an executive officer of an entity if any of the issuer's current executive officers serves or served at that same time on the entity's compensation committee; and

 

(f) an individual who received, or whose immediate family member who is employed as an executive officer of the issuer received, more than $75,000 in direct compensation from the issuer during any 12 month period within the last three years.

 

(4) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because

 

(a) he or she had a relationship identified in subsection (3) if that relationship ended before March 30, 2004; or

 

(b) he or she had a relationship identified in subsection (3) by virtue of subsection (8) if that relationship ended before June 30, 2005.

 

(5) For the purposes of clauses (3)(c) and (3)(d), a partner does not include a fixed income partner whose interest in the firm that is the internal or external auditor is limited to the receipt of fixed amounts of compensation (including deferred compensation) for prior service with that firm if the compensation is not contingent in any way on continued service.

 

(6) For the purposes of clause (3)(f), direct compensation does not include:

 

(a) remuneration for acting as a member of the board of directors or of any board committee of the issuer, and

 

(b) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the issuer if the compensation is not contingent in any way on continued service.

 

(7) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because the individual or his or her immediate family member

 

(a) has previously acted as an interim chief executive officer of the issuer, or

 

(b) acts, or has previously acted, as a chair or vice-chair of the board of directors or of any board committee of the issuer on a part-time basis.

 

(8) For the purpose of section 1.4, an issuer includes a subsidiary entity of the issuer and a parent of the issuer.”

 

 

National Instrument 58-101 can be found here: <a href="http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp">http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20050617_58-101_disc-corp-gov-pract.jsp</a>

National Instrument 52-110 can be found here: <a href="https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/">https://www.bcsc.bc.ca/Securities_Law/Policies/Policy5/PDF/52-110_Audit_Committees__NI_/</a>

 

Blog Activity 6.4:

In short all of this tends to come down to a meaning of “independence” which translates into there being no direct or indirect material relationship with the issuer. That is no relationship that could, in the view of the board, be reasonably expected to interfere with the exercise of a member's independent judgement. A whole series of relationships that are deemed material e.g. family relationships, are specifically proscribed.

Note that these requirements do not apply to private companies.

Please read the short paragraph on “Qualifications: (a) Minimum Standards” at page 311 of the Casebook. What in your view are the justifications for these “independence” requirements? If justified why should they not also apply to private companies?

Please blog your views on these questions and your reasons in less than one page under the heading “Why Independent Directors?”

 

(V)    Disqualifications

BCBCA section 124 (2) and CBCA section 105 (1) set out who are those persons disqualified to act as a director.

Note BCBCA 124 (2) (d) which disqualifies a person: convicted in or out of British Columbia of an offence in connection with the promotion, formation or management of a corporation or unincorporated business, or of an offence involving fraud, unless...”

Note in particular that there is nothing comparable in CBCA. Why not?

Section 161 (1)(d) of the BC Securities Act [RSBC 1996] CHAPTER 418 – BCSC provides:

161.  (1) If the commission or the executive director considers it to be in the public interest, the commission or the executive director, after a hearing, may order one or more of the following:…

(d) that a person

(i)   resign any position that the person holds as a director or officer of an issuer or registrant,

(ii)   is prohibited from becoming or acting as a director or officer of any issuer or registrant,

(iii)   is prohibited from becoming or acting as a registrant or promoter,

(iv)   is prohibited from acting in a management or consultative capacity in connection with activities in the securities market,…”

 

 

“Issuer” is defined in section 1(1) of the BC Securities Act:

"issuer" means a person who

(a) has a security outstanding,

(b) is issuing a security, or

(c) proposes to issue a security;”

Note that this definition of “issuer” in fact applies to any corporation, not just “public” companies who trade their shares on stock exchanges. The BC Securities Commission has forced the resignation of individuals as directors even of companies whose securities are not traded in the public markets, but generally only where they have been guilty of some misconduct in connection with the affairs of publicly traded companies.  There is no known case of forcing a director of a purely private company to resign, absent some connection with the affairs of a publicly traded company.

Is this ok?

By way of contrast, the UK Directors Disqualification Act, 1986 does permit disqualification of a director of a purely private company, even absent a public company connection.  Grounds include conduct as a director  . . . makes him unfit to be concerned in the management of a company”.  There is no comparable provision in any Canadian legislation.

 

TOPIC 6: Becoming a director – The PROCESS OF election and appointment

 

  1. General

Please read pages 314-316 of the Casebook; BCBCA sections 121 to 122, 130 to 135; and CBCA sections 106 and 107. These are all largely technical provisions - detailed familiarity not required.

(I) The Beginning of Directorship:

One becomes a member of board as a result of having been elected or appointed.

 

BCBCA section 122 (1): “Directors…must be elected or appointed in accordance with this Act and with the memorandum and articles of the company.”

 

(II) The End of Directorship:

BCBCA section 128:

“128.  (1) A director ceases to hold office when

(a) the term of office of that director expires in accordance with

(i)   this Act or the memorandum or articles, or

(ii)   the terms of his or her election or appointment,

(b) the director dies or resigns, or

(c) the director is removed in accordance with subsection (3) or (4).” (Emphasis added)

 

As a general matter, directors are elected at a meeting of shareholders.  In private companies, the election of directors is either identified in notice of the meeting or nominations are called for and then the election proceeds. In public companies, the election of directors is identified in the notice of meeting and accompanying information circular.

 

(III) Extended and Staggered Terms:

BCBCA section 128 (1) (a) permits a term of more than one year, so that annual election of that director is not required.  Extended terms are thus permissible without any maximum.  CBCA section 106 (3) limits each term a director can serve to a maximum of 3 years per term (although they may of course be re-elected to additional terms).  Longer terms are not common in private companies where annual election of directors tends to be the more common practice. The Act also permits staggered terms – i.e. where not all directors resign at the same time. This is seen as enhancing the stability of boards.  Again this is not an especially common in private companies.

In case of publicly listed companies, the TSX now requires each director to stand for election annually.

 

(IV) Actual Election Process – how voting takes place:

In the case of private companies, generally straightforward because rarely a contest.

In publicly traded companies, plurality or slate voting was common until recently.

(a)     Slate voting - Shareholders may vote for all of the directors nominated by management (i.e. a slate of directors), but not for individual directors.

This obstructs shareholders from voting against individual directors for performance issues such as poor board attendance or poor decision-making on a specific board committee. The only option in such cases is to vote against the whole board, or conduct a costly proxy fight.

(b)     Plurality voting

You vote for or withhold vote.  So: 5 candidates:

<tbody> </tbody>
  For Withhold
A 60 40
B 55 30
C 51 40
D 36 30
E 36 45

Accordingly directors can be elected without receiving a majority of shareholder votes. Indeed, a single vote in favour of a director nominee is all that is required for election. Where director nominees are also shareholders, they can be elected on the basis of their own votes.

“Plurality voting” prevents shareholders from voting against specific under-performing directors.

The TSX prohibits slate voting.  Voting on director candidates should be conducted on an individual basis.

The TSX mandates majority voting. Any nominee for director who receives a greater number of votes ‘withheld' from than ‘for' their election, would be required to tender their resignation as a director. The remaining board members would, absent unusual circumstances, generally accept such resignation.

So in the above noted scenario, E would be required to tender their resignation.

(c)     Cumulative voting

Please read the middle paragraph of page 315 of the Casebook; the middle paragraph of page 441 of the Casebook; and CBCA section 107.

Generally speaking a shareholder only has one vote per share and may not give more than the one vote per share you to any single nominee.  For example, if there are 4 board positions and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 shares for any one candidate (giving you 2,000 votes total - 500 votes per each of the four candidates). “Cumulative Voting” allows a shareholder to cast all of their votes for a single nominee. Accordingly you could choose to vote all of your (cumulative) 2,000 votes (500 shares x 4 board positions) for one candidate, or 1,000 each to two candidates, or otherwise divide your votes whichever way you want.

Intended to allow minority shareholders to elect some directors in rough proportion to voting strength.

CBCA section 107 provides:

 

Cumulative voting

  1. Where the articles provide for cumulative voting,

(a) the articles shall require a fixed number and not a minimum and maximum number of directors;

(b) each shareholder entitled to vote at an election of directors has the right to cast a number of votes equal to the number of votes attached to the shares held by the shareholder multiplied by the number of directors to be elected, and may cast all of those votes in favour of one candidate or distribute them among the candidates in any manner;

(c) a separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting two or more persons to be elected by a single resolution;

(d) if a shareholder has voted for more than one candidate without specifying the distribution of votes, the shareholder is deemed to have distributed the votes equally among those candidates;

(e) if the number of candidates nominated for director exceeds the number of positions to be filled, the candidates who receive the least number of votes shall be eliminated until the number of candidates remaining equals the number of positions to be filled;

(f) each director ceases to hold office at the close of the first annual meeting of shareholders following the director’s election;

(g) a director may be removed from office only if the number of votes cast in favour of the director’s removal is greater than the product of the number of directors required by the articles and the number of votes cast against the motion; and

(h) the number of directors required by the articles may be decreased only if the votes cast in favour of the motion to decrease the number of directors is greater than the product of the number of directors required by the articles and the number of votes cast against the motion.”

 

  1. Calling and Convening Meetings
  2. With respect to notices of meetings generally see BCBCA section 169 (1).

The “company” must send notice of date, time and location. Who is the company for this purpose? Compare to the scenario we encountered earlier, for example in the case of Canadian Jorex Ltd. v. 477749 Alberta Ltd.

  1. Location, date and time of the meeting must be specified in accordance with BCBCA section 169 (1). BCBCA section 166 (a) provides that the meeting must take place in British Columbia, unless certain conditions met.

As an example what if the meeting were called for “Sunday, 11.30 p.m. at xxx, Atlin B.C.” Is that a problem in your mind? What if the company in question is a massive public company like “Teck Corporation” and they decide to hold their Annual General Meeting in Logan Lake B.C. (which is in the southern interior of British Columbia and not necessarily terribly convenient to many of their shareholders?

III. Business to be transacted?  The directors also ultimately control this though it is often planned by management. All of which begs the question of what exactly are the opportunities for “dissidents”?

Recall the “Advance Notice Policy” which was upheld in the case of Northern Minerals Investment Corp. v. Mundoro Capital Inc., which we examined earlier. Any person proposing to nominate a director for election at a meeting of shareholders must provide the company with advance notice (typically between 30-65 days) of, and prescribed details concerning, any such proposed nominee.  Unless proper notice is given to the company any such proposed nominee is ineligible for election at the shareholders meeting. This sort of policy (assuming it is either in the articles of the company or is ratified by the shareholders) eliminates the risk of an ambush proxy contest.

There are other opportunities for shareholders. For example meetings can be requisitioned pursuant to BCBCA section 167 (CBCA section 143). Shareholders holding at least 5% of the issued voting shares may requisition a meeting for the purpose of transacting any business that may be transacted at a general meeting.

Consider the scope of this power. What does it mean in practical terms?

If shareholders holding at least 5% of the issued voting shares do call such a meeting, the directors of the company must give notice of a meeting to be held within 4 months of date of requisition to be held for the specified purpose.

There are exceptions:

(a) if they have called a general meeting to be held after date of requisition and have given notice thereof;

(b) if substantially the same business was submitted to shareholders at a meeting held not more than 5 years ago and received less than 3% of the vote if it was tried once, less than 6% of the vote of it was tried twice, and less than 10% of the vote if tried 3 times.

(c) the business stated in the requisition does not relate in a significant way to the business or affairs of the company,

(d) it clearly appears that the primary purpose for the requisition is (i)  securing publicity, or (ii)  enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders,

(e) the business stated in the requisition has already been substantially implemented.

If none of these conditions are fulfilled the directors must call a meeting (to be held within 4 months) within 21 days after receipt of requisition and if they do not the requisitioning shareholders, or any one or more of them holding, in the aggregate, more than 1/40 of the issued shares of the company that carry the right to vote at general meetings, may do so.  If this happens they may be reimbursed for their expenses unless the shareholders by an ordinary resolution decide otherwise.

The full text of BCBCA section 167 follows:

 

“Requisitions for general meetings

  1. (1) Shareholders referred to in subsection (2) may requisition a general meeting for the purpose of transacting any business that may be transacted at a general meeting.

(2) A requisition under this section may be made by shareholders who, at the date on which the requisition is received by the company, hold in the aggregate at least 1/20 of the issued shares of the company that carry the right to vote at general meetings.

 

(3) A requisition under this section

(a) must, in 1 000 words or less, state the business to be transacted at the meeting, including any special resolution or exceptional resolution to be submitted to the meeting,

(b) must be signed by, and include the names and mailing addresses of, all of the requisitioning shareholders,

(c) may be made in a single record or may consist of several records, in similar form and content, each of which is signed by one or more of the requisitioning shareholders, and

(d) must be delivered to the delivery address of, or mailed by registered mail to the mailing address of, the registered office of the company.

 

(4) If a requisition under this section consists of more than one record, the requisition is received by the company on the first date by which the company has received requisition records that comply with subsection (3) from shareholders who, in the aggregate, hold at least the number of shares necessary to qualify under subsection (2).

 

(5) On receiving a requisition that complies with subsections (2) and (3), the directors must, regardless of the memorandum or articles, call a general meeting to be held not more than 4 months after the date on which the requisition is received by the company to transact the business stated in the requisition and must, subject to subsection (7),

(a) send notice of the date, time and location of that meeting at least the prescribed number of days, but not more than 4 months, before the meeting

(i)   to each shareholder entitled to attend the meeting, and

(ii)   to each director, and

(b) send, in accordance with subsection (6), to the persons entitled to notice of the meeting, the text of the requisition referred to in subsection (3) (a).

 

(6) The text referred to in subsection (5) (b) must be sent

(a) in, or within the time set for the sending of, the notice of the requisitioned meeting, or

(b) in the company's information circular or equivalent, if any, sent in respect of the requisitioned meeting.

 

(7) The directors need not comply with subsection (5) if

(a) the directors have called a general meeting to be held after the date on which the requisition is received by the company and have sent notice of that meeting in accordance with section 169,

(b) substantially the same business was submitted to shareholders to be transacted at a general meeting that was held not more than the prescribed period before the receipt of the requisition, and any resolution to transact that business at that earlier meeting did not receive the prescribed amount of support,

(c) it clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company,

(d) it clearly appears that the primary purpose for the requisition is

(i)   securing publicity, or

(ii)   enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders,

(e) the business stated in the requisition has already been substantially implemented,

(f) the business stated in the requisition, if implemented, would cause the company to commit an offence, or

(g) the requisition deals with matters beyond the company's power to implement.

 

(8) If the directors do not, within 21 days after the date on which the requisition is received by the company, send notice of a general meeting in accordance with subsection (5) of this section, the requisitioning shareholders, or any one or more of them holding, in the aggregate, more than 1/40 of the issued shares of the company that carry the right to vote at general meetings, may send notice of a general meeting to be held to transact the business stated in the requisition.

 

(9) A general meeting called, under subsection (8), by the requisitioning shareholders must

(a) be called in accordance with subsection (5),

(b) be held within 4 months after the date on which the requisition is received by the company, and

(c) as nearly as possible, be conducted in the same manner as a general meeting called by the directors.

 

(10) Unless the shareholders resolve otherwise by an ordinary resolution at the general meeting called, under subsection (8), by the requisitioning shareholders, the company must reimburse the requisitioning shareholders for the expenses actually and reasonably incurred by them in requisitioning, calling and holding that meeting.”

 

 

  1. Shareholder Proposals

 

Please read pages 439-440 of the Casebook; BCBCA sections 187-191; and CBCA section 137.

A qualified shareholder may send the company a notice setting out a matter that they wish to have considered at the next AGM. A “qualified shareholder” is one who holds a voting share and has held it for at least two years, unless within the preceding two years they had failed to present an earlier shareholder proposal of some kind  (in other words – if they previously were a “no show” after sending a notice to the company).

To be valid, a proposal must be supported by qualified shareholders (i.e. those meeting the same 2 year test) holding at least 1% of the issued voting shares or shares with a “fair market value” of at least $2000. A brief written explanatory statement may support the shareholders proposal.

 

If a proposal is received the company must send it, and any explanatory statement as part of the Annual General Meeting materials and must allow the shareholder to present it at the meeting.

 

The obligation to send proposal to shareholders not applicable if the  Annual General Meeting has already been called; if substantially the same proposal was submitted within the preceding two years and did not achieve the support thresholds applicable in relation to requisitions; or if one of the other requisition exclusions applies.

 

Check out the Financial Post article dated April 25, 2013 “Shareholder proposals declining in Canada” <a href="http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1">http://business.financialpost.com/2013/04/25/shareholder-proposals-trending-downwards/?__federated=1</a>

<a href="http://www.tumblr.com/share/link?url=http%3A%2F%2Fbusiness.financialpost.com%2F2013%2F04%2F25%2Fshareholder-proposals-trending-downwards%2F&name=Shareholder+proposals+declining+in+Canada&description=According+to+Kingsdale+Shareholders+Services+Inc.%2C+the+downward+trend+in+the+number+of+shareholders%27+proposals+over+the+past+few+years+is+continuing">Tumblr</a>

 

  1. Executive Compensation

 

Please read pages 317-318 of the casebook.

 

The concept of “say on pay” is a non-binding, advisory vote by shareholders “for” or “against” the compensation paid to executives as described in a proxy circular.  Shareholders can express approval or disapproval of a company’s compensation policies. Mandatory “say on pay” voting has been implemented in various forms in numerous countries.

However “say on pay” is not mandatory in Canada. By mid-2013, 129 Canadian companies had voluntarily added annual say on pay resolutions to their AGM proxies, either as a matter of good governance or in response to shareholder proposals.

 

See “Say-on-pay movement on the rise in Canada, but is it changing anything?”

<a href="http://business.financialpost.com/2014/03/12/say-on-pay-movement-on-the-rise-in-canada-but-is-it-changing-anything/">http://business.financialpost.com/2014/03/12/say-on-pay-movement-on-the-rise-in-canada-but-is-it-changing-anything/</a>

 

 

  1. Removing Directors

Please read BCBCA section 128(3) and CBCA sections 109 and 110.

BCBCA 128 (3) allows for the removal of directors by special resolution, or as specified in the memorandum or articles of the company, provided that a director may be removed by a resolution of the shareholders entitled to vote at general meetings passed by less than a special majority or may be removed by some other method, by the resolution or method specified in the memorandum or articles of the company.

 

BCBCA 128 (4) provides comparable provisions for classes of shareholders holding shares of a class or series of shares of a company removing those directors whom they have the exclusive right to elect or appoint. These would be resolutions of a specific class of shareholders depending on the specific type of shares they own (as opposed to all of the shareholders).

Note that in these sections of the legislation no provision is made for a right to attend or a right to circulate a statement.

 

  1. Quorum and Enhanced Quorum By-Laws

What is quorum for a shareholders meeting? The normal quorum requirements are set out in BCBCA section 172.

Quorum for a shareholders meeting will be established by having the number of shareholders present established by the Memorandum and Articles of the company or, if no quorum is set out by the Memorandum and Articles of the company, then two shareholders present in person or by proxy regardless of number of shares represented will establish quorum for a shareholders meeting.

Paragraph 11.3 of the standard form BC articles establishes quorum if there are present at the shareholders meeting two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting. The same mechanic is provided in paragraph 8.5 of the standard form of Federal Bylaws.

An “Enhanced Quorum” is where the articles or bylaws of a company require that a minimum of two shareholders holding at least a majority of the issued and outstanding common shares are required to be present or represented by proxy at any meeting at which a shareholder will be seeking to replace half or more of the board of directors, before the meeting can be held and business validly transacted.

 

 

TOPIC 7: shareholder meetings and the election and removal of directorS: A CONTEXTUAL EXERCISE

What follows is an exercise for you to work through in a semi-guided manner that is intended to provide some context to the mechanics of company meetings.  For this purpose some hypothetical facts are provided so that you can explore some of the procedural implications of those facts.  In order to expand the possibilities various changes can be made to the facts as you work through them.

First we deal with “private” companies; and then with publicly traded companies.  While the core corporate mechanisms involved in each case are substantially similar, in the case of publicly traded companies they have been significantly elaborated through the intervention of provincial securities regulators and the stock exchanges.

  1. “Private” Companies

Some assumed facts

At its last annual general meeting held about six months ago the 8 shareholders of Longwood Industries Inc., a “private” company incorporated under the British Columbia Business Corporations Act, unanimously adopted a resolution fixing the number of directors at 3 and elected 3 individuals, all shareholders, to the board.

The 3 directors have decided that it would be to the company’s advantage to increase the number of directors to 4 and, sooner rather than later, to add John Dewar, who is not a shareholder, to the board. He is qualified to be a director and agrees to become one.  The five non-director shareholders are generally supportive of the board of directors and have indicated that they favour Dewar’s appointment.

The question is: what are the appropriate mechanisms to achieve the desired result.

  1. Appointment by the Directors

Since everyone seems supportive of Dewar’s early appointment, the most expeditious way of proceeding would be for the 3 existing directors to appoint him a director.  Section 122 of the BCBCA allows this.   The directors might proceed in one of 3 ways:

  • Hold a meeting, either in person or, as permitted by BCBCA section 140 (1) (a), by telephone, at which Dewar is appointed.  The appointment would be recorded in the minutes of the meeting.  There is no legal requirement that all directors be present at a meeting of this kind
  • By a resolution consented to in writing by each of the directors, pursuant to section 140 (3)

Suppose, however, that contrary to what has been assumed above, one of the directors, say X, objects to the appointment of Dewar so that:

  • A consent resolution under section 140 (3) will not work, and
  • For practical reasons, (e.g. that the 2 directors who favor Dewar’s appointment are not comfortable imposing their will on X, or because two of the directors are unreachable so that neither an in person nor a telephone meeting is possible).

Since appointment by the directors under section 122 of the BCBCA will not work, the authority shifts to the shareholders, who will have to do two things: (a) increase the number of directors to 4 and (b) elect or appoint Dewar to fill the resulting vacancy.

  1. Election/Appointment by the Shareholders

Both decisions can be made by ordinary resolution.  This is defined in the BCBCA as a resolution that is either:

  • passed at an actual meeting of shareholders by a simple majority (i.e. 50% + 1) of the votes cast (that is, actually voted) by shareholders voting shares that carry the right to vote at general meetings, or
  • if not passed at an actual meeting, passed, after being submitted to all the shareholders holding shares that carry the right to vote at general meetings, by being consented to in writing by shareholders holding shares that carry the right to vote at general meetings who, in the aggregate, hold shares carrying at least a special majority of the votes entitled to be cast on the resolution.  A “special majority” means. Depending on what the articles provide, a majority of at least 2/3 and not more than 3/4 of the votes cast.

If an actual meeting is to be held, there are two possibilities:

  • wait until the next annual meeting of shareholders;
  • convene a special meeting of shareholders for the purpose.

III. Annual Meeting

If, as seems likely, it is decided that the matter should be dealt with at the next annual meeting:

  • * this must be held, by virtue of BCBCA s. 182 (1), in the calendar year following the year in which the last annual meeting was held, but not later than 15 months after the last annual meeting – so, if the last annual meeting was held on June 30, 2013 the next annual meeting must be held no later than July 31, 2014;
  • * the directors must prepare and send out a notice of the annual meeting.

Length of notice:

The period of notice for an annual meeting of a “private” company is the period, being not less than 10 days, prescribed by the articles and if no period is prescribed, then 21 days.

Content of notice:

Standard requirements;

The notice must specify the date, time and place (which must, in the absence of contrary provision in the articles, be in British Columbia).

Additional requirements in certain cases (special business):

The standard form of articles in common use for British Columbia companies includes provisions comparable to the following:

10.9 Notice of Special Business at Meetings of Shareholders

If a meeting of shareholders is to consider special business . . . the notice of meeting must state the general nature of the special business.

11.1 Special Business

At a meeting of shareholders, the following business is special business:

  1. at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting;
  2. at an annual general meeting, all business is special business except for the following:

(a)                 business relating to the conduct of or voting at the meeting;

(b)                 consideration of any financial statements of the Company presented to the meeting;

(c)                 consideration of any reports of the directors or auditor;

(d)                 the setting or changing of the number of directors;

(e)                 the election or appointment of directors;

(f)                  the appointment of an auditor;

(h)                 business arising out of a report of the directors not requiring the passing of a special resolution or an exceptional resolution;

(i)                  any other business which, under these Articles or the Business Corporations Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders.”

Since, under Article 11.1 (2) (d) and (e), neither an increase in the number of directors nor the election of directors is considered “special business” there will be no additional requirements as to the content of the notice of the annual meeting.

If, however, the notice did identify something to be done at the meeting that is “special business” Article 10.9 requires that the notice must state “the general nature” of that business.  The essence of that requirement is that the notice (or some document accompanying the notice) should provide enough information about the special business to enable a shareholder to form an intelligent conclusion as to how he/she will vote on it.  You will find some illustrations of this requirement that would be required by the common law even if there were no Article 10.9.  See the judgment in Garvie v. Axmith, at pages 430-432 of the Casebook.

Any matter that requires a “special resolution” of the shareholders, generally, “out of the ordinary” transactions such as a resolution for the removal of a director, will be “special business”.  The definition of “special resolution” is unnecessarily complicated but the nub of it is that it must be passed by a majority of not less than 2/3 (and, depending on the Articles, not more than 3/4) of the votes cast to be voted in favor.

Assuming, then, that the only matters to be dealt with at the annual meeting fall within the scope of Article 11.1 (2), i.e. there will be no “special business”, the notice of meeting will look something like this:

                           NOTICE OF ANNUAL GENERAL MEETING OF

ABC CORPORATION

NOTICE IS HEREBY GIVEN that the annual general meeting of shareholders of the Company will be held (address, date and time) for the following purposes:

  1. to receive the financial statements of the Company for the year ended -------;
  2. to appoint auditors and to authorize the directors to fix their remuneration;
  3. to fix the number of directors of the Company at four (4):
  4. to elect directors;
  5. to consider such other matters as may properly come before the meeting.

BY ORDER OF THE BOARD OF DIRECTORS

By:      ________________________

Secretary

Dated:


You will see that the Notice does not identify the people who are to be proposed for election as directors.  It is not required to do so, nor, in contrast to the position in public companies (as to which see below) must this information be provided in any other document sent to shareholders in connection with the meeting.  The shareholders may only learn who the nominees are when, and if, they turn up at the meeting.

Voting at meetings:

Although it is not common, it is certainly possible to create a class of shares that does not have the right to vote at a meeting of shareholders.  Even in that case, however, such shares may have the right to vote in certain extraordinary circumstances.

Where a class of shares does have the right to vote (which would be the case if there is only one class of [“common”] shares), in most cases that right may be exercised in one of two ways [BCBCA s. 173 (1)]:

(a)     in person; or

(b)     by proxy

Voting in person by show of hands or ballot:

To exercise the right to vote “in person”, the shareholder must be present at the meeting.  Assuming that he/she is present, there are two methods for tallying the vote: (i) by “show of hands” and (ii) by a ballot.

In the former case, the shareholders present are asked to raise a hand to indicate their vote, which is then counted.  Effectively, this means that each shareholder voting has one vote only, regardless of the number of votes attached to all the shares owned by that shareholder.

To avoid this, it is common for the articles to permit a “ballot” vote by which each shareholder present is invited to complete a ballot form indicating how he/she is voting on a particular resolution and the number of votes which that shareholder is entitled to cast.  The voting result will then reflect the number of votes, not the number of shareholders.  In the ordinary course of events, absent some unusual circumstances (such as, some matter as to which there is a difference of opinion), there will generally only be a vote by show of hands, though a shareholder generally has the right to demand that a ballot or poll be held.  See BCBCA sectiom 173 (1).

Voting by proxy:

Simply put, voting by proxy is a procedure by which a shareholder appoints another person to vote his/her shares.  More often than not, shareholders who, for one reason or another, are unable to attend a meeting in person use this procedure.  Sometimes, a shareholder who, although able to attend a meeting and intending to be present, wishes to be accompanied by an advisor such as a lawyer uses it.  In that case, for example, a shareholder with 100 votes (shares) might give the lawyer his/her proxy in respect of 1 share, and vote the remaining shares himself/herself.

Proxy voting at common law and under the standard form articles:

At common law, a shareholder did not have the right to appoint a proxy.  (The word, “proxy” is, by the way, used both to describe the document by which someone is given the right to vote on one’s behalf and, sometimes, the person  (proxyholder or nominee) who is given that right).  If there is to be a right to vote by proxy, this has to be found in the memorandum or articles of the company.  Under section 173 of the BCBCA a shareholder has the right to vote by proxy unless that memorandum or articles provide otherwise.

In fact, it is commonplace to find a provision permitting proxy voting in the articles of “private” companies.  Article 12.8 of the standard articles is a good example:

“Every shareholder of the Company, including a corporation that is a shareholder but not a subsidiary of the Company, entitled to vote at a meeting of shareholders may, by proxy, appoint one or more proxyholders to attend and act at the meeting in the manner, to the extent and with the powers conferred by the proxy.”

The articles also commonly specify the (relatively simple) form of proxy.  See, forexample, Article 12.12 of the standard articles which says:

A proxy, whether for a specified meeting or otherwise, must be either in the following form or in any other form approved by the directors or the chair of the meeting:

[name of company] (the “Company”)

The undersigned, being a shareholder of the Company, hereby appoints [name] or, failing that person, [name], as proxyholder for the undersigned to attend, act and vote for and on behalf of the undersigned at the meeting of shareholders of the Company to be held on [month, day, year] and at any adjournment of that meeting.

Number of shares in respect of which this proxy is given (if no number is specified, then this proxy is given in respect of all shares registered in the name of the undersigned):

Signed [month, day, year]

[Signature of shareholder]

[Name of shareholder—printed]

For obvious reasons, the BCBCA requires a ballot vote where proxy voting is permitted.  See BCBCA section 173 (2) (a) in this regard.

If proxy voting is provided for it is common, though not required, to include language in the notice of an AGM to the effect that proxy voting is permissible, to provide a form of proxy, and instructions as to how it is to be completed.

  1. Special Meeting

On the facts about Longwood that are assumed, it is highly unlikely as a practical matter that a special meeting of shareholders of a “private” company would ever be convened for the purpose of appointing an additional director, whether on the initiative of the directors or, by means of a requisition, by Dewar or one of his supporters.  This is much more likely (although not commonplace) in the case of a publicly traded company.

  1. Court Ordered Meetings

Under section 186 of the BCBCA if for some reason it is “impracticable” for a company to call or conduct a meeting of shareholders in the prescribed manner, or for any other reason the court considers appropriate, it may, on the application of a director or shareholder, order that a meeting be called, held and conducted in the manner the court considers appropriate, and give appropriate directions to this end.  Although this section is equally applicable to private and publicly traded companies it is rarely used in relation to the latter.  The sort of circumstance in which it might be used in connection with a private company is where there is an internal dispute and a shareholder tries to exert leverage over his adversary by refusing to attend shareholder meetings thus preventing a quorum being reached and thus preventing the meeting from doing anything.

  1. PUBLICLY TRADED COMPANIES

Assume some slightly different facts from those indicated above.

Longwood Industries Inc.:

  • Is not a private company but a publicly traded company, with its common shares (each of which carries one vote) traded on the Toronto Stock Exchange;
  • Has several thousand shareholders scattered across Canada;
  • Has a board consisting of 5 directors;
  • Held its last AGM in January 2014 (i.e. the next AGM need only be held before the end of April 2015 [see above II.A. (i)];
  • In March 2014 completes an agreement with “Zillion$ Financing Inc” under which the latter invests about $25 million by the purchase of common shares by way of a “private placement” (i.e. a private transaction).  Effectively, this gives Zillion$ slightly under 4% of the total outstanding shares (and hence votes) of Longwood, making it the largest single shareholder.   Suppose that the agreement entitles Zillion$, upon request, to appoint 2 nominees to Longwood’s board of directors.
  • Zillion$ has indicated to Longwood that it has no present intention of exercising its right to appoint nominees to Longwood’s board and is content to wait until the next AGM.  It also indicates that it presently contemplates that its 2 nominees will be in addition to the 5 existing directors and not by way of replacement of two of them.

ANNUAL MEETING OF LONGWOOD IN APRIL 2015

The basic procedure:

The basic procedure for convening the AGM to be held in April 2015 will be essentially the same as that outlined in II.A above in connection with the AGM of the private company.   Some of the details will, however, differ.

On the basis of the facts assumed, the “appointment by directors” procedure outlined above is not relevant.  We are dealing, then, with the subject of appointment/election by the shareholders.

Notice of meeting and information circular:

A notice of meeting will have to be sent out, slightly more elaborate but not unlike that outlined above for a private company.  On the next page you will find a recent example:

 

                     ABSOLUTE SOFTWARE CORPORATION

Suite 1600, Four Bentall Centre

1055 Dunsmuir Street

Vancouver, British Columbia, V7X 1K8

NOTICE OF ANNUAL GENERAL MEETING

TO OUR SHAREHOLDERS:

Our Annual General Meeting (the “Meeting”) will be held at the Metropolitan Hotel Vancouver, 645 Howe St, Vancouver, British Columbia on Wednesday, December 11, 2013 at 4:00 p.m. (local time) for the following purposes:

  1. To receive the report of our directors;
  2. To receive our audited financial statements of the financial year ended June 30, 2013, and the accompanying report of the auditors;
  3. To fix the number of persons to be elected to our board of directors;
  4. To elect our directors for the ensuing year;
  5. To appoint our auditor for the ensuing year and to authorize the directors to fix the auditor’s remuneration;
  6. To consider any amendment to or variation of a matter identified in this Notice; and
  7. To transact such other business as may properly come before the Meeting or any adjournment thereof.

Our Information Circular, which includes a detailed description of the matters to be dealt with at the Meeting, along with a copy of our 2013 Annual Report, accompanies this Notice. Our consolidated financial statements for the year ended June 30, 2013 and the report of the auditors thereon are included in the Annual Report.

If you are unable to attend the Meeting in person and wish to ensure that your shares will be voted at the Meeting, you must complete, date and execute the enclosed form of proxy, or another suitable form of proxy, and deliver it by hand or by mail in accordance with the instructions set out in the form of proxy and in the Information Circular. If you are an unregistered shareholder and want to attend the Meeting, you must follow the instructions set out in the Information Circular to ensure that your shares will be voted at the Meeting.

DATED at Vancouver, British Columbia, November 6, 2013.

BY ORDER OF THE BOARD

“John Livingston”

Chairman and Chief Executive Officer

 

As in the case of the notice of meeting of the private company, Absolute Software’s Notice of Annual Meeting itself gives virtually no information about the various agenda items to be considered at the meeting.

Much of this information is (and must be) contained in the “Information Circular” referred to as accompanying the Notice of Meeting.  This is an elaborate disclosure document the contents of which are prescribed in a Form published by the various provincial securities commissions.  It does not apply in connection with meetings of “private” companies.

It is too long to include here but if you wish to see Absolute Software’s Information Circular, the following link will take you to it:

<a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00013849&fileName=/csfsprod/data148/filings/02134783/00000001/k%3A%5Cfilings%5Clivework%5Cwkout%5C40151%5Ccirc.pdf</a>

If you do look at the Absolute Software Information Circular you will notice that, in contrast to the position in connection with private companies,  it identifies each of the proposed nominees for election as a director and provides detailed information about their background and experience and their compensation.  All of this information, and a great deal else besides, is prescribed in the relevant Form and the Policy under which it has been developed.  In addition, you should note that the Form says:

“If action is to be taken on any matter to be submitted to the meeting of securityholders other than the approval of annual financial statements, briefly describe the substance of the matter, or related groups of matters, except to the extent described under the foregoing items, in sufficient detail to enable reasonable securityholders to form a reasoned judgment concerning the matter. Without limiting the generality of the foregoing, such matters include alterations of share capital, charter amendments, property acquisitions or dispositions, reverse takeovers, amalgamations, mergers, arrangements or reorganizations and other similar transactions.”

You will see that the language used here is a slightly more elaborate (and perhaps more informative) version of what is contemplated by the disclosure required under the standard form articles in respect of “special business”.

Voting procedure:

As in the case of “private” companies, voting at the meeting both by “show of hands” and by ballot so that proxy votes (calculated by shares not shareholders) are counted is possible.  The securities regulators require that an opportunity to vote by proxy be given to each shareholder entitled to vote at a meeting of a “public” company.  In practical terms, “show of hands” voting is used, if at all, only on relatively uncontroversial matters.

Proxy voting:

In general, only registered shareholders are entitled to vote, i.e. those whose names are entered on the company’s shareholders register.  In the case of publicly traded companies, this gives rise to two problems.  First, a registered shareholder might be unable to attend the meeting; and second, it is almost invariably the case that there are shareholders in public companies who, for reasons of convenience or otherwise, do not wish to have their shares registered in their own names, but instead to hold them through nominees such as investment dealers or banks.

To deal with these problems there is an elaborate and complex set of rules concerning the process of “soliciting” proxies (i.e. asking shareholders (or, viewed from another perspective, giving them the opportunity) to exercise their right to vote.  This is achieved through the proxy regulation system the rules of which are sometimes found in corporate legislation (see, for example, Part XIII of the CBCA) but more often in published policies of the provincial securities regulators.

There are two major components of this system:

  • Every time the management of a public company gives notice of a meeting of shareholders it is deemed to engage in a “solicitation”<a href="#_ftn1" name="_ftnref1">[1]</a> of proxies and must give shareholders:

- An information circular (see above) containing certain mandated disclosure.  The information circular must include certain specific information and, in addition, if the shareholders are asked to take action on some specific matter, the substance of that matter must be described “in sufficient detail to permit security holders to form a reasoned judgment concerning the matter”;

- A form of proxy (i.e. the document appointing the proxy nominee) that permits them to specify that their shares shall be voted for or against on every matter to be voted on and, in connection with an election of directors or appointment of auditors, that permits them to vote or be withheld from voting.

  • A complex set of rules designed to enable beneficial shareholders such as those who hold their shares through banks or investment dealers as nominees, the opportunity to have their votes cast.  Simply put, these rules require the nominees to solicit voting instructions from those on whose behalf they act.  If you look at the Absolute Software information circular you will see that it contains detailed information about these procedures.

 

 

On the assumption that the April 2015 Annual Meeting of Longwood Industries Inc. is going to be in all respects routine, conducted in accordance with its agreement with Zillion$.  On that assumption,  the form of proxy would look something like this:

 

ANNUAL GENERAL MEETING OF SHAREHOLDERS OF LONGWOOD INDUSTRIES INC. (the “Company”) TO BE HELD AT ●, British Columbia, Canada

on ●, April ●, 2015, at 10:00 a.m. (Pacific Time)

The undersigned shareholder (“Registered Shareholder”) of the Company hereby appoints ●, a director and the President and Chief Executive Officer of the Company, or failing him, , the Chief Financial Officer and Corporate Secretary of the Company, or, in the place of the foregoing, ______________________________ as proxyholder for and on behalf of the Registered Shareholder with the power of substitution to attend, act and vote for and on behalf of the Registered Shareholder in respect of all matters that may properly come before the Meeting of the Registered Shareholders of the Company and at every adjournment thereof, to the same extent and with the same powers as if the undersigned Registered Shareholder were present at the said Meeting, or any adjournment thereof.

The Registered Shareholder hereby directs the proxyholder to vote the securities of the Company registered in the name of the Registered Shareholder as specified herein.

The undersigned Registered Shareholder hereby revokes any proxy previously given to attend and vote at said Meeting. SIGN HERE:_______________________________

 

Please Print Name: _________________________

 

Date: ____________________________________

 

Number of Shares Represented by Proxy:______

 

THIS PROXY FORM IS NOT VALID UNLESS IT IS SIGNED AND DATED. SEE IMPORTANT INFORMATION AND INSTRUCTIONS ON REVERSE.

 

Resolutions (For full detail of each item, please see the enclosed Notice of

Meeting and Information Circular)

<tbody> </tbody>
  For Against Withhold
·        To set the number of directors at seven (7)     N/A
·        To elect as a director,   N/A  
·        To elect as a director,   N/A  
·        To elect as a director,   N/A  
·        To elect as a director,    N/A  
·        To elect as a director,   N/A  
·        To elect as a director,   N/A  
·        To elect as a director,   N/A  
·        To appoint , Chartered Accountants, as auditor of the Company   N/A  

INSTRUCTIONS FOR COMPLETION OF PROXY

  • This Proxy is solicited by the Management of the Company.
  • This form of proxy (“Instrument of Proxy”) must be signed by you, the Registered Shareholder, or by your attorney duly authorized by you in writing, or, in the case of a corporation, by a duly authorized officer or representative of the corporation; and if executed by an attorney, officer, or other duly appointed representative, the original or a notarial copy of the instrument so empowering such person, or such other documentation in support as shall be acceptable to the Chairman of the Meeting, must accompany the Instrument of Proxy.
  • If this Instrument of Proxy is not dated in the space provided, authority is hereby given by you, the Registered Shareholder, for the proxyholder to date this proxy the date on which it was mailed to you, the Registered Shareholder, by Olympia Trust Company.
  • A Registered Shareholder who wishes to attend the Meeting and vote on the resolutions in person, may simply register with the scrutineers at the Meeting before the Meeting begins.
  • A Registered Shareholder who is not able to attend the Meeting in person but wishes to vote on the resolutions, may do one of the following:

     (a) appoint one of the management proxyholders named on this Instrument of Proxy, by leaving the wording appointing a nominee as is (i.e. do not strike out the management proxyholders shown and do not complete the blank space provided for the appointment of an alternate proxyholder).  Where no choice is specified by a Registered Shareholder with respect to a resolution set out herein, a management appointee acting as a proxyholder will vote in favour of each matter identified on this Instrument of Proxy and for the nominees of management for directors and auditor as identified in this Instrument of Proxy; OR     (b) appoint another proxyholder, who need not be a Registered Shareholder of the Company, to vote according to the Registered Shareholder’s instructions, by striking out the management proxyholder names shown and inserting the name of the person you wish to represent you at the Meeting in the space provided for an alternate proxyholder. If no choice is specified with respect to the matters to be voted on at the Meeting, the proxyholder has discretionary authority to vote as the proxyholder sees fit.

  • The securities represented by this Instrument of Proxy will be voted or withheld from voting in accordance with the instructions of the Registered Shareholder on any poll of a resolution that may be called for and, if the Registered Shareholder specifies a choice with respect to any matter to be acted upon, the securities will be voted accordingly. Further, the securities will be voted by the appointed proxyholder with respect to any amendments or variations of any of the resolutions set out on the Instrument of Proxy or matters which may properly come before the Meeting as the proxyholder in its sole discretion sees fit.

If a Registered Shareholder has submitted an Instrument of Proxy, the Registered Shareholder may still attend the Meeting and may vote in person. To do so, the Registered Shareholder must record his/her attendance with the scrutineers before the commencement of the Meeting and revoke, in writing, the prior votes by proxy.

To be represented at the Meeting, this Instrument of Proxy must be received by Olympia Trust Company no later than forty eight (48) hours (excluding Saturdays, Sundays and holidays) prior to the time of the Meeting, or adjournment thereof, or may be accepted by the Chairman of the Meeting prior to the commencement of the Meeting. 

  1. VOTING METHODS

INTERNET VOTING 24 Hours a Day, 7 days a week:  If a WEB VOTING ID NUMBER appears on the face of this Instrument of Proxy in the address box (see example below), you can complete internet voting at https://secure.olympiatrust.com/proxy/

<tbody> </tbody>
Example: 123456       9999       1000      123F45K

JOHN DOE 123 MAIN STREET

CALGARY AB T1A 1A1
o 123F45K would be your WEB VOTING ID NUMBER

 

RETURN YOUR PROXY BY MAIL, FACSIMILE OR E-MAIL TO Olympia Trust Company:

Olympia Trust Company, Proxy Department, 1003 – 750 West Pender Street, Vancouver, British Columbia V6C 2T8

Facsimile: (604) 484-8638     E-mail:  proxy@olympiatrust.com                            I

Do not mail the printed Instrument of Proxy if you have voted via the Internet.

It was noted in the hypothetical facts that Zillion$ owns slightly less than 4% of the outstanding Longwood shares.  To achieve its objectives, therefore, it is likely that it will have to secure the support of other shareholders including, having regard to its investment agreement, the present directors of Longwood.  This will generally be achieved through the proxy system.

[Suppose, however, that some other shareholder has a different view about the desirability of the 5 nominees and has some candidates of its own to put forward.  In that event, it will probably decide to put up its own nominees for election and solicit proxies for those candidates.  To do this, it will need to obtain a copy of a list of shareholders.  Its rights in this respect are governed by section 49 of the BCBCA.  Essentially, that section provides that an application must be made to the company or its transfer agent for a copy of the list.  The application must include an affidavit to the effect that the list will only be used for a permitted purpose.  The permitted purposes include an effort to influence the voting of shareholders of the company at any meeting of shareholders and to acquire or sell securities of the company.]

It is likely that, if Longwood has not previously done so, it will take the opportunity at its 2015 annual meeting to adopt certain changes to its articles affecting the election of directors that are now required under various policies of the Stock Exchange.  These are:

  1. Preventing slate voting

Until fairly recently a minority of publicly traded companies used to employ a voting system – “slate voting” which only allowed shareholders to vote for all of the directors nominated by management (i.e. a slate of directors), but not for individual directors.  This effectively prevented shareholders from voting against individual directors for performance reasons such as poor board attendance. The only option in such case was to vote against the whole board, or to conduct a costly proxy fight.  Slate voting is no longer permitted.  As is apparent from Longwood’s form of proxy, it provides for individual and not slate voting

  1. Plurality and majority voting

Under the “for-withhold” plurality voting system for directors contemplated by the Longwood form of proxy it is possible for someone to be elected without receiving a majority of the votes.  So: assume 7 candidates for election and 100 possible votes, cast as follows:

 

 

 

 

<tbody> </tbody>
  For Withhold
A 60 40
B 55 30
C 51 40
D 40 43
E 36 45
F 25 35
G. 20 30

Despite the facts that each of D, E, F and G received less than a majority of the possible votes and that more shareholders withheld voting for them than voted in their favour, each of them will be elected.

Under a Policy recently adopted by the Toronto Stock Exchange, however, any nominee for director who receives a greater number of votes ‘withheld' from him than ‘for' his or her election, would be required to tender his or her resignation as a director and the remaining directors would have to consider whether – as is likely to be the case – those resignations should be accepted.

The remaining board members would, absent unusual circumstances, generally accept such resignation.

Most publicly traded companies are also subject to a requirement that they publish the results of voting at a shareholders’ meeting.

  1. 3. Advance notice policy

It is becoming increasingly common for publicly traded companies to adopt what is referred to as an “advance notice” policy under which anyone (effectively anyone who is not part of management) proposing to nominate a director for election at a meeting of shareholders must provide the company with advance notice (typically between 30-65 days) of, and prescribed details concerning, any such proposed nominee.  Unless proper notice is given to the company any such proposed nominee is ineligible for election at the shareholders meeting.  The policy is intended to the risk of ambush proxy contests.

  1. An “enhanced quorum” policy

A “quorum” is the minimum number of participants who must be present at a meeting in order to permit it to proceed to do the business for which it has been called.  This number is commonly found in the Articles of a company and may be measured either by reference to shareholders present in person or by a combination of shareholders present in person and shareholders represented by proxy.  Article 11.3 of the “model” articles, for example, says that subject to certain qualifications, the quorum for the transaction of business at a meeting of shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting.  Section 172 of the Business Corporations Act contains a “default” provision if the company’s articles are silent on the point.

A number of public traded companies have recently adopted an “enhanced quorum” provision.  Essentially, this provides that at any meeting at which a shareholder will be seeking to replace half or more of the board of directors a minimum of two shareholders holding at least a majority of the issued and outstanding common shares must be present or represented by proxy before the meeting can be held and business validly transacted.

The matters identified above are all “special business” within the meaning of Articles 10.9 and 11.1 of Longwoods Articles and of the requirements for disclosure in its Information Circular.  The relevant provisions have been quoted earlier.


A SLIGHT CHANGE IN THE ASSUMED FACTS ABOUT LONGWOOD AND ZILLION$ - REQUISITIONING  A SPECIAL MEETING IN AUGUST 2014

Suppose that within a short time after Zillion$ completes its investment in Longwood it starts becoming progressively more disenchanted with the policies and competence of the Longwood directors to the point that it considers that it cannot afford to wait until the April 2015 AGM to reconstitute the Longwood board.

Up for consideration by Zillion$ is to requisition a meeting of Longwood shareholders to

  • Increase the number of directors to 7 and elect two Zillion$ nominees to fill the vacancies; or
  • Remove two existing directors and replace them with 2 Zillion$ nominees; or
  • Remove all 5 existing directors and replace them with 5 Zillion$ nominees

The procedure for requisitioning a meeting of Longwood shareholders is set out in section 167 of the British Columbia Business Corporations Act.

In summary, a requisition must be:

  • For the purpose of transacting any business that may be transacted at a general meeting – the removal and election of directors both qualify:
  • Served on Longwood and signed by shareholders who, at the date on which the company receives it, hold in the aggregate at least 1/20 of the issued shares. Since Zillion$ only holds 4% of the shares, it will have to find other shareholders to join it;
  • State in 1,000 words or less, the business to be transacted at the meeting, including (the text of) any special resolution to be voted on.

Note that the removal of a director can only happen if the shareholders pass a special resolution to this effect.  If a requisition meeting these requirements is received the directors must call a general meeting for the purpose set out in the requisition, to be held not more than 4 months after the date on which it is received.  They are relieved of this obligation, however, if:

  • They have already called a general meeting to be held after the receipt of the requisition and have sent out notice of that meeting;
  • Substantially the same business was submitted to shareholders to be transacted at a general meeting that was held within the preceding 5 years and was only supported by a certain threshold number of votes which varies according to the number of times it has been submitted;
  • It clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company or that the primary purpose for the requisition is securing publicity, or enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders;
  • The business stated in the requisition has already been substantially implemented or, if implemented, would cause the company to commit an offence, or
  • The requisition deals with matters beyond the company's power to implement.

None of the actions contemplated by Zillion$ seems to fall within any of the grounds for rejection specified.  It seems, then, that the Longwood directors will have to respond to the requisition by calling a meeting to be held within 4 months.

If they do not do so within 21 days, then Zillion$ (and its friends) will be able to call a meeting to be held within the prescribed 4 months.  The notice and proxy requirements described generally above if the meeting were to be called by the directors, will apply to Zillion$ and its friends (because, almost by definition, they are engaged in a “solicitation”) and, unless at the requisitioned meeting the shareholders, by an ordinary resolution, decide otherwise, those making the requisition will be entitled to be reimbursed for their expenses.

Assuming that Longwood has adopted the “enhanced quorum” provision referred to above, it may be difficult for Zillion$ to achieve its objectives without a vigorous proxy battle to ensure that the enhanced quorum is satisfied.

SHAREHOLDER PROPOSALS

It is possible, though as a practical matter unlikely, that Zillion$ might seek to achieve its objectives by means of a so-called “shareholder proposal”.  Essentially, this involves a non-management shareholder or shareholders taking steps to try and get the actions that they wish to have taken, included in management’s notice of meeting and proxy materials.  Shareholder proposals are more likely to be used to raise structural issues, such as the reconstitution of the board of directors, than issues that are not essentially structural but relate to the opportunities to scrutinize management in ways that are not readily amenable to the requisition procedure.

Examples might be to persuade a reluctant board of directors to adopt the sort of changes that have now been mandated by the Stock Exchange, relating to slate and majority voting, etc.  In fact, what has happened is that the original initiative for the adoption of mechanisms of this kind came in the form of shareholder proposals, not binding on the directors, but attracting a level of support that made it increasingly difficult to resist these ideas.  Eventually, the pressure from “activist” shareholders caused the exchange to act.

An example of a shareholder proposal that is becoming increasingly common is the so-called “say on pay” proposition.  Essentially, this involves giving shareholders the opportunity to vote on an advisory resolution on executive compensation.  Among the items identified in the Notice of the 2009 Annual Meeting of National Bank of Canada was “to examine the shareholder proposals, as set out in Schedule A to the Management Proxy Circular”.  That Schedule advised that the Bank had received a proper proposal that the board of directors adopt a governance rule stipulating that a shareholder advisory vote be held on the compensation policy for their executive officers; set out the proposer’s rationale for its proposal and the Bank’s response which was, in essence, to oppose adoption of the proposal.  Despite this, the shareholders supported the proposal with 56.85% of the votes being cast in favour of it and 43.15% voting against.  The board of National Bank has since changed somewhat its approach to the subject of “say on pay” but the matter continues to arise as a topic at annual meetings.  See, for example, the Bank’s 2014 Notice of Annual Meeting and Information Circular, at <a href="http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00002236&fileName=/csfsprod/data149/filings/02172923/00000001/g%3A%5CSEDAR%5CNational-Bank%5CNBC%5C2014%5CAGM%5CCircular-Eng.pdf">http://www.sedar.com/GetFile.do?lang=EN&docClass=10&issuerNo=00002236&fileName=/csfsprod/data149/filings/02172923/00000001/g%3A%5CSEDAR%5CNational-Bank%5CNBC%5C2014%5CAGM%5CCircular-Eng.pdf</a>

The provisions governing shareholder proposals are found in sections 187 to 191 of the BC Business Corporations Act.  Nothing is to be gained from a detailed examination of those provisions here.

 

 

UNIT WRAP UP:

Understanding that this (sort of) separate entity known as the corporation functions and has legally defined rights, powers and constraints; we cannot avoid the truth that it is human beings who actually animate those rights, powers and constraints. They are Oscar Zoroaster Phadrig Isaac Norman Henkle Emmannuel Ambroise Diggs”, the human being of flesh and bones who pretended to be the Great and Powerful Oz in “The Land of Oz” by Frank Baum that served as the basis of the film “The Wizard of Oz”. So although companies are separate, they need people. The next Unit is about what those people, known as management (and in limited circumstances shareholders), can and cannot do.

<a href="#_ftnref1" name="_ftn1">[1]</a>               There is an elaborate definition of  “solicit” and solicitation.  The essence of a solicitation is that it involves a request to a shareholder to execute and deliver a form of proxy.