Ontario Court Rejects Dissident Shareholders' Attempt to Call Shareholder Meeting
|Area||Corporate Finance and Securities|
The Ontario Superior Court of Justice’s recent decision in Wells v. Bioniche Life Sciences Inc. provides important guidance on a number of matters relating to a dissident shareholder’s ability to requisition and call a shareholder meeting under the Canada Business Corporations Act (CBCA).
In addition to addressing the elements of a valid meeting requisition, the Bioniche decision:
- considers the breadth of the exception to the requirement to call a meeting in response to a meeting requisition where the corporation has fixed a record date for a meeting;
- concludes that, under the CBCA, if the directors do not call a meeting in response to a valid requisition for any reason, even if there is an exception in the statute from the obligation to call a meeting, a dissident shareholder may call a meeting itself; and
- suggests that a dissident shareholder may be precluded from calling a requisitioned meeting if a court determines that it would not be appropriate for the meeting to proceed.
Bioniche Life Sciences Inc. develops, manufactures and markets biopharmaceuticals for animals and people. In 2012 and early 2013, the dissident shareholders (William Wells and Greg Gubitz) and Bioniche discussed potential transactions proposed by the dissidents involving the company’s animal health business or a financing of the company by the dissident shareholders accompanied by a reconstitution of the board. The parties were unable to agree on the terms of a transaction and Bioniche instead initiated a process to sell its animal health business, which the dissident shareholders opposed.
In April 2013, Mr. Wells acquired just over 5% of Bioniche’s common shares and requisitioned a special meeting of shareholders to replace the board. Bioniche rejected the requisition because (i) Mr. Wells was not at that time the registered holder of those shares, and (ii) the requisition did not specify the names of his proposed board nominees or any other information about the nominees. At the same time, Bioniche announced that it had called its annual general meeting of shareholders (“AGM”) for November 5, 2013 and fixed September 9, 2013 as the record date for that meeting.
In May 2013, Mr. Wells delivered to Bioniche a second meeting requisition that corrected the deficiencies in his first requisition. This time, Bioniche rejected the requisition on the basis that it had already called and fixed a record date for its AGM.
The dissident shareholders objected to the November AGM date because they believed that the company would try to complete the sale of its animal health business before then. On June 27, 2013, the dissident shareholders called the requisitioned meeting themselves and set August 27, 2013 as the meeting date. The dissident shareholders also applied to the Ontario Court for a declaration that they were entitled to call the meeting. Bioniche applied for a declaration that the meeting called by the applicants was invalid.
Validity of Meeting Requisitions
The Ontario Court found that under the CBCA:
- a corporation can take the position that only registered holders of at least 5% of the corporation’s outstanding voting shares are entitled to requisition a meeting; and
- a valid meeting requisition must provide reasonable detail regarding the business to be conducted at the meeting so that the board has the information it needs to respond to the requisition - which, in the case of a requisition seeking to elect new directors, would include the names and qualifications of the proposed nominees.
Since the dissidents’ first requisition satisfied neither of these requirements, the Court held that it was invalid. The second requisition satisfied both of the requirements and was valid.
Requirement to Respond to Requisition
The CBCA provides that a corporation is not required to call a requisitioned meeting if, among other things, it has already fixed a record date for a shareholder meeting at the time of the requisition. In considering Bioniche’s response to the second requisition, the Court limited this exception to circumstances in which the meeting, in respect of which the record date has been fixed, will occur “reasonably soon” after the requisition is received.
Bioniche’s AGM was scheduled for approximately six months from the date of the requisition. Although the Court called it a “close case,” it concluded that holding the AGM in November 2013 constituted a sufficiently timely meeting and Bioniche was not required to call the requisitioned meeting. In reaching this conclusion, the Court noted Bioniche’s commitment (made after the second requisition) that it would seek shareholder approval for any divestiture of its animal health business (in addition to the perceived low likelihood of Bioniche committing to pay a break fee). The Court viewed this commitment as significantly mitigating any prejudice that might otherwise arise from the significant delay between the requisition date and the AGM date and took it into account in assessing whether the AGM date was reasonable. The Court also noted that the actions of the Bioniche board reflected “a reasonable exercise of business judgment” sufficient to bring it within the statutory exemption from the requirement to call a meeting.
Dissidents’ Right to Call Meeting
Under the CBCA, if the directors do not call a meeting within 21 days of receiving a requisition, any shareholder who signed the requisition may call the meeting. In Bioniche, the Court considered whether the dissident shareholders could exercise their right to call a meeting in circumstances where Bioniche’s directors were not required to respond to their requisition because of a statutory exception. The Ontario Court noted that, unlike the Business Corporations Act (Ontario) and the Business Corporations Act (British Columbia), the CBCA does not expressly limit the ability of a shareholder to call a requisitioned meeting to situations where the board fails to call the meeting without the benefit of a statutory exception.
Notwithstanding its conclusion that the CBCA does not preclude requisitioning shareholders from calling a meeting where the directors do not rely on a statutory exception to call the meeting, the Court held that the dissenting shareholders could not proceed with their meeting in this case because:
- neither of their requisitions specified a particular deadline for holding a meeting and they waited nearly a month after Bioniche refused to call a meeting before calling their own meeting, which the Court considered to be incompatible with the shareholders’ complaints about the directors’ failure to act quickly;
- Bioniche’s commitment to seek shareholder approval for any sale of the animal health business and the likelihood that any agreement for the sale of the business would not commit Bioniche to pay a break fee significantly mitigated any prejudice that the dissidents might suffer if a meeting of shareholders was not convened before the November AGM; and
- the dissidents had provided no evidence of the urgency of holding the meeting that would justify Bioniche incurring significant additional costs by holding two meetings in close proximity to each other.
Implications of the Bioniche Decision
The Bioniche decision helps to clarify and provides guidance on a number of issues that frequently arise in the context of shareholder meeting requisitions under the CBCA, such as (i) what constitutes a valid meeting requisition, (ii) when can a board refuse to call a requisitioned meeting, (iii) the acceptable length of time between the requisition date and meeting date, and (iv) the requisitioning shareholder’s rights to call and hold a meeting if the board refuses to do so.
At the same time, the decision appears to subject a requisitioning shareholder’s ability to call a meeting to general court oversight based on subjective factors relating to the conduct of the parties. This appears to impose additional limitations on the shareholder’s statutory rights that are not set out in the CBCA, creating uncertainty around the exercise of those rights.
For more information on the implications of the Bioniche decision, please contact any member of our Corporate Securities Group.