Ontario Court Addresses Expense Reimbursement for Dissident Shareholders
|Lawyer||Neill May, Robert Vaux|
|Area||Corporate Finance and Securities|
A decision of the Ontario Superior Court in Goodwood Inc. v. Cathay Forest Products Corp. may have important implications for dissident shareholders, specifically concerning the extent to which such shareholders can have their expenses reimbursed by the corporations that are the focus of the dissident activity.
The court had earlier ordered the holding of a meeting of the shareholders of Cathay Forest, when the company’s board of directors had breached its duty to call an annual meeting and then failed to take steps to convene a meeting requisitioned by shareholders. The meeting was held, and a new board of directors was elected. The principal requisitioning shareholder then went back to court seeking an order requiring Cathay Forest to reimburse it for certain expenses.
The court based its analysis on the provisions of the Canada Business Corporations Act (CBCA), the corporate statute governing Cathay Forest. The CBCA does not state whether a requisitioning shareholder is entitled to reimbursement of its expenses in the case of a court-ordered meeting. The court concluded that, in such circumstances, the requisitioning shareholder should be reimbursed for those expenses that it would have been entitled to recover under the CBCA had the shareholder called the meeting. (A shareholder can requisition a meeting where the board does not call a meeting within 21 days of receiving a valid requisition. In this case the court found that it was impracticable for the shareholder to do so, given the inaction of the Cathay Forest board). Under the CBCA, a corporation is required to reimburse requisitioning shareholders (where the shareholders call the meeting, not under court order) for those expenses “reasonably incurred by them in requisitioning, calling and holding the meeting.”
The court reviewed the expenses incurred, which consisted of printing costs, the costs of the court-appointed independent chair of the meeting and the fees of the shareholder’s proxy advisory firm and legal counsel. The analysis focused on the fees of the proxy advisory firm, which had provided a broad range of services. The court ordered reimbursement for the expenses it considered to relate to the “requisitioning, calling and holding” of the meeting, such as expenses relating to the (i) making of the requisition, (ii) engagement of service providers to facilitate the meeting, (iii) retention of the independent chair, and (iv) mechanics of calling the meeting. The court did not order reimbursement for expenses relating to other matters, including: (i) strategic advice to the requisitioning shareholder before the requisition was made, (ii) strategic advice to the proposed slate of directors about the future conduct of the business of the corporation, and (iii) the production of evidence for the shareholder in support of the court order calling the meeting.
The core conclusion of the court is that the CBCA does not mandate recovery by a dissident shareholder of all costs incurred to bring about the desired corporate result, and instead speaks of reimbursement for a much narrower range of expenses. What is not clear from the Cathay Forest decision is the scope, and how it will be interpreted. The decision clearly suggests limits on the extent to which a court will order reimbursement. However, if no application is made to the court, can a board comfortably determine that a broader range of expenses should be reimbursed? If it does so, might it be subject to challenge? Given the complexity of contemporary proxy contests, the expenses of a dissident process can be significant. Going forward, the Cathay Forest case may affect how parties involved in a dissident process think about expense reimbursement.
For further information on this decision, please contact any member of our Corporate Securities Group.