The British Columbia Supreme Court (Court) recently considered certain issues relating to a proxy battle involving a TSX Venture Exchange-listed issuer, Kobex Capital Corp. (Kobex). The Court’s decision in Kingsway Financial Services Inc. v. Kobex Capital Corp. demonstrates a deferential approach to the internal decisions of a company in the context of a contested shareholders’ meeting.
A dissident group requisitioned the Kobex board to call a special meeting of shareholders for the purposes of reconstituting the Kobex board with five new directors.
Kobex called the meeting and, one week later, adopted a shareholder rights plan (Plan). The Plan was to be triggered upon a shareholder acquiring or announcing an intention to acquire shares totaling 15 per cent or more of the issued and outstanding Kobex shares. Specific provisions were made under the Plan for an existing Kobex shareholder, Sprott Inc. (Sprott), which already owned 18.50 per cent of issued and outstanding Kobex shares. In Sprott’s case, the Plan would be triggered if Sprott acquired 0.1 per cent or more additional shares. Upon being triggered, Kobex shares could be purchased by Kobex shareholders at a substantial discount to the existing market price.
An individual associated with Sprott, Mr. Rick Rule, purchased approximately 2.5 per cent of the issued and outstanding shares of Kobex after the Plan was adopted. The transaction was cancelled days later (Cancelled Transaction). Nevertheless, the dissident group claimed the purchase:
- Triggered Sprott’s obligations to file an early warning report under National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues and Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids (MI 62-104)
- Constituted a takeover bid pursuant to MI 62-104
- Triggered the Plan
Kobex had proposed that the chairman of the Kobex board act as chair of the shareholders’ meeting (Kobex Chair). The dissident group sought an order from the Court appointing an independent chair for the shareholders’ meeting pursuant to section 186(1) of the Business Corporations Act (British Columbia).
The dissident group argued that the Kobex board’s actions supported a strong apprehension that the shareholders’ meeting would be conducted unfairly since, among other things, the incumbent board was comprised entirely of Sprott representatives and the Kobex Chair and Mr. Rule had worked together to select the incumbent Kobex board.
The Court disagreed, saying that while the Court has a broad discretion to make orders regarding the conduct of shareholders’ meetings, a Court “should not involve itself in the internal affairs of the company unless there is sufficient evidence to justify such intervention.”
The Court noted that in the context of a contentious meeting, consideration should be given to the appointment of an independent chair. However, the Court concluded that “mere self-interest” of a meeting chair would not be sufficient to appoint an independent chair. The duties of the meeting chair to be honest and fair to all individual interests were cited by the Court as a safeguard militating against Court intervention absent evidence of potential impropriety.
Without such evidence in this case, the Court did not appoint an independent chair.
Shares Entitled to Vote at the Shareholders’ Meeting
The Court dismissed the dissident group’s application to prevent Sprott from voting the shares associated with the Cancelled Transaction at the shareholders meeting. The Court noted that the voting rights in respect of such shares remained with the unidentified original owner who attempted to sell them to Mr. Rule since the transaction had occurred after the record date and it was clear the transaction had been cancelled. The Court also noted that there was no evidence of a voting agreement between the original owner of the shares and Sprott or its associates.
Adjournment of Meeting
The Court was also asked to adjourn the meeting as a result of the alleged breaches of applicable disclosure obligations under securities laws. The Court refused to make the order, noting that there was no evidence that such a determination would impact voting at the meeting.
Ultimately, the orders sought relating to alleged breaches of securities laws and the operation of the Plan were adjourned as a key witness was not available and the dissident group conceded that there was no particular urgency to resolving such orders.
Kobex shareholders voted down the resolutions proposed by the dissident group at the Kobex shareholders’ meeting held on November 17, 2015.
The Court’s decision represents a deferential approach to the internal decisions of a company and will be viewed favourably by companies structuring their affairs in advance of a potentially contentious shareholders’ meeting. Despite the Court’s acknowledgment that it was plain from the evidence that the Kobex Chair supported the incumbent Kobex board over the dissident group’s slate of directors, the Court was unwilling to appoint an independent chair. The Court makes it clear in this case that mere self-interest of a meeting chair is not enough to warrant court intervention.