A recent trio of hotly contested proxy fights involving Norton Rose Fulbright’s Special Situations team helped further clarify and define the rights of a board of directors to determine the timing of a shareholders’ meeting.
Bioniche Life Sciences Inc.
With the July 18, 2013, decision of Justice Brown of the Ontario Superior Court in Wells v Bioniche Life Sciences Inc.,1 Norton Rose Fulbright obtained an important victory for its client Bioniche Life Sciences Inc. Justice Brown’s decision affirms and clarifies that a reasonable exercise of business judgment by the board of directors in setting the timing for shareholders’ meetings should not be interfered with by dissident shareholders or the court.
On April 25, 2013, William Wells sought to requisition a meeting of Bioniche shareholders with a view to replacing Bioniche’s incumbent board. A special committee of the board was formed to address the issues raised by the requisition.
Ultimately the board, on the recommendation of the special committee, rejected the requisition as invalid on the bases that (i) Mr. Wells was not a registered holder of Bioniche shares; and, (ii) the requisition lacked sufficient detail regarding the business proposed to be conducted at the meeting (which, in the case of a requisition for a meeting to elect new directors, would include the names and qualifications of the proposed nominees). On that same day, the board also resolved to call its annual shareholders’ meeting for November 5, 2013, with a record date of September 9, 2013.
On May 14, 2013, Mr. Wells submitted a second requisition for a shareholders’ meeting, which corrected the deficiencies in his first requisition. Bioniche’s board rejected this second requisition on the basis that a record date for a scheduled meeting of shareholders had been fixed and notice of it had been given to shareholders in accordance with the Canada Business Corporations Act (CBCA). The board also made clear its considered determination that a special shareholders’ meeting in advance of the November 5, 2013, meeting was not in Bioniche’s best interests.
In response, Mr. Wells commenced an application asking the court to declare the validity of the requisitions he made on April 25 and May 14 and to direct the holding of a special shareholders’ meeting. At the same time, relying on section 143(4) of the CBCA, Mr. Wells purported to call a special meeting of shareholders for August 27, 2013, with a record date of July 22, 2013. Bioniche argued that neither requisition was effective and that, once the board had called a shareholders’ meeting in accordance with the CBCA, Mr. Wells had no right to call his own meeting.
In the final result, Bioniche was wholly successful in the application. Important aspects of the decision include:
- The court confirmed that Bioniche was entitled to reject Mr. Wells’s first requisition on the basis that he was not a registered shareholder and the requisition was defective in failing to provide the names and biographical information about Mr. Wells’s proposed board nominees.
- The board’s decision to reject Mr. Wells’s second requisition on the basis that it had already fixed a record date with notice—for a meeting to be held approximately 6 months from the time of the requisition—was a reasonable exercise of the board’s business judgment.
- Although Mr. Wells had the right to call the requisitioned meeting under the CBCA, given the particular circumstances in this case, he was not entitled to hold such meeting. This decision was made based on the absence of real evidence of urgency by Mr. Wells and the combination of: (i) the length of time that elapsed before Mr. Wells called the requisitioned meeting, (ii) no prejudice accruing to the dissidents by waiting for the November meeting date, and (iii) the cost to the company of holding two shareholder meetings in quick succession.
Intrinsyc Software International, Inc.
Justice Brown’s ruling in the Bioniche case builds on the decision of Justice Mesbur of the Ontario Superior Court in Marks v Intrinsyc Software International, Inc.,2 a case in which Norton Rose Fulbright successfully represented the special committee of the board of directors of Intrinsyc Software International, Inc.
On December 10, 2012, Mr. Marks requisitioned a special shareholders’ meeting at which he sought to replace Intrinsyc's board of directors. Intrinsyc’s board, on the considered recommendation of a special committee that was struck to address the requisition, responded to the requisition on December 20, 2012, by calling a combined annual and special shareholders’ meeting for May 14, 2013—155 days after Mr. Marks made his requisition and 146 days after the company gave notice of the meeting.
Unhappy with the date scheduled for the requisitioned meeting, Mr. Marks applied to the court, asking it to exercise its power under section 144 of the CBCA to set an earlier date for the requisitioned shareholders’ meeting. Mr. Marks wanted the requisitioned meeting to be held on February 28, 2013. Underlying Mr. Marks’s position was an argument that the board had an obligation to schedule the earliest possible meeting date in response to a shareholder requisition.
In defending the board’s decision, Intrinsyc pointed to numerous factors considered by the board and its special committee in setting the date for the combined meeting, including:
- The cost of holding two shareholder meetings within a two-month period.
- The distraction that two meetings would cause for management of a company in the middle of a strategic review.
- The company’s interest in avoiding shareholder fatigue and the corresponding risk of minimal shareholder participation.
- The value to shareholders of having the company’s financial statements publicly released prior to deciding the fate of the board.
These arguments were accepted and endorsed by Justice Mesbur when she rejected Mr. Marks’s application. In her decision, Justice Mesbur stated that the role of the court “is to determine whether the board applied the appropriate degree of prudence and diligence in coming to its decision on the timing of the special meeting.” She agreed with the position advocated on behalf of Intrinsyc, and stated that, “It is not so much the length of the delay, or the timing of the meeting, but the reasons for it that must inform my analysis of whether the board is acting appropriately.” She went on to hold that the considerations made by the special committee and the board in determining the meeting date were a reasonable exercise of business judgment and should therefore not be interfered with by the court.
The board’s judgment in choosing a date for the shareholders’ meeting played a key role in Agrium Inc.’s successful defence against activist shareholder JANA Partners LLC. In this case Norton Rose Fulbright was counsel to the special committee of the board of directors.
In the circumstances of an aggressive attack from JANA Partners, which was causing ongoing disruption to Agrium’s business, the board called an early shareholders’ meeting. Accordingly, on February 15, 2013, Agrium gave notice that its annual shareholders’ meeting, at which shareholders would have the option of re-electing Agrium’s incumbent board or electing a board proposed by JANA Partners, would occur on April 9, 2013.
The decision to hold the meeting only 53 days after it was called permitted Agrium to focus its efforts on the proxy contest for a relatively short time, thereby minimizing the distraction to its core business and to management that was arising from JANA Partners’ aggressive and public attack.
Norton Rose Fulbright’s Special Situations team provided creative solutions to address novel issues that arose in the context of this particularly aggressive and public proxy contest, including:
- The dissidents’ attempted use of nominee incentive, or so-called golden leash, payments.
- The use of dealer solicitation arrangements.
- The role of proxy advisory institutions such as ISS and Glass Lewis.
These recent cases are examples of Norton Rose Fulbright’s leading expertise in creating new law and practice in Canada on fundamental issues in shareholder activism, including empty voting, board duties during a proxy contest, the definition of solicitation, the definition of acting jointly or in concert, advance notice bylaws, independent chairpersons and shareholder requisitions.