In its recent decision in Orange Capital, LLC v Partners Real Estate Investment Trust,1 the Ontario Superior Court addressed an interesting issue with respect to the interpretation of the operation of an advance notice policy (the "Policy"). Ultimately, the Court held that the Policy should be interpreted in accordance with its plain meaning and purpose, and with a view to construing any ambiguity in favour of unitholders. It would appear, however, that the Court did not have the benefit of relevant United States jurisprudence or practice which, in light of the longstanding and widespread adoption of advance notice provisions by Delaware companies, may have been helpful in the contractual interpretation of a purported ambiguity in the Policy.
Orange Capital, LLC ("Orange"), a unitholder in the Partners Real Estate Investment Trust (the "REIT"), sought to replace the REIT's board of trustees (the "Board") at the annual and special meeting of unitholders scheduled for July 15, 2014 (the "Meeting").
In April 2013, the Board amended its Declaration of Trust to add the Policy, pursuant to which any nominations of trustees to the Board must be given "not less than 30 nor more than 65 days prior to the date of the annual meeting".2 Included in the Policy was a proviso (the "Proviso") which provided that "[i]n no event shall any adjournment or postponement of a meeting of unit holders or the announcement thereof commence a new time period" for the purposes of giving notice of an intention to nominate trustees.3
In April 2014, the REIT announced that its annual meeting would be held on June 26, 2014, which it later postponed by 19 days to July 15, 2014. On June 6, 2014, Orange provided notice of its intention to nominate trustees to the Board at the Meeting. The Board resolved not to waive the notice timing provisions under the Policy, and contended that Orange ought to be precluded from pursuing the elections of its nominees because it had not complied with the Policy: Nominations for trustees were due between April 22, 2014 and May 27, 2014 (i.e. between 65 and 30 days prior to June 26, 2014), as per the originally scheduled meeting time and independent of any adjournment or postponement thereof; no such nominations had been received by the REIT within that specified time period.
Conversely, Orange maintained that the window for nominations was triggered by the actual meeting date (i.e. July 15, 2014) as opposed to the originally scheduled date (i.e. June 6, 2014). According to Orange, the Proviso should be read to ensure that a timely nomination does not become "stale" as a result of an adjournment or postponement.4 In other words, upon adjournment or postponement, a unitholder that has already made a timely nomination will not be required to repeat the nomination process.
The Court found that both the plain meaning and the policy rationale behind advance notice provisions support the interpretation proposed by Orange, and that insofar that there is ambiguity in the language, "doubt is resolved in favor of the stockholders' electoral rights."5 With respect to the plain wording of the provision, the Court held that the Policy clearly sets the "date of the annual meeting" as the trigger for giving notice—not the originally scheduled date of the meeting—and any interpretation to the contrary would, in effect, render the words "date of the annual meeting" ineffective. In support of the interpretation advanced by Orange, the Court held that the Proviso is intended to remove the need for a unitholder to provide further notice in order to preserve its nomination rights in the event of a postponement or adjournment.
The Court also found that Orange's interpretation is in accordance with the purpose of the Policy: "Such bylaws are designed and function to permit orderly meetings and election contests and to provide fair warning to the corporation so that it may have sufficient time to respond to shareholder nominations."6
Finally, the Court held that any ambiguity regarding the operation of the Proviso should be resolved to reflect the commercially reasonable result, which for the Court meant that the Proviso operated "to prevent a timely nomination from becoming stale as a result of an adjournment or a postponement of a scheduled meeting date."7 Thus, the Court found Orange had complied with the Policy and so was entitled to nominate trustees for election.
The Court deemed it unnecessary, however, to address the alternative arguments put forth by Orange, including that the Policy was invalid due to the fact that the REIT unitholders had not voted to approve the Policy, as was arguably required by the Declaration of Trust. However, in light of the novelty of the issue before it and the lack of explanation offered by Orange for its failure to comply with the notice timelines of the Policy prior to the postponement of the Meeting (notwithstanding that it had "ample notice" of the terms of the Policy), the Court decided that each party should bear its own costs.
The Landscape in the United States
As discussed in our seminal study published in August 2013, advance notice provisions have been used by Delaware companies for over 20 years and are widely adopted in the United States.8 The provisions of the Policy that were before the Court, including the Proviso, are standard provisions in both Delaware and Canadian advance notice provisions. It is therefore not surprising that the interpretation of these provisions in the context of postponed meetings have been the subject of litigation. For example, in Sherwood, et al v Chan Tze Ngon, et al,9 Vice Chancellor Parsons of the Delaware Court of Chancery sided with a dissident stockholder of ChinaCast Education Corporation ("ChinaCast"), finding that the postponement of the annual meeting of stockholders likely re-opened the advance notice nomination window under ChinaCast's bylaws.
The Delaware Chancery Court held that ChinaCast's bylaw provision requiring advance notice for director nominations was ambiguous as to the effect of the various postponements of the annual meeting for the purposes of determining the deadline for stockholders to give notice of an opposing slate.10 Whereas other companies' advance notice bylaws expressly address this issue by explicitly stating that an adjournment or postponement does not commence a new time period, ChinaCast's bylaw contained no such proviso in such an event. Specifically:
Defendants' position is that the various postponements of the Annual Meeting are immaterial for purposes of determining whether a stockholder's notice is timely under Section 3.3. In their reading of the bylaw, "the meeting" was announced on October 18, the postponements have not negated the fact that the Company has only one annual shareholder meeting, and Plaintiffs did not provide their notice within ten days of October 18. For their part, Plaintiffs dismiss the argument about the existence of only one annual shareholder meeting as a straw man. Rather, their position is that the plain language of the bylaw requires that notice be given within ten days of the announcement "of the date of the meeting." Because the date of the Annual Meeting, now scheduled to occur on December 21, 2011, was first announced in the Proxy Supplement on December 8, Plaintiffs contend that notice of their slate is timely so long as the Company's Secretary received it by December 18. In addition, Plaintiffs reported at the argument that notice of the slate they support was given on or about December 15.
Furthermore, Plaintiffs note by way of comparison that other companies' advance notice bylaws clearly address this issue. For example, Hewlett-Packard Co.'s advance notice bylaw states expressly that "[i]n no event will the public announcement of an adjournment or postponement of a stockholders meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above." The conspicuous absence of similar language from ChinaCast's bylaw suggests that Section 3.3 is at least ambiguous in this regard, and ambiguities in advance notice bylaws are construed "in favor of the stockholders' electoral rights."11
Accordingly, the "conspicuous absence of similar language" to the Proviso led to an ambiguity. It should then logically follow that the inclusion of the Proviso in advance notice provisions should resolve any ambiguity in favour of the public company.
The meaning given to the Proviso as advanced by Orange and accepted by the Court appears to be counter-intuitive and inconsistent with the interpretation generally accepted in the United States. While it may or may not be the case that the Court would have reached a different conclusion had it been given the benefit of a discussion of the history of advance notice provisions in the United States and the Sherwood decision, an exploration of the United States jurisprudence and practice would likely have been helpful.
Although the Policy may be unclear as to the date that triggers the nomination window, what is clear from the provision is that the addition of the Proviso abrogates any ambiguity with respect to the effect of an adjournment or postponement of the date of the annual meeting. Without due consideration for the plain language of the Proviso, which expressly prohibits commencing a new time period for giving notice, the Court appears to have read in an ambiguity to the Policy that did not exist.
Perhaps, in reaching its decision, the Court was coloured by the facts that transpired against the backdrop of the REIT and Orange's proxy fight.12 Whatever the case may be, as expected, we have entered a phase of increased litigation in Canada relating not only to the validity of advance notice provisions (particularly those adopted by policy), but also with respect to the interpretation of advance notice provisions. Given the well-established jurisprudence in the United States relating to advance notice provisions, we would expect that future litigants in Canada will seek guidance from jurisprudence in the United States in interpreting advance notice provisions.
by Paul Davis, James Munro and Allison Vale, Student-at-Law
1 2014 ONSC 3793 [Orange Capital].
2 Amended and Restated Declaration of the REIT, Appendix A, s 3(a).
4 Orange Capital, LLC v Partners Real Estate Investment Trust, 2014 ONSC 3793 (Factum of the Appellant at para 57).
5 Orange Capital, supra note 1 at para 42 citing Openwave Systems Inc v Harbinger Capital Partners Master Fund I, Ltd, CA No 2690-VCL at 20 [Openwave].
6 Orange Capital, supra note 1 at para 52 citing Openwave, supra note 5 at 19.
7 Supra note 1 at 58.
8 Paul Davis et al, "Canadian Advance Notice Provisions Study" (2013).
9 CA No 7106-VCP (Del Ct Ch 2011) [Sherwood].
10 Section 3.3 of ChinaCast's bylaws state that if less than 70 days notice of the date of the annual meeting is given, "notice by the stockholder, to be timely, must be received no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs."
11 Sherwood, supra note 9 at 26-28 [emphasis in original and footnotes omitted].
12 The REIT had pursued a transaction for the purchase of certain properties in exchange for units in the REIT. Subsequently, however, the REIT decided to unwind the transaction after the TSX advised that the REIT would be reported to the Ontario Securities Commission given the REIT's chief executive officer's interest in the transaction.
Additional author - Allison Vale, Student-at-Law