The Ontario Superior Court recently offered new guidance on interpreting advance notice bylaws in the context of proxy contests for control of an issuer. In Orange Capital, LLC v Partners Real Estate Investment Trust,1 the court held that such bylaws should be interpreted in accordance with their plain meaning and purpose, and with the view to preserving shareholders’ voting rights.

Background

Partners REIT (the REIT) is a publicly traded real estate trust governed pursuant to a Declaration of Trust. Orange is an investment firm that owned units in the REIT.

In 2013, the REIT amended its Declaration of Trust to add an advance notice policy (the Policy) requiring unitholders wishing to nominate trustees to the board to provide notice to the REIT “not less than 30 and no more than 65 days prior to the date of the annual meeting of unitholders.” The Policy included a proviso (the Proviso) that stated, “In no event shall any adjournment or postponement of a meeting of unit holders or the announcement thereof commence a new time period for the giving of a Nominating Unitholder’s notice...”

On April 21, 2014, the REIT announced that its annual and special meeting of unitholders (the Meeting) would be held on June 26, 2014. On May 29 the REIT postponed the Meeting to July 15.  

On May 28 Orange first announced its intention to nominate trustees for election to the REIT’s board and on June 6 provided formal notice to the REIT’s board that it was nominating five named individuals for election at the Meeting on July 15.  

The REIT announces Orange has not complied with the Policy

The REIT took the position that Orange has not complied with the Policy. Specifically, the REIT argued that the original Meeting date should be used for the purposes of applying the Policy, meaning that any nominations for trustees were due between April 22 and May 27, 2014. The REIT maintained the Proviso meant that, once such a nomination window is established based on the originally scheduled meeting date, it is unaffected by any adjournment or postponement of that date.  

Orange took the position that the nomination window is triggered by the actual Meeting date, not the originally scheduled date. According to Orange, the purpose of the Proviso was to ensure that a timely nomination does not become “stale” when a meeting is adjourned or postponed, thereby relieving a nominating unitholder from having to give another notice of nomination.

Orange brought an application challenging the REIT’s refusal to accept Orange’s nominations. The application raised three issues: 1) whether the Policy was invalid because it did not receive the approval of REIT unitholders; 2) if the Policy is valid, whether Orange has complied with its terms; and 3) if Orange has not complied with its terms, whether the Policy should be waived in the circumstances to allow the REIT’s unitholders to consider Orange’s nominees at the Meeting.  

Superior Court’s decision

As the court held that Orange had complied with the Policy, it declined to rule on whether the Policy was invalid and should be waived in Orange’s case. The court focused its decision on the Policy’s meaning and purpose, holding that Orange’s interpretation of the Policy was correct, and consequently that Orange had complied with it.

Plain meaning

First, the court found that the plain wording of the Policy clearly sets “the date of the annual meeting” as the trigger for giving notice, rather than the originally scheduled meeting date or the date on which the meeting is first called. The court agreed with Orange 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.  

Purposive interpretation

Second, the court found that Orange’s interpretation accords with a purposive interpretation of the Policy. Courts have upheld advance notice bylaws because they provide management and unitholders with sufficient notice of a contest for control of the business before the vote takes place, thus facilitating orderly and efficient meetings. However, Justice Wilton-Siegel noted that there were important limits on an issuer’s use of such bylaws:

Advance notice policies are intended to be a shield to protect shareholder or unitholders, as well as management, from ambush; they are not intended to be a sword in the hands of management to exclude nominations given on ample notice or to buy time to develop a strategy for defeating a dissident shareholder group.

The court held that the REIT’s interpretation of the Policy would have the effect of excluding a nomination that occurred after the initial nomination window closed, notwithstanding that Policy timelines had been respected. The court also questioned an interpretation of the Policy that would foreclose further nominations if a shareholder meeting were postponed or adjourned “by reason of material development in the affairs of an issuer that might well call into question the appropriateness of the existing directors and management.”

More generally, the court held that there was no demonstrable need for unitholders to have advance knowledge of nominations contemplated for a future meeting of any period beyond the 30- to 65-day period provided by the Policy. The court considered the REIT’s argument that its interpretation of the Policy had the benefit of allowing the REIT to concentrate on its more immediate business without the distractions of an unnecessary proxy contest. The court held: “Most issuers regard a proxy contest as an unnecessary distraction. It is for unitholders or shareholders to make that determination in any particular situation, not management.”

Commercially reasonable result

Third, the court held that any ambiguity regarding the operation of the Policy should, in accordance with the principles of contractual interpretation, be resolved to reflect the most commercially reasonable result. In this context, that result is the one that favours unitholder voting rights.

The court found that, in providing notice of its nominations within 30 to 65 days of the actual Meeting date, Orange had complied with the Policy and was entitled to nominate trustees for election.  

Key takeaways

Orange Capital provides important new guidance on the use of advance notice policies/bylaws in the context of a contest for control of an issuer, specifically:

  • Advance notice provisions should be interpreted purposively, with a view to ensuring that a nominating shareholder provides sufficient notice of a contest for control of the business. They should only be used as a shield to protect shareholders, not as a sword to exclude nominations.
  • Postponement or adjournment of a meeting due to material developments in the affairs of an issuer cannot be used to foreclose nominations for election.
  • An issuer may be required to show a demonstrable need for requiring advance knowledge of nominations over and above a 30- to 65-day period from the actual date of a meeting. The court’s endorsement of such a period echoes the recommendation of similar periods by organizations such as Institutional Shareholder Services.