On March 6, 2011, the Ontario Superior Court of Justice released a decision dismissing an oppression application brought by Inspiration Mining Corporation against Cassels Brock’s client, Ursa Major Minerals Incorporated, in which Inspiration sought to reverse a private placement and/or restrict the voting rights of the private placees. In the application, Inspiration attacked the bona fides of a private placement arranged by the board of Ursa without shareholder approval for 25% of the outstanding shares of Ursa. The private placement closed immediately upon obtaining TSX approval (thereby making the private placees shareholders as of the record date for the shareholder meeting requisitioned by Inspiration). The court ultimately dismissed Inspiration’s allegations that the board of Ursa had orchestrated the private placement in order to dilute Inspiration’s large block of shares and thereby entrench themselves in response to Inspiration’s requisition for a special shareholders meeting in which Inspiration was seeking to replace the incumbent board.
The court found that the private placement was consistent with prior press releases and Ursa’s most recent MD&A (announcing the intention of the Ursa board to accelerate its exploration program while only having a portion of existing cash flow available for such program), which had been publicly disseminated prior to Inspiration acquiring large blocks of its shares in Ursa. Ultimately, the court agreed with Ursa and found that the private placement was consistent with the reasonable expectations of Ursa’s shareholders and that the Ursa board had used reasonable and bona fide business judgment to approve the private placement.
The case is of significance for a few reasons. It confirms that:
- It is possible for a company to undertake a private placement of 25% of its outstanding shares without shareholder approval notwithstanding that a significant shareholder has requisitioned a meeting of shareholders to remove the incumbent board and has objected to the private placement.
- The courts will continue to defer to the reasonable and bona fide business judgment of a board of directors, as long as the decision is supported by a valid business purpose, honestly made and within a range of reasonable decisions (even if the decision itself is not ultimately found to be perfect).
- There can be no finding of oppression, which is required to trigger a remedy, if the directors’ actions are consistent with reasonable shareholder expectations.
- If a shareholder has its own private agenda that is inconsistent with or beyond the reasonable and objective expectations of the shareholders as a whole, that private agenda is not to be used as a barometer for considering oppression. In this case, it was Ursa’s position that Inspiration’s objection to the private placement was in fact motivated by its disappointment that the Ursa board was not interested in pursuing a business combination with Inspiration, as initially sought by Inspiration after acquiring a large block of Ursa shares.
- If a shareholder does establish oppression, this does not give the court unbridled jurisdiction to order any remedy requested by the shareholder. The remedy for oppression must be guided by the principle of “rectification” and not “punishment”. In this case, the court recognized that, had oppression been established, the reversal of the private placement (which had already closed by the time that the court application had been commenced) would be inappropriate and punitive relief, as would an injunction to prevent the innocent private placees from voting at the next shareholders meeting.