Activism Update: Ontario Court in Bioniche clarifies rights of dissidents in requisitioning a contested meeting
The Ontario Superior Court of Justice recently issued its decision in Wells v. Bioniche Life Sciences Inc. The decision is noteworthy in that it clarifies a number of significant issues that both dissident shareholders and boards must deal with in the face of contested meetings, finding that:
- Only registered shareholders are entitled to requisition a shareholder meeting under the Canada Business Corporations Act.
- A requisition must contain sufficient detail to allow shareholders to make an informed decision about the business proposed in the requisition (including names and qualifications of proposed director nominees).
A requisitioning shareholder may be entitled to call its own shareholder meeting under s. 143(4) of the CBCA even if the target’s board is justified under the CBCA in refusing to call the meeting in response to the requisition.
Bioniche Life Sciences Inc. (“Bioniche”) is a biopharmaceutical company incorporated under the CBCA.
William Wells and Gregory Gubitz, both former employees of Biovail Corporation, collectively own approximately 6% of Bioniche’s outstanding common shares. In April 2013, Wells expressed displeasure to Bioniche’s board in a letter and subsequently issued a press release. Shortly thereafter, Wells submitted a requisition (the “First Requisition”) to call a meeting of shareholders to remove and replace all of Bioniche’s directors.
At the time of the First Requisition, Wells held his shares through an intermediary and as such while beneficially owning his shares, , was not a registered shareholder of Bioniche. Wells also did not provide the names or any biographical information about his proposed director nominees.
Bioniche’s board declared the First Requisition invalid because it was submitted by a beneficial shareholder, as opposed to a registered shareholder, and because it failed to identify or provide any information about the proposed director nominees. The board also set November 5, 2013 as the date for the company’s annual meeting of shareholders with a record date of September 9, 2013.
Wells subsequently registered his Bioniche shares in his name and submitted a second rectified requisition (the “Second Requisition”), identifying as well his proposed director nominees.
Despite determining that the Second Requisition was valid under section 143(1) of the CBCA, Bioniche’s board determined that it was under no legal obligation to call a meeting of shareholders given that a meeting has been scheduled for November 5, 2013 for which a record date had already been fixed, and it was therefore not in the best interests of the company to proceed with a special meeting.
The dissidents commenced an application to the court to seek an order requiring Bioniche to hold a special meeting and about 20 days later, relying on section 143(4) of the CBCA, they unilaterally called a special meeting of shareholders scheduled for August 27, 2013.
Issues before the Court
- Was the First Requisition valid?
- Was the Bioniche board entitled to refuse to call a special meeting of shareholders in response to the Second Requisition?
- Were the dissidents entitled to unilaterally call a shareholders’ meeting under s. 143(4) of the CBCA?
Was the First Requisition Valid?
Bioniche declared the First Requisition invalid because it was submitted by a beneficial shareholder, as opposed to a registered shareholder, and because it failed to identify or provide any information about the proposed nominee directors. The court agreed on both counts.
Regarding the first rationale, the court confirmed well settled law in holding that only a registered shareholder is entitled to requisition a shareholder meeting pursuant to section 143(1) of the CBCA. The court did note that while the Bioniche board was entitled to treat the requisition from a beneficial shareholder as valid, it was also entitled to decline to do so.
Regarding the second rationale, the court stated that the precedent cases send out “mixed signals”. It noted that section 143(2) of the CBCA only requires a requisition to “state the business to be transacted at the meeting”, while section 135(5) requires that a notice of meeting regarding special business state “the nature of that business in sufficient detail to permit the shareholder to form a reasoned judgment thereon.” Reading these two sections together, the court stated that it is reasonable to conclude that the details of the business to be transacted at the meeting contained in the requisition should be sufficient to enable the directors to issue a notice of the requisitioned meeting, which in turn contains sufficient detail to permit the shareholders to form a reasoned judgment thereon.
As a result, the court concluded that in the case of a requisition which seeks the election of new directors such “sufficient detail” would include the names and qualifications of the director nominees proposed by the dissident shareholder.
Was the Bioniche board entitled to refuse to call a special meeting of shareholders in response to the Second Requisition?
Section 143(3) of the CBCA provides that on receiving a requisition, the directors shall call a meeting of shareholders to transact the business stated in the requisition unless certain excepting circumstances exist. Such excepting circumstances include that a record date has already been fixed for a shareholder meeting and notice of it has been given or the directors have already called a meeting of shareholders and have given proper notice. If the directors do not call a meeting in response to a valid requisition within 21 days, then the requisitioning shareholder can unilaterally call a shareholder meeting.
As noted above, upon declaring the First Requisition invalid on May 3, 2013, the Bioniche board set a meeting date of November 5, 2013 for its annual general meeting and set a record date. The meeting date was set 6 months away. In responding to the Second Requisition, Bioniche argued it was under no obligation to call a special meeting in response to the requisition because it had set a record date for a future meeting and as such it fell within one of the exceptions in section 143(3) of the CBCA.
The court agreed, in part.
In citing the prevailing jurisprudence, the court stated that a shareholder’s right to requisition a meeting “is only meaningful if it can be exercised in a timely and expeditious matter”. In reviewing the exceptions in section 143(3) of the CBCA, it noted that (i) the exception in section 143(3)(b) has a timeliness discipline built into it as a notice of meeting can be provided not more than 60 days before the meeting, and (ii) no similar discipline regarding timeliness is imposed by the exception in section 143(3)(a) regarding the setting of a record date. Applying this logic strictly, the court observed that technically a company could set its record date for its next annual meeting following its most recent annual meeting thereby effectively barring the ability of a shareholder to requisition meetings.
As a result, the court concluded that in order to rely on the exception in section 143(3)(a) of the CBCA, “the meeting in respect of which [the directors] have fixed a record date before receiving a requisition must be scheduled for a time reasonably soon after the receipt of the requisition.” According to the court, to interpret it otherwise could result in the triumph of form over substance to the detriment of minority shareholders.
In assessing whether Bioniche had met this requirement in fixing the November 5, 2013 meeting date, the court weighed certain factors and concluded that although it had difficulty understanding “why half a year is necessary”….”the actions of Bioniche’s Board reflect a reasonable exercise of business judgment…sufficient to bring it within the exception set out in CBCA s. 143(3)(a).”
Were the dissidents entitled to unilaterally call a shareholders’ meeting under s. 143(4) of the CBCA?
Section 143(4) of the CBCA provides that if the directors of a company do not within 21 days after receiving a valid requisition call a meeting, any shareholder who signed the requisition may call the meeting.
The Bioniche board took the position that, as it could properly rely on the exception under 143(3)(a), the requisitioning shareholder was not entitled to call the meeting. Bioniche argued that the right of a requisitioning shareholder to call the meeting could only be exercised in the event directors, without justification, refused or failed to call a requisitioned meeting.
The court disagreed, but on the facts sided with Bioniche.
The court reviewed applicable caselaw and noted a difference between the CBCA and the Business Corporations Act (Ontario) in concluding that even though the directors of a company may fit within one of the exemptions found within section 143(3)(a) of the CBCA in responding to a requisition, section 143(4) of the CBCA “should not be interpreted to close the door on such a possible remedy.” As a result, its finding on this point was that although a company may be able to rely on an exemption in section 143(3)(a) of the CBCA in responding to a requisition, it may nonetheless be open for a requisitioning shareholder to call its own meeting. Without affording a shareholder this potential remedy, the court reasoned that a board may attempt to block the making of requisitions by resolving to fix record dates far in advance of an actual meeting date.
Although the court concluded that the shareholders enjoy the right under the CBCA to unilaterally call a shareholders meeting, it decided not to allow the shareholders to proceed with the called August 27, 2013 meeting of shareholders in this case in part because the court felt two meetings within close proximity would be costly to the company and it saw no prejudice in waiting untilthe November annual meeting.
In a well written decision, Justice Brown re-affirms some well accepted legal principles (i.e. only a registered shareholder is entitled to requisition a shareholder meeting) but also provides clarity on some other less established issues. He definitively concluded that to be valid, a requisition regarding the election of directors should contain a list of nominee directors and some biographical information and that notwithstanding the fact that a board may be able to rely on an exception in concluding not to call a shareholder meeting in response to a requisition, a court may nevertheless intervene if a board is trying to unduly delay a requisitioning shareholder’s day in front of shareholders.
For target companies, this case highlights that one key tool in a company’s tool box is its ability to control the process. A company has the ability to determine the validity of requests from shareholders (i.e. requisitions, shareholder proposals, requests for shareholder lists etc.) and ultimately controls the meeting and proxy tabulation process. In reviewing directors’ conduct, courts will apply the business judgment rule and will generally uphold determinations made by a board in the proper exercise of their statutory obligations.
For dissident shareholders, this case highlights the need to be well advised and to ensure compliance with technical legal requirements failing which it risks losing any procedural advantages it may have. It also highlights that courts may be willing to intervene if a target company is trying to frustrate a bona fide attempt by a shareholder to exercise its rights under corporate law. Lastly, where a dissident shareholder argues that a delay of a shareholder meeting would result in a prejudice, the dissident must be willing to act quickly to exercise its rights as the court will consider such a factor when determining how much weight should be attached to the asserted prejudice.