In this presentation, FMC partner Matthew Fleming reviews strategic considerations and recent trends in litigation arising from proxy battles for corporate control.

1. Litigating Proxy Fights – Strategic
Considerations and Recent Trends
Advocates’ Society Securities Litigation Symposium
September 13, 2012
Presented by: Matthew Fleming, Partner, Fraser Milner Casgrain LLP
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2. Types of Proxy Fight Litigation
• Requisitions for Shareholder Meetings
• Unlawful Proxy Solicitation
• Misrepresentation in a Circular
• Disputes at the Shareholder Meeting
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3. Shareholder Requisitions (CBCA s. 137
and s. 143)
• Holders of 5% of shares may requisition the directors to call a
meeting for the purposes stated in the requisition
• Directors shall call a meeting unless a meeting already called
or the primary purpose is to enforce a personal claim or secure
publicity; the proposal is unrelated to the business or affairs of
the corporation; the person previously failed to present the
same proposal; or it is already the subject of the meeting
• If directors do not call a meeting within 21 days, the
shareholder may call the meeting
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4. Invalid Requisitions
• Requisition must state purpose of meeting and business to be
transacted; if requisition is to replace board, it must specify
the proposed nominees (Reichert v. Richtree Inc., 2003
CarswellOnt 9374 (S.C.J. - Comm. List))
• No obligation to call a meeting where a shareholder involved
in litigation against company sought to ask detailed questions
about company’s financial statements – not bona fide purpose
relating to company’s business (Watkin v. Open Window
Bakery Ltd., 1996 CarswellOnt 838 (Gen. Div. – Comm. List))
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5. Valid Requisitions
• Not a personal claim where proposed business was mandated
by requirements for public companies; related party had
requisitioned meeting to replace board and approve
transaction converting its debt to equity; transaction required
shareholder approval (Burnham v. Augen Capital Corp., 2010
ONSC 783 (S.C.J.))
• The mere fact that directors, like other shareholders, will
receive a dividend does not mean their requisition of a
meeting is a personal claim (Eckberg v. MTW Solutions Online
Inc., 2000 CarswellOnt 2978 (S.C.J. - Comm. List))
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6. Obligation to Call Meeting
• Obligation to “call a meeting” met if meeting date announced; date is
within discretion of directors exercising business judgment honestly, in
good faith and in best interests of the corporation, provided date falls
within a range of reasonable alternatives (Paulson & Co. v. Algoma Steel
Inc., 2006 CarswellOnt 41 (S.C.J.))
• Where meeting called by dissident, court unwilling to prevent meeting
from occurring: “In my view this is a matter that should be decided by the
shareholders. Notice has been duly given, both [parties] sent out circulars,
both [parties] sent out press releases and there is no reason to believe that
the shareholders are uninformed” (Coronation Minerals Inc. v. Guyana
Goldfields Inc., 2008 CarswellOnt 8428 (S.C.J. – Comm. List))
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7. Obligation to Deliver Circular When
Soliciting Proxies (CBCA s. 147 and s. 150)
• A person shall not solicit proxies unless a management or
dissident circular sent to shareholders; “solicit” defined
broadly to include:
a) a request for a proxy whether or not accompanied by or included in a
form of proxy,
b) a request to execute or not to execute a form of proxy or to revoke a
proxy,
c) the sending of a form of proxy or other communication to a
shareholder under circumstances reasonably calculated to result in
the procurement, withholding or revocation of a proxy, and
d) the sending of a form of proxy to a shareholder under section 149 of
the CBCA
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8. Exceptions to Obligation to Send Circular
• Dissident may solicit 15 shareholders or less (CBCA, s. 150(1.1))
• Dissident may solicit by public broadcast, speech or
publication, provided information sent to Director and identity
of those making and paying costs of the solicitation is provided
with details of any material interest of those involved (CBCA, s.
150(1.2), CBCA Regs., s. 69 and Form 51-102F5)
• A public announcement of how shareholder intends to vote
and reasons for decision (CBCA, s. 147 and CBCA Regs., s. 67)
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9. Exceptions to Obligation to Send Circular (cont’d)
• Communications to shareholders regarding a company’s
business and affairs, concerning the organization of a
dissident’s solicitation, or by a person who does not seek the
power to act as proxy, subject to exceptions (CBCA, s. 147 and
CBCA Regs., s. 68)
• Technical Exemptions (unsolicited requests, professional
services, registered shareholders sending documents to
beneficial shareholders, etc.)
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10. Proxy Solicitation
• It is not a “solicitation by or on behalf of management” obligating
management to deliver circular if board has knowledge of proxy
solicitation but cannot exercise control over it (JLL Patheon Holdings,
LLC v. Patheon Inc., 2009 CarswellOnt 7315 (S.C.J. – Comm. List))
• Issuing press releases reporting that shareholder support has been
secured to replace incumbent directors and referring shareholders
to a proxy solicitation firm, without the prescribed information,
amount to steps in the chain of communication “reasonably
calculated to result in the procurement” of a proxy (Polar Star
Mining Corporation v. Willock, 2009 CarswellOnt 1416 (S.C.J. –
Comm. List))
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11. Proxy Solicitation (cont’d)
• Proxies will be disallowed where they are granted under a
proxy solicitation system (TeleVote) that:
a) allows a grant of proxy to be authorized orally and no reliable method
of confirming the authorization (such as a unique identifier) or a
record of the grant of authority exist
b) only permits shareholders to vote for one competing slate and lacks
safeguards to ensure shareholders could make their choices privately,
on a fully informed basis and without undue pressure from a proxy
solicitor; and
c) is not disclosed in the management proxy circular or otherwise
(International Energy and Mineral Resources Investment (Hong Kong)
Company Limited v. Mosquito Consolidated Gold Mines Limited, 2012
BCSC 1191)
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12. Misrepresentation in a Circular
• A circular must contain full, fair and plain disclosure and
include information concerning the pertinent matters with
sufficient detail to permit shareholders to form a reasoned
judgment (Kluwak v. Pasternak, 2006 CarswellOnt 7766 (S.C.J.
– Comm. List))
• Circulars must balance between providing too much
information and too little; however, courts are unlikely to
interfere with the sufficiency of a circular unless it is “plain
that there are good reasons to be concerned about the
adequacy of the disclosure” (First Marathon Inc., Re, 1999
CarswellOnt 2295 (S.C.J. – Comm. List))
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13. Misrepresentation in a Circular – When Will a Court
Intervene?
• Backdating a circular after director’s resignation not a
misrepresentation and court will intervene only in “clear and
unusual cases where there is a substantial risk of harm to the
corporation or to the shareholders as a group, or where it is patently
clear that the conduct in issue has been illegal or abusive” (Lei v.
Noble China Inc., 1996 CarswellOnt 2314 (Gen. Div. – Comm. List))
• Statement in dissident circular that dissidents intended to vote for
member of incumbent board not misleading even where director
stated after dissident circular released that he would resign if
dissident slate elected (Shopplex.com v. Brown, 2010 ABQB 365)
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14. Misrepresentation in a Circular – When Will a Court
Intervene? (cont’d)
• Based on advice of special committee and recommendation of
independent financial advisors, company closed bought deal rather than
rights offering; dissidents issued circular suggesting that management’s
circular misrepresented financial advisor’s opinion (but omitting the
advisor’s conclusions); court ordered that a notice be sent to shareholders
correcting the dissidents’ misrepresentations (AnorMED Inc. v. Baker Bros.
Investments, LP, 2006 BCSC 755)
• Dissident circular suggested fees paid to entities controlled by chair were
unreasonable but failed to disclose that dissident had entered into
agreement which provided that fees would be charged and that fees had
been approved by shareholders at prior meeting (Kluwak, supra)
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15. Disputes at Shareholder Meetings
• “In the absence of demonstrated impropriety, the court should
not interfere with the operation of the exercise of the
shareholders’ right to design their corporate constitution and
electoral process” (Maudore Minerals Ltd. v. Harbour
Foundation, 2012 ONSC 4255)
• The Chair of a shareholder meeting is not disqualified simply
because he/she is partial to one side; the Chair’s duty is “one
of honesty and fairness to all individual interests, and directed
generally towards the interests of the company” (Blair v.
Consolidated Enfield [1995], 4 S.C.R. 5)
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16. Disputes at Shareholder Meetings – Validity of Proxies
• The Chair may disallow “omnibus” proxies delivered by the
registered shareholder listing the NOBOs on behalf of whom
the registered shareholder purports to hold shares, even
where the NOBOs delivered a letter to the registered
shareholder authorizing it to take instructions from a specific
individual and authorizing that individual to vote the shares at
the meeting (Ebrahim v. Continental Precious Metals Inc., 2012
ONSC 2918)
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17. Disputes at Shareholder Meetings – Validity of Proxies (cont’d)
• “The conduct of business has for many years been enhanced
by technological improvements in communication. Those
improvements should not be rejected automatically... They
should be considered and, unless there are compelling reasons
for rejection, they should be… approved… [i]n the absence of
specific provisions to the contrary” (See Beatty v. First
Exploration Fund 1987 & Co., 1988 CarswellBC 158 (S.C.) and
United Canso Oil & Gas Ltd., Re, 1980 CarswellNS 29 (T.D.))
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18. Disputes at Shareholder Meetings – Validity of Proxies (cont’d)
• STAC Proxy Protocol (referred to in International Energy and
Mineral Resources Investment (Hong Kong) Company Limited
v. Mosquito Consolidated Gold Mines Limited, supra)
• There is a general presumption in favour of accepting the
proxy and giving effect to the security holder’s intention where
possible
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19. Disputes at Shareholder Meetings –
Quorum
• Special quorum requirement of persons holding 50% of company’s
shares in connection with resolution to remove, elect, appoint or
change number of directors is not contrary to shareholders’
reasonable expectations and not oppressive if special quorum was
disclosed and approved by shareholders (Ebrahim v. Continental
Precious Metals, supra)
• A shareholder is entitled to revoke proxies immediately prior to the
shareholder meeting in order to prevent quorum from existing at
meeting; board may not respond by approving resolution amending
by-laws to reduce quorum because shareholders will not have had
proper notice of amendment (Wells v. Melnyk, 2008 CarswellOnt
4438 (S.C.J. – Comm. List))
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20. Potential Remedies
• Section 144 of CBCA provides that director or shareholder entitled to vote
at a meeting may apply for an order that a meeting be held and specifying
procedure prior to and at meeting; the court’s broad discretion should be
exercised “cautiously” (Airline Industry Co. v. Air Canada, 1999 CarswellOnt
3020 (S.C.J. – Comm. List)); court should not intervene where another
corporate remedy exists and application is made by one faction against
another faction (Ebrahim v. Continental Precious Metals, supra)
• Section 145 of CBCA provides that a corporation, shareholder or director
may apply to determine a controversy with respect to a meeting and the
court may make any order it sees fit; broad discretionary power based on
principle that remedy should be available to enable shareholders to freely
exercise their voting rights in accordance with their instructions (Mason v.
Augen Capital Corp., 2010 ONSC 5319)
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21. Potential Remedies (cont’d)
• Under s. 154 of the CBCA, where a form of proxy, management or dissident
circular contains an untrue statement of material fact or omits to state a
material fact an “interested person” may apply to court which may make
any order it sees fit; an “omitted fact is material if there is a substantial
likelihood that a reasonable shareholder would consider it important in
deciding how to vote” (AnorMED Inc. v. Baker Bros. Investments, supra)
• Section 247 of the CBCA permits a “complainant” to apply for an order
directing a corporation, director, officer and others to comply with, or
restraining them from breaching, the Act, Regs., articles or by-laws; s. 247
does not apply to a shareholder or to a director acting “qua shareholder”
when soliciting proxies (Polar Star Mining Corporation, supra)
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22. Potential Remedies (cont’d)
• Under oppression remedy in s. 241 of CBCA, the court must
first consider whether a reasonable expectation exists and has
been breached and if so, whether the conduct complained of
amounts to “oppression”, “unfair prejudice” or “unfair
disregard” (BCE Inc. v. 1976 Debentureholders, 2008 SCC 69)
• In the proxy fight context, the court should consider “business
realities, not merely legal realities” (Ebrahim v. Continental
Precious Metals, supra)
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23. Choose Your Forum Carefully
• Court - May be reluctant to intervene? (Lei v. Noble China,
supra, etc.)
• OSC - Public interest jurisdiction but other limits on ability to
intervene? (Re Vengrowth Funds (Special Committee of
Directors), 2011 34 O.S.C.B. 6755))
• Director under CBCA - Prosecution unlikely? (Polar Star Mining
Corporation v. Willock, supra)
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24. Thank you!

25. The preceding presentation contains examples of the
kinds of issues companies dealing with Litigation Proxy
Fights could face. If you are faced with one of these
issues, please retain professional assistance as each
situation is unique.