Legal Updates

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Update

Thursday, June 22, 2017

In February 2017, we reported on the decision of the Superior Court of Justice (Ontario) (the “Court”) in Koh v. Ellipsiz Communications Ltd. (It’s Personal: Board Refusal of a Requisition of a Meeting of Shareholders). In its decision, the Court affirmed a company’s refusal of a requisition for a meeting of shareholders under the Business Corporations Act (Ontario) (the “OBCA”), on the grounds that the requisition was being made to redress a personal grievance (the “Personal Grievance Exception”). The Divisional Court (Ontario) recently overturned the Court’s decision, probably curtailing significantly the ability of companies to thwart future requisitions using the Personal Grievance Exception.  

Background 

In November 2015, Ellipsiz Communications Ltd. (“ECL”) became a public company following the completion of a reverse takeover. The principal asset of ECL is a wholly-owned Taiwanese operating subsidiary, Ellipsiz Communications Taiwan Ltd. (“ECTW”). ECTW operates an engineering services business that provides technical engineering services to major telecommunications companies in Taiwan. 

On May 18, 2016, ECL’s board of directors (the “Board”) unanimously approved a management information circular for ECL’s annual meeting of shareholders to be held on June 30, 2016 (the “Meeting”), which included a proposed slate of directors comprised of the largest shareholder of ECL (the “Requisitioner”), the president of ECL and ECTW, three resident Canadians (the “Canadian Directors”) and another individual. 

On or about June 29, 2016, the Requisitioner (who owned approximately 42% of the outstanding shares of ECL) changed his mind and attempted to withhold his votes in respect of the Canadian Directors at the Meeting. At the Meeting, the scrutineer rejected the Requisitioner’s proxy, and the slate of directors proposed by ECL was elected, including the Canadian Directors.

 In August 2016, the Requisitioner demanded that the Canadian Directors resign, failing which he would requisition another shareholders meeting to remove them. When the Canadian Directors failed to resign, the Requisitioner submitted a requisition (the “Requisition”) pursuant to the OBCA seeking a shareholders’ meeting to be convened to consider two resolutions—a resolution to remove the Canadian Directors and, if approved, a further resolution to elect three new directors identified in the Requisition. 

The Board rejected the Requisition in reliance on the Personal Grievance Exception, asserting that the Requisition was for the primary purpose of redressing a personal grievance of the Requisitioner against ECL and its directors. In particular, among other items, the Board claimed that the Requisitioner: (i) wanted to be chairman of ECL and ECTW; (ii) wanted to be ECL’s negotiator in respect of a potential ECL acquisition; (iii) wanted to arrange financing for ECL; and (iv) insisted on reimbursement of expenses related to ECL. As such, the Board asserted that it was entitled to decline the Requisition pursuant to the OBCA.

The Requisitioner applied to the Court seeking, among other relief, a declaration that the Requisition was valid.   

The Decision of the Court 

The Court found that the Board had properly exercised its right to reject the Requisition, and declined to issue a declaration that the Requisition was valid: 

“… I conclude that the evidence regarding the applicant’s opposition to the reconstitution of the board of directors does not reveal any serious difference of opinion among the directors regarding the corporate governance or operations of ECTW. Instead, I find that the applicant was, in fact, principally concerned to maintain his position as a director and chairman of ECTW…

 In a larger sense, the acrimony between the applicant and the Canadian Directors reflects a conflict between the applicant’s sense of his entitlement as the largest shareholder of ECL and the Canadian Directors’ position that these matters are properly addressed by the Board and that, as a director, the applicant should act in the best interests of ECL. The important point is that the evidence described above regarding the five matters in dispute demonstrates that the applicant’s position reflected his own personal interests rather than any larger sense of the best interests of ECL. In other words, the dispute does not reflect a significant difference between the parties regarding corporate policy or corporate operations.” 

The Requisitioner appealed the Court’s decision to the Divisional Court. 

The Decision of the Divisional Court

The Divisional Court began its review of the Court’s decision by identifying the “central issue”: to determine whether the Court was correct in concluding that ECL had satisfied its onus to show that the Requisition was made to “enforce a personal claim or redress a personal grievance” and therefore properly refused by the Board pursuant to the Personal Grievance Exception.

The Divisional Court continued its analysis by stating that it was not sufficient for ECL to show simply that the Requisitioner had an element of personal interest in the matter, which would cast the scope of the Personal Grievance Exception too broadly. This was especially true, the Divisional Court found, in a situation where the shareholder has a significant interest in the corporation, in which case it would be “difficult to separate the personal interests of the shareholder from his/her business interests.” 

The court emphasized that the proper interpretation of the Personal Grievance Exception rested on the finding of a personal “claim” or “grievance” as the motivation behind the requisition, not merely a personal “interest”: 

“the application judge’s conclusion highlights the concern regarding the application judge’s use of the term “personal interest” rather than “personal grievance”.  A personal interest does not trigger the [Personal Grievance Exception].  Only a personal grievance does.  It also highlights the point I made earlier, that is, that it seems difficult to separate out personal interests from business interests when one is dealing with an individual who owns almost 50% of the corporation that is involved.  It would seem self-evident that advancing the interests of the corporation would undoubtedly advance the personal interests of the appellant and vice versa.  In addition, given the nature of the disputes, especially who should be in a leadership role in the company; who should negotiate a major transaction; and how financing for the corporation should be arranged; it is difficult to see how the conclusion, that these were primarily personal issues, and not differences regarding the business and affairs of the respondent, was arrived at…  

It seems to me that one of the indicators of a personal grievance is that the subject matter of that grievance bears no real or direct relationship, nor is it otherwise integral, to the business and affairs of the company, or, for that matter, to the griever’s role as a shareholder.  In other words, while the grievance may bear some connection to the business and affairs of the company, that is not at the heart of the grievance.”

In overturning the decision of the Court, the Divisional Court found that the facts disclosed legitimate differences of opinion between the Requisitioner and the Board on the business and affairs of ECL: 

“However, on a fair reading of the record, it is apparent that the appellant [the Requisitioner] had what, at least he believed, were significant differences of opinion on business steps being taken.  The appellant objected to the fact that the respondent was contemplating entering into a significant transaction with a person who would not deal with the appellant.  The appellant raised concerns about the wisdom of the respondent doing business with a person who would not meet, or otherwise deal, with the single largest shareholder of the respondent.  This would seem to be a legitimate concern to raise, both in terms of the ongoing successful implementation of any transaction as well as the possible need to obtain shareholder approval of the transaction.  Directors who push ahead with a transaction, with full knowledge that significant shareholders do not approve of the transaction, risk wasting the time and money of the respondent in pursuit of a deal that is doomed to failure… 

On a fair reading of the record, it appears that the appellant and the Canadian Directors have a significant difference of opinion as to the course the company should take, and how it should be managed. It seems to me that the shareholders ought to be permitted to decide those issues.” 

On the basis of the Court misinterpreting the OBCA requirements to sustain the Personal Grievance Exception, as well as an apparent mistake in applying the onus of proof on the Requisitioner rather than ECL, the Divisional Court overturned the Court’s decision, and ordered ECL to call a meeting of shareholders to consider the matters set out in the Requisition. 

Conclusion 

The decision of the Divisional Court in Koh v. Ellipsiz Communications Ltd. provides a counterbalance against a line of cases that have operated to restrict the use of the requisition right under the OBCA and other Canadian corporate law statutes. Apart from using tactical and technical defenses to frustrate requisitions, companies have attempted to substantively frustrate the use of the requisition right by using the shield of the “business judgement rule”, which is a judicial reluctance to interfere in board decisions, to schedule the holding of requisitioned meetings at times favourable to companies and not requisitioners. A number of cases have protected this scheduling advantage for companies. Until the application of these cases becomes more constrained, the practical effect of the requisition right will remain hindered, despite the Divisional Court’s decision in Koh v. Ellipsiz Communications Ltd.    

If you have any questions with respect to the matters discussed above, please contact Mark Wilson (mwilson@wildlaw.ca) or any other member of our Corporate Governance practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

Authors

Mark Wilson