Tuesday, July 31, 2012

Judge Requires Dissident Shareholders to "Help Themselves" First

Continental Precious Minerals Inc. ("Continental" or the "Company") is a junior natural resource and mining company whose shares are traded on the Toronto Stock Exchange. The Company owns a number of mineral exploration licenses in Sweden. Continental has filed several technical reports containing estimates of the resources in its main project. However, to date, Continental's mineral exploration licenses have not earned any revenues and are still in the development stage.
Continental was founded in 1987 by Edward Godin, a retired commercial airline pilot. Mr. Godin has been President, CEO and a member of Continental's board of directors ("Board") since that date. Mr. Godin is the only executive of the Company who is employed on a full-time basis. He is 69 years old and has no plans to retire.
When the Company was formed, Mr. Godin and his friends and family held the majority of its shares. At that time, the Company's by-laws provided that two shareholders, personally present or represented by proxy would constitute a quorum for any meeting of any class of shareholders.
However, as the Company issued more shares to other investors, and Mr. Godin's position became diluted, he became increasingly concerned about his ability to maintain control of the Company. In 1996, at Mr. Godin's request, the Board initiated an amendment to the ordinary quorum ("Ordinary Quorum") for the purposes of considering any matter that related to removing directors from office, electing or appointing directors, changing the number of directors, or later amending or appealing this provision of the by-laws from two or more persons, personally present or represented by proxy, to two or more persons representing not less than 50 per cent of the outstanding voting shares of the Company ("Special Quorum"). As a result, the bylaws provided for two separate quorums: the Special Quorum for electing directors and the Ordinary Quorum for all other business.
According to the circular for the 1996 AGM, the Board's rational for adopting the Special Quorum was that "only a significant number of shareholders ought to be able to change the board, since change in the board will effect the overall direction of the Company". The amendments were ratified at the 1996 AGM, apparently by no more than 5 per cent of the total shares of the Company.
The Board enacted the Special Quorum with the knowledge that it was unlikely that the Special Quorum would be achieved, given the historically low attendance at meetings of shareholders. In fact, the Special Quorum has never been achieved for 15 years – since the 1996 amendment. The effect of the amendment has been to entrench Mr. Godin and his friends on the Board: Patricia Sheahan was appointed to the Board in 1998, Gerard Osika in 2005 and Herb Dhaliwal in 2008. Neither Mr. Osika's or Mr. Dhaliwal's appointment was ratified by shareholders as a result of the Company's failure to achieve the Special Quorum.
The applicants are a group of shareholders who challenged the Special Quorum on the basis that it was not only impractical because its effect was to prevent the election of directors, but taken together with Mr. Godin's conduct at the Company's last AGM (held October 24, 2011), the Special Quorum was "oppressive" to their interests as shareholders of Continental.
The applicants (the Ebrahim family, Jatinder Dhillon and Rita Hoff) are the beneficial owners of approximately 22.5 per cent of the outstanding shares of Continental.
On August 19, 2011, the Company announced that the 2011 AGM would be held on October 24, 2011. The management information circular indicated that the four nominees for election to the Board were all the incumbent directors, Godin, Sheahan, Osika and Dhaliwal.
At the October 2011 AGM there were approximately 51,750,000 issued and outstanding common shares of which the Board owned approximately 3.25 per cent.
The applicants had been dissatisfied with the performance of the Company for some time. Prior to the 2011 AGM, arrangements were made through Gary Singh, their investment advisor at Canaccord Genuity Corporation ("Canaccord"), for a meeting between Mr. Godin, Sajjad Ebrahim and Jatinder Dhillon. Godin failed to show up for the meeting and shortly thereafter, certain of the shareholders including the applicants retained Grant Sawiak of Fogler, Rubinoff to advise the Company that he was acting for a number of concerned shareholders and to request changes to the composition of the Board.
The applicants and other shareholders authorized Canaccord to deliver proxies to Mr. Sawiak to vote their shares at the 2011 AGM. They gave 12,755,630 proxies (approximately 24.5 per cent of the Company's shares) to Mr. Sawiak in the form of omnibus proxies signed by Canaccord. The Company received from Canaccord another omnibus proxy permitting Mr. Singh to vote a total of 993,600 shares owned by his family and his business partner (about 2 per cent).
At the AGM a representative of the Company's transfer agent, Equity Financial Trust ("Equity"), advised Mr. Sawiak that 83 per cent of his proxies had been disallowed on the instructions of Mr. Godin who took on the role of chairman of the meeting. The majority of Mr. Singh's proxies were also disallowed. Mr. Godin refused to give a reason for disallowing the proxies.
Mr. Godin refused Mr. Sawiak's request to adjourn the meeting for 30 days in order to challenge the disallowance of the proxies.
As a result of that disallowance, only about 21.6 per cent of the issued shares were represented at the meeting. Of these, only 4 million shares voted for the incumbent board, the remaining votes were withheld. In any event, no election of directors occurred because the 50 per cent Special Quorum had not been met.
Upon subsequent investigation it was determined that in the 15 years since the Company's by-laws had been amended, the average attendance at shareholders meeting was only 27 per cent.
The applicants brought an application claiming that the acts of the Company and the Board constituted oppression within the scope of subsection 248(2) of the OBCA. The applicants asked the court to make an order pursuant to section 106 of the OBCA for a new meeting of shareholders to be called for the purpose of electing directors and dispensing the with Special Quorum for the purposes of the meeting. S. 106 of the OBCA provides that: "if for any reason it is impracticable to call a meeting of shareholders or to conduct the meeting in the manner prescribed by the by-laws, or if for any other reason the court thinks fit, the court may order that a meeting be held and conducted in such manner as the court directs or otherwise as the court deems fit".
In response, the Company brought a counter-application alleging that the respondents, as well as the family company operated by the Ebrahims – Par-Pak Companies Inc. ("Par-Pak") had been acting jointly or in concert and had acquired shares of the Company contrary to part XX of the Securities Act (takeover bid provisions). Prior to the return of the application, the Ebrahims sold their shareholdings in excess of the 20 per cent ownership threshold and the Company abandoned its argument that Singh was a joint actor with the Ebrahims.
The application was heard before Mr. Justice D. Brown of the Superior Court of Justice – Commercial List on March 28 and 29, 2012. Justice Brown released his decision on May 22, 2012.
Justice Brown dismissed the application for the following reasons.
Justice Brown, first reviewed what he called the " governing legal principles" in the case. He held that the oppression remedy contained in section 248 of the OBCA is an equitable remedy which seeks to ensure fairness and "which gives courts a broad jurisdiction to enforce not just what is legal but what is fair".
The applicants argued that the Board's conduct of:
1. relying on the Special Quorum at the 2011 AGM;
2. failing to actively solicit proxies for the meeting; and
3. excluding non-management proxies from voting at the meeting effected a result that was oppressive to them.
With respect to the Board's failure to actively solicit proxies, Justice Brown held that the evidence disclosed that the Board had complied with its obligations under corporate and securities law. He found that a shareholder of an offering corporation had a reasonable expectation only that management will:
(a) give proper notice of a shareholders meeting;
(b) solicit proxies as required by section 111 of the OBCA; and
(c) send out a management information circular. Continental met those obligations imposed by law. Impliedly he found that shareholders would have no expectation that management would do any more than meet the minimum under the legislation.
Justice Brown found that if the applicants thought that something more was required to secure a "large turnout at the AGM" it was open to the applicants to make suggestions to management about what to do. They made none. Brown also found that it was also open to the applicants to solicit proxies and issue a dissident information circular but they did not do so.
With respect to the exclusion of proxies, Justice Brown held that the applicable section of the OBCA provides that a proxy must be signed, in writing or by electronic signature, by the shareholder or an attorney who is authorized by a document that is signed in writing or by electronic signature. Those requirements were reproduced by Continental in its management information circular. The applicants did not deposit with Continental signed copies of the form of proxy the Company had distributed. Instead, they signed a short form of letter addressed to Mr. Singh at Canaccord. The letter included the words, "I have lost my original proxy, therefore needing you to take my instructions above and have Mr. Sawiak vote on my behalf". The letters signed by the applicants were not deposited with Continental. Instead, Continental received a form of proxy signed by Canaccord (not by the beneficial shareholders) designating Mr. Sawiak as the proxy holder.
Justice Brown noted that at the AGM Mr. Godin gave no reason for his disallowance of the applicants’ proxies notwithstanding that prior to the meeting Equity had advised him that it could only accept the proxies if they were executed by the beneficial holders.
He held that the duty under which the Chairman of such meetings operates is one of honesty and fairness to all individual interests and directed generally towards the best interests of the company. Courts are reluctant to find a chair to be in dereliction of his responsibility barring proof of bad faith. He found that it would have been "sensible, or the better practice", for Mr. Godin to have disclosed the reason for disallowing the proxies but he saw nothing in the evidence to support a suggestion that Mr. Godin acted in bad faith by disallowing the proxies.
Justice Brown held that, in any event, the disallowance of the proxies was not oppressive because even if the proxies had been counted the Special Quorum would not have been met. Causation remains a necessary element of any oppression claim and in the present case no cause and link existed between the disallowance of the proxies and a lack of a vote for the election of directors at the 2011 AGM.
Justice Brown also found that there was reason to doubt the correctness of Mr. Godin's ruling not to allow an adjournment of the meeting for 30 days. He should have sought the views of those present to ascertain whether the "consent of the meeting" existed for an adjournment. But he saw nothing oppressive or unfair in that ruling. He found that management had (a) given proper notice of the meeting, and (b) had sent out required information circular. It was open to any shareholder to attempt to seek proxies opposing management through a dissident information circular. In light of the Company having taken all necessary steps before the meeting, the judge did not regard as unfair Mr. Godin's ruling to refuse an adjournment.
With respect to the Special Quorum the judge held as follows.
In forming their reasonable expectations, shareholders must take into account the public pronouncements and documents issued by the Company. The Special Quorum had been disclosed in materials posted on SEDAR. The by-law had been publicly available since May of 2006. The Special Quorum had been described in management information circulars since 1996, all of which were available on SEDAR. Accordingly, it was not reasonable for the applicants to expect some other Special Quorum because at the time a simple search of SEDAR would have disclosed the existence of the Special Quorum.
Secondly, Justice Brown found that there was no evidence that the Board had acted in any way to frustrate the attendance at meetings to meet the Special Quorum. To the contrary, management had complied with its proxy solicitation and MIC obligations. If shareholders were dissatisfied with the Special Quorum, they were free to submit a change to management for inclusion in the management information circular or to requisition a special meeting of shareholders. The applicants did neither.
Thirdly, it was true that historically turnouts at the AGM were low. However, the applicants did not avail themselves of the tools contained in the OBCA by which displeased shareholders can attempt to effect change in the management of a corporation. Specifically, the applicants did not conduct a solicitation of proxies or distribute a dissident information circular. Brown held that, "Common sense suggests that the more one acts as a squeaky wheel, the more likely that one's message will attract some attention". Accordingly, he could not accept that the Special Quorum acted as an "insurmountable barrier to effecting management change when the applicants haven't really tried that hard to bring about such change".
He then dismissed the application for oppression. Note that he used the work insurmountable rather than impractical which is the language of the OBCA.
With respect to the section 106 of the OBCA argument, he found that the majority of the cases dealt with varying the Ordinary Quorum only in "exceptional circumstances" and that judicial discretion should be exercised cautiously. Where there is a corporate remedy still open to a shareholder under the legislative scheme, the court should be reluctant to step into the fray and impose its own solution. The courts role is to decide issues of a procedural or substantive nature which need to be determined to enable the process to proceed in a proper and timely fashion, but otherwise to remain apart from the battle.
He reiterated that the reluctance of a court to call a meeting where the shareholder has not availed itself of the procedure to requisition a meeting was well mentioned in the precedents.
He found that the evidence did not reveal any matter which would make it impracticable to call a shareholder meeting. The Special Quorum mirrors the default quorum provision in the OBCA and management had not impeded the solicitation of proxies by dissident shareholders.
Instead the dissidence did not make use of the proxy fight devices available under the corporate legislation to effect change in Continental's management nor have they attempted to requisition a special meeting notwithstanding that they hold over 5 per cent of the issued and outstanding shares. Accordingly, he declined to exercise his discretion in the circumstances.

Regards,

Blair