Ontario Court Confirms Shareholders’ Right to Demand a Shareholders’ Meeting
In a unanimous decision, the Ontario Divisional Court set aside a previous decision and ordered a company to call a shareholders’ meeting as soon as possible in order to decide on two resolutions previously put forth by an individual shareholder. The earlier decision had dismissed the shareholder’s application to have the court make such an order.
The individual shareholder requesting the meeting was the largest shareholder of the company in question (the largest shareholder), holding approximately 42% of the outstanding shares of the corporation (ECL). The principal asset of the corporation is a wholly-owned Taiwanese operating subsidiary providing technical engineering services to major telecommunications companies in that country (ECTW). ECTW was held by ECL through an intermediate holding company (HMGL). The second largest shareholder of ECL was the president of ECTW with 26.6% of the outstanding shares.
ECL became a publicly traded corporation listed on the TSX in November 2015. In June 2016 the company’s first Annual General Meeting was held, and six directors were proposed (the Canadian Directors).
The largest shareholder opposed the election of the Canadian Directors and requested that they resign, or he would requisition a shareholders’ meeting to remove them. When the Canadian Directors failed to resign, the largest shareholder formally submitted a requisition seeking the threatened shareholders’ meeting (as was his right under s. 105(1) of the Ontario Business Corporations Act). He sought two resolutions: 1) a resolution removing the Canadian Directors, and 2) if the first resolution was approved, a further resolution to elect three new directors.
The ECL Board declined the requisitions on the basis that they had been made for the primary purpose of “redressing a personal grievance against the corporation or its directors” and therefore exercised its authority under s. 105(3) of the OBCA.
The Original Decision
The application judge outlined a number of principles for determining when a board might refuse to call a requisitioned meeting under sections 105(3) and 99(5) of the OBCA. When read together, these sections require a determination of the primary purpose for the requisitioned meeting, which necessarily requires a determination of the intent of the person requisitioning it.
The Board must call a requisitioned meeting unless it is “clearly apparent” that a meeting is being requisitioned for the primary purpose of redressing a personal grievance.
The application judge concluded that the largest shareholder’s primary purpose in requisitioning the shareholders’ meeting was to redress a personal grievance against ECL and the Canadian Directors. The court found that:
- The largest shareholder was not concerned about any serious difference of opinion among the directors, but was “principally concerned to maintain his position as director and chairman of ECTW;
- The largest shareholder was upset that was he was not reappointed as chairman of ECL;
- The largest shareholder was upset that ECL refused to reimburse him for certain expenses he claimed had been incurred on behalf of ECL;
- The largest shareholder was upset that one of the Canadian Directors refused to accede to certain trading arrangements proposed by him in an attempt the to increase ECL’s share price.
The application judge found that none of the above were issues of corporate policy or operational policy. Based on this, the court concluded that it was “clearly apparent that the [largest shareholders’] primary purpose in making the Requisition is to redress a personal grievance against ECL and the Canadian Directors”. The motion for a declaration to call a shareholders’ meeting was denied.
The Divisional Court Decision
The central issue before the Divisional Court was whether the application judge had been correct in finding that the requisition for the shareholders’ meeting had been made to “enforce a personal claim or redress a personal grievance”.
The Divisional Court found that the application judge had erred in his interpretation of s. 99(5)(b) and the meaning of “personal grievance” and further erred when he focused only on the largest shareholder’s personal interests and potential intent. As a result, the largest shareholder had been required to prove that he had not been pursuing a personal issue and the potential motives of the Canadian Directors had not been examined as thoroughly.
The Divisional Court noted that:
It is not, in my view, sufficient to show simply that the shareholder requisitioning the meeting has an element of personal interest in the matter. That would cast the scope of the personal grievance exception too broadly. This is particularly so where the shareholder requisitioning the meeting has a significant stake in the corporation. In those circumstances, it will be difficult to separate the personal interests of the shareholder from his/her business interests.
The Divisional Court did emphasize that, in allowing the appeal and concluding that the requisitioned meeting should have been held, the Divisional Court was not admitting that the issues raised by the largest shareholder were relevant, or making any decision as to how those issues should be decided by the shareholders, only that the meeting should have taken place.
The court also went on to say:
I would also make it clear that the fact that the [largest shareholder] is a significant shareholder in [ECL] does not mean that any issue he chooses to raise must, as a consequence, be an issue involving the business and affairs of the company. By way of example only, any issue that the [largest shareholder] had regarding reimbursement of expenses would not escape the label of a personal grievance just because [he] is a significant shareholder. Each situation will turn on its own facts. That said, the fact remains that the threshold for such a finding is a high one and the right to requisition a meeting is not one to be overruled easily.
The appeal was allowed, and the application judge’s decision was set aside. ECL was ordered to hold a shareholders’ meeting.
As noted in the decision, a board is obligated (under s. 105(3) of the OBCA) to call a shareholders’ meeting that has been validly requisitioned. Before it can refuse to call such a meeting based on sections 105(3)(c) and 99(5)(b) of the OBCA, it must carefully determine whether a shareholder may be motivated by concerns that relate to the corporation itself, or whether the crux of the shareholders’ motivations are personal. This may be particularly challenging where the person requisitioning the meeting is a significant shareholder whose personal and business interests and motivations may be very closely tied together (as they were here).
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